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 | ||||||||
(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: | 02/28/07 |
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Date of reporting period: | 08/31/06 |
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Item 1. Reports to Stockholders.
The semiannual reports for each series of the registrant for the periods ended August 31, 2006 are filed herewith.
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.0 | % | |||||
Short-Term Investments | 4.0 | ||||||
Futures | 0.0 | ||||||
Other | 0.0 | ||||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Financial | 20.8 | % | |||||
Technology | 13.9 | ||||||
Services | 10.7 | ||||||
Health Care | 10.0 | ||||||
Retail Stores | 9.6 | ||||||
Construction | 8.0 | ||||||
Utility | 7.0 | ||||||
Consumer Goods | 5.1 | ||||||
Machinery | 3.9 | ||||||
Manufacturing | 3.0 | ||||||
Automotive | 2.4 | ||||||
Food & Beverage | 2.2 | ||||||
Primary Process Industry | 1.6 | ||||||
Oil & Gas | 1.0 | ||||||
Transportation | 0.5 | ||||||
Metals & Mining | 0.3 | ||||||
100.0 | % |
1
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 96.0% | |||||||||||
Automotive — 2.3% | |||||||||||
1,800 | American Axle & Manufacturing Holdings, Inc. | 30,042 | |||||||||
4,025 | ArvinMeritor, Inc. | 59,771 | |||||||||
1,800 | BorgWarner, Inc. | 102,078 | |||||||||
9,100 | Goodyear Tire & Rubber Co. (The) * | 123,760 | |||||||||
2,300 | Navistar International Corp. * | 52,762 | |||||||||
1,200 | Oshkosh Truck Corp. | 62,040 | |||||||||
1,700 | Superior Industries International, Inc. | 28,747 | |||||||||
4,600 | Tenneco Automotive, Inc. * | 104,650 | |||||||||
2,200 | TRW Automotive Holdings Corp. * | 54,252 | |||||||||
618,102 | |||||||||||
Construction — 7.7% | |||||||||||
1,000 | AMB Property Corp. REIT | 55,830 | |||||||||
2,500 | American Home Mortgage Acceptance Corp. REIT | 79,250 | |||||||||
4,000 | Annaly Capital Management, Inc. | 50,040 | |||||||||
5,000 | Anthracite Capital, Inc. REIT | 64,250 | |||||||||
3,800 | Anworth Mortgage Asset Corp. REIT | 29,754 | |||||||||
900 | Beazer Homes USA, Inc. | 36,270 | |||||||||
600 | BRE Properties, Inc.-Class A | 35,454 | |||||||||
900 | Crane Co. | 35,982 | |||||||||
1,000 | Drew Industries, Inc. * | 26,110 | |||||||||
2,400 | EMCOR Group, Inc. * | 133,056 | |||||||||
900 | Equity Lifestyle Properties, Inc. REIT | 40,347 | |||||||||
2,300 | FelCor Lodging Trust, Inc. REIT | 49,335 | |||||||||
1,000 | Forest City Enterprises, Inc.-Class A | 53,780 | |||||||||
1,400 | Hovnanian Enterprises, Inc.-Class A * | 37,114 | |||||||||
800 | Jacobs Engineering Group, Inc. * | 69,672 | |||||||||
2,400 | KB Home | 102,624 | |||||||||
1,500 | Kilroy Realty Corp. REIT | 118,605 | |||||||||
1,400 | Lennox International, Inc. | 32,956 | |||||||||
1,000 | M/I Homes, Inc. | 32,360 | |||||||||
1,000 | Martin Marietta Materials, Inc. | 82,360 |
See accompanying notes to the financial statements.
2
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Construction — continued | |||||||||||
2,774 | MDC Holdings, Inc. | 118,699 | |||||||||
9,700 | MFA Mortgage Investments, Inc. REIT | 68,191 | |||||||||
1,600 | �� | Mission West Properties REIT | 17,360 | ||||||||
2,900 | National Health Investors, Inc. REIT | 79,286 | |||||||||
1,250 | New Century Financial Corp. | 48,387 | |||||||||
400 | Newcastle Investment Corp. REIT | 10,984 | |||||||||
3,600 | Ryland Group, Inc. | 153,612 | |||||||||
500 | Simpson Manufacturing Co., Inc. | 13,175 | |||||||||
300 | SL Green Realty Corp. REIT | 33,468 | |||||||||
2,900 | Standard-Pacific Corp. | 69,397 | |||||||||
900 | Technical Olympic USA, Inc. | 10,944 | |||||||||
1,400 | Thor Industries, Inc. | 59,052 | |||||||||
7,800 | Thornburg Mortgage, Inc. REIT | 179,166 | |||||||||
900 | USG Corp. * | 45,900 | |||||||||
800 | Watsco, Inc. | 35,152 | |||||||||
2,107,922 | |||||||||||
Consumer Goods — 4.9% | |||||||||||
2,500 | Columbia Sportswear Co. * | 122,050 | |||||||||
1,600 | Ethan Allen Interiors, Inc. | 54,000 | |||||||||
2,500 | Fossil, Inc. * | 47,050 | |||||||||
4,300 | Furniture Brands International, Inc. | 82,345 | |||||||||
600 | Herman Miller, Inc. | 16,944 | |||||||||
500 | HNI Corp. | 19,950 | |||||||||
4,600 | Jones Apparel Group, Inc. | 143,980 | |||||||||
900 | Kellwood Co. | 24,669 | |||||||||
1,700 | K-Swiss, Inc.-Class A | 46,767 | |||||||||
3,000 | La-Z-Boy, Inc. | 41,850 | |||||||||
5,800 | Liz Claiborne, Inc. | 216,746 | |||||||||
1,000 | Matthews International Corp.-Class A | 35,600 | |||||||||
200 | Middleby Corp. * | 15,708 | |||||||||
1,100 | Oakley, Inc. | 18,095 | |||||||||
2,100 | Playtex Products, Inc. * | 27,615 | |||||||||
1,050 | Select Comfort Corp. * | 20,843 |
See accompanying notes to the financial statements.
3
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Consumer Goods — continued | |||||||||||
2,600 | Steven Madden, Ltd. | 95,810 | |||||||||
3,700 | Timberland Co.-Class A * | 105,117 | |||||||||
3,900 | Tupperware Corp. | 70,239 | |||||||||
1,800 | Universal Corp. | 69,534 | |||||||||
1,800 | Vector Group, Ltd. | 31,086 | |||||||||
358 | Whirlpool Corp. | 28,966 | |||||||||
1,334,964 | |||||||||||
Financial — 19.9% | |||||||||||
900 | Amcore Financial, Inc. | 27,045 | |||||||||
800 | American Capital Strategies, Ltd. | 30,984 | |||||||||
4,600 | American Financial Group, Inc. | 214,912 | |||||||||
2,400 | AmeriCredit Corp. * | 56,376 | |||||||||
3,000 | AmerUs Group Co. | 203,400 | |||||||||
700 | Arthur J. Gallagher & Co. | 18,760 | |||||||||
1,400 | Associated Banc Corp. | 44,156 | |||||||||
5,250 | Astoria Financial Corp. | 161,175 | |||||||||
2,000 | Bancorpsouth, Inc. | 56,120 | |||||||||
800 | BankAtlantic Bancorp, Inc.-Class A | 11,256 | |||||||||
400 | BlackRock, Inc.-Class A | 52,060 | |||||||||
1,000 | Brown & Brown, Inc. | 29,940 | |||||||||
700 | Camden National Corp. | 30,450 | |||||||||
1,500 | CB Richard Ellis Group, Inc.-Class A * | 34,500 | |||||||||
1,725 | Chittenden Corp. | 49,766 | |||||||||
900 | City National Corp. | 59,220 | |||||||||
1,340 | Commerce Bancshares, Inc. | 67,161 | |||||||||
3,800 | Commerce Group, Inc. | 113,202 | |||||||||
800 | CompuCredit Corp. * | 23,320 | |||||||||
2,706 | Delphi Financial Group, Inc.-Class A | 105,209 | |||||||||
800 | Dollar Thrifty Automotive Group, Inc. * | 34,144 | |||||||||
1,200 | Downey Financial Corp. | 73,668 | |||||||||
5,500 | First American Corp. | 223,410 | |||||||||
1,100 | First Midwest Bancorp, Inc. | 41,085 | |||||||||
600 | FirstFed Financial Corp. * | 30,516 |
See accompanying notes to the financial statements.
4
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
2,700 | FirstMerit Corp. | 62,127 | |||||||||
5,600 | Flagstar Bancorp, Inc. | 81,424 | |||||||||
4,900 | Fremont General Corp. | 69,972 | |||||||||
2,400 | Friedman, Billings, Ramsey Group, Inc.-Class A | 19,800 | |||||||||
900 | GATX Corp. | 33,399 | |||||||||
1,000 | Great Southern Bancorp, Inc. | 27,870 | |||||||||
3,100 | Greater Bay Bancorp | 88,257 | |||||||||
1,300 | Hanover Insurance Group (The), Inc. | 57,850 | |||||||||
2,150 | HCC Insurance Holdings, Inc. | 69,854 | |||||||||
6,800 | IMPAC Mortgage Holdings, Inc. REIT | 61,812 | |||||||||
4,300 | IndyMac Bancorp, Inc. | 168,130 | |||||||||
1,800 | Investment Technology Group, Inc. * | 83,178 | |||||||||
700 | Investors Financial Services Corp. | 32,452 | |||||||||
4,900 | Janus Capital Group, Inc. | 87,122 | |||||||||
2,700 | Jefferies Group, Inc. | 67,284 | |||||||||
900 | Kansas City Life Insurance Co. | 38,421 | |||||||||
2,600 | Knight Capital Group, Inc.-Class A * | 45,396 | |||||||||
1,900 | LaBranche & Co., Inc. * | 15,770 | |||||||||
1,300 | LandAmerica Financial Group, Inc. | 82,212 | |||||||||
2,600 | Leucadia National Corp. | 66,898 | |||||||||
700 | MAF Bancorp, Inc. | 28,889 | |||||||||
1,000 | Mercury General Corp. | 50,270 | |||||||||
2,900 | MoneyGram International, Inc. | 91,060 | |||||||||
3,800 | Nationwide Financial Services, Inc.-Class A | 183,958 | |||||||||
1,000 | NCO Group, Inc. * | 26,200 | |||||||||
800 | Novastar Financial, Inc. REIT | 23,568 | |||||||||
6,200 | Old Republic International Corp. | 129,580 | |||||||||
4,100 | PMI Group (The), Inc. | 177,284 | |||||||||
1,100 | Pre-Paid Legal Services, Inc. | 41,316 | |||||||||
3,800 | Protective Life Corp. | 174,914 | |||||||||
1,800 | Radian Group, Inc. | 107,784 | |||||||||
1,750 | Raymond James Financial, Inc. | 48,510 | |||||||||
1,500 | Redwood Trust, Inc. REIT | 72,960 | |||||||||
3,000 | Reinsurance Group of America, Inc. | 155,040 |
See accompanying notes to the financial statements.
5
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
1,300 | Ryder Systems, Inc. | 64,246 | |||||||||
1,000 | Saxon Capital, Inc. REIT | 13,910 | |||||||||
2,500 | StanCorp Financial Group, Inc. | 116,425 | |||||||||
1,200 | Stewart Information Services Corp. | 40,932 | |||||||||
600 | Student Loan Corp. | 110,280 | |||||||||
5,400 | TCF Financial Corp. | 140,778 | |||||||||
300 | Transatlantic Holdings, Inc. | 18,426 | |||||||||
3,400 | Trustmark Corp. | 107,338 | |||||||||
900 | United Fire & Casualty Co. | 25,182 | |||||||||
1,000 | United Rentals, Inc. * | 21,660 | |||||||||
3,600 | W.R. Berkley Corp. | 126,000 | |||||||||
2,506 | Washington Federal, Inc. | 55,683 | |||||||||
2,300 | Webster Financial Corp. | 108,652 | |||||||||
1,300 | Westamerica Bancorporation | 62,179 | |||||||||
1,400 | Wilmington Trust Corp. | 61,670 | |||||||||
5,435,757 | |||||||||||
Food & Beverage — 2.2% | |||||||||||
700 | Brown-Forman Corp.-Class B | 53,886 | |||||||||
1,900 | Flowers Foods, Inc. | 51,585 | |||||||||
1,600 | Lancaster Colony Corp. | 70,624 | |||||||||
2,800 | NBTY, Inc. * | 89,208 | |||||||||
700 | Sanderson Farms, Inc. | 21,882 | |||||||||
4,800 | Smithfield Foods, Inc. * | 144,144 | |||||||||
10,600 | Tyson Foods, Inc.-Class A | 156,138 | |||||||||
587,467 | |||||||||||
Health Care — 9.6% | |||||||||||
700 | Adolor Corp. * | 17,465 | |||||||||
3,000 | Apria Healthcare Group * | 61,170 | |||||||||
2,000 | Cephalon, Inc. * | 114,040 | |||||||||
1,400 | Cerner Corp. * | 64,484 | |||||||||
2,100 | Endo Pharmaceuticals Holdings, Inc. * | 69,363 | |||||||||
5,300 | Health Net, Inc. * | 221,593 |
See accompanying notes to the financial statements.
6
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Health Care — continued | |||||||||||
1,700 | Henry Schein, Inc. * | 84,779 | |||||||||
2,000 | Idexx Laboratories, Inc. * | 184,020 | |||||||||
17,400 | King Pharmaceuticals, Inc. * | 282,228 | |||||||||
1,100 | Kyphon, Inc. * | 39,831 | |||||||||
600 | LCA-Vision, Inc. | 26,418 | |||||||||
5,800 | Lincare Holdings, Inc. * | 214,774 | |||||||||
900 | Mentor Corp. | 43,686 | |||||||||
400 | Molecular Devices Corp. * | 9,604 | |||||||||
1,500 | Odyssey HealthCare, Inc. * | 24,060 | |||||||||
2,800 | Omnicare, Inc. | 126,868 | |||||||||
2,200 | Owens & Minor, Inc. | 70,774 | |||||||||
700 | PDL BioPharma, Inc. * | 13,790 | |||||||||
1,000 | Pediatrix Medical Group, Inc. * | 45,800 | |||||||||
1,900 | Per-Se Technologies, Inc. * | 43,301 | |||||||||
6,000 | Pharmaceutical Product Development, Inc. | 228,720 | |||||||||
600 | PolyMedica Corp. | 24,354 | |||||||||
2,300 | Res-Care, Inc. * | 46,115 | |||||||||
1,200 | ResMed, Inc. * | 48,816 | |||||||||
2,400 | Respironics, Inc. * | 88,584 | |||||||||
2,800 | Spectranetics Corp. (The) * | 30,520 | |||||||||
2,800 | Techne Corp. * | 142,520 | |||||||||
4,500 | Tenet Healthcare Corp. * | 35,460 | |||||||||
1,600 | Thoratec Corp. * | 23,456 | |||||||||
600 | United Surgical Partners International, Inc. * | 16,932 | |||||||||
2,000 | Universal Health Services, Inc.-Class B | 113,240 | |||||||||
1,600 | VCA Antech, Inc. * | 56,672 | |||||||||
2,613,437 | |||||||||||
Machinery — 3.8% | |||||||||||
3,200 | AGCO Corp. * | 79,520 | |||||||||
2,100 | Cameron International Corp. * | 100,611 | |||||||||
600 | Carbo Ceramics, Inc. | 23,964 | |||||||||
800 | Cummins, Inc. | 91,856 | |||||||||
2,400 | Flowserve Corp. * | 122,736 |
See accompanying notes to the financial statements.
7
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Machinery — continued | |||||||||||
1,600 | FMC Technologies, Inc. * | 94,112 | |||||||||
900 | Grant Prideco, Inc. * | 37,377 | |||||||||
800 | Lincoln Electric Holdings, Inc. | 44,024 | |||||||||
1,000 | Manitowoc Co., Inc. (The) | 44,200 | |||||||||
1,700 | MSC Industrial Direct Co., Inc.-Class A | 66,912 | |||||||||
100 | NACCO Industries, Inc.-Class A | 13,353 | |||||||||
700 | Nordson Corp. | 28,028 | |||||||||
1,600 | Oceaneering International, Inc. * | 57,552 | |||||||||
1,900 | Superior Energy Services, Inc. * | 60,667 | |||||||||
3,200 | Terex Corp. * | 140,576 | |||||||||
1,500 | Transmontaigne, Inc. * | 17,010 | |||||||||
1,022,498 | |||||||||||
Manufacturing — 2.9% | |||||||||||
2,000 | Barnes Group, Inc. | 32,840 | |||||||||
200 | Greif, Inc.-Class A | 14,170 | |||||||||
1,400 | Kaman Corp.-Class A | 25,074 | |||||||||
900 | Mueller Industries, Inc. | 34,488 | |||||||||
1,400 | Myers Industries, Inc. | 23,002 | |||||||||
3,600 | Owens-IIlinois, Inc. * | 54,576 | |||||||||
3,800 | Reliance Steel & Aluminum Co. | 124,526 | |||||||||
2,000 | Sonoco Products Co. | 66,960 | |||||||||
1,600 | SPX Corp. | 84,480 | |||||||||
1,500 | Standex International Corp. | 44,175 | |||||||||
1,200 | Temple-Inland, Inc. | 53,424 | |||||||||
4,200 | Trinity Industries, Inc. | 140,112 | |||||||||
700 | Valmont Industries, Inc. | 36,512 | |||||||||
1,700 | Wabtec Corp. | 47,957 | |||||||||
782,296 | |||||||||||
Metals & Mining — 0.3% | |||||||||||
1,200 | Arch Coal, Inc. | 39,300 | |||||||||
1,200 | CONSOL Energy, Inc. | 43,764 | |||||||||
83,064 |
See accompanying notes to the financial statements.
8
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Oil & Gas — 0.9% | |||||||||||
600 | Ashland, Inc. | 37,884 | |||||||||
500 | Crosstex Energy, Inc. | 46,100 | |||||||||
1,000 | Houston Exploration Co. (The) * | 64,150 | |||||||||
2,500 | Stone Energy Corp. * | 110,425 | |||||||||
258,559 | |||||||||||
Primary Process Industry — 1.6% | |||||||||||
700 | Airgas, Inc. | 25,074 | |||||||||
700 | Allegheny Technologies, Inc. | 40,145 | |||||||||
3,000 | Commercial Metals Co. | 64,770 | |||||||||
2,000 | Metal Management, Inc. | 51,160 | |||||||||
900 | Millipore Corp. * | 57,762 | |||||||||
1,000 | Olympic Steel, Inc. | 27,650 | |||||||||
900 | OM Group, Inc. * | 36,000 | |||||||||
1,900 | Ryerson Tull, Inc. | 40,242 | |||||||||
1,000 | Sensient Technologies Corp. | 20,120 | |||||||||
3,600 | Worthington Industries, Inc. | 68,796 | |||||||||
431,719 | |||||||||||
Retail Stores — 9.2% | |||||||||||
800 | Advance Auto Parts, Inc. | 24,096 | |||||||||
900 | AnnTaylor Stores Corp. * | 35,820 | |||||||||
1,400 | Big Lots, Inc. * | 25,690 | |||||||||
3,200 | BJ's Wholesale Club, Inc. * | 84,320 | |||||||||
700 | Borders Group, Inc. | 13,391 | |||||||||
1,500 | Casey's General Stores, Inc. | 35,460 | |||||||||
900 | Cato Corp.-Class A | 20,907 | |||||||||
2,700 | Circuit City Stores, Inc. | 63,747 | |||||||||
200 | Conn's, Inc. * | 3,990 | |||||||||
1,000 | Dillard's, Inc.-Class A | 31,180 | |||||||||
6,300 | Dollar Tree Stores, Inc. * | 181,314 | |||||||||
2,200 | Dress Barn, Inc. * | 38,830 | |||||||||
2,800 | Family Dollar Stores, Inc. | 71,596 | |||||||||
4,000 | Fastenal Co. | 146,720 |
See accompanying notes to the financial statements.
9
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Retail Stores — continued | |||||||||||
2,800 | Great Atlantic & Pacific Tea Co. | 64,204 | |||||||||
1,500 | Group 1 Automotive, Inc. | 67,950 | |||||||||
1,100 | Gymboree Corp. (The) * | 36,905 | |||||||||
1,250 | Hibbett Sporting Goods, Inc. * | 30,663 | |||||||||
1,700 | Ingles Markets, Inc.-Class A | 43,520 | |||||||||
2,500 | Insight Enterprises, Inc. * | 45,025 | |||||||||
1,000 | Lithia Motors, Inc.-Class A | 25,520 | |||||||||
1,000 | Longs Drug Stores Corp. | 45,430 | |||||||||
700 | Men's Wearhouse, Inc. | 24,815 | |||||||||
900 | OfficeMax, Inc. | 37,377 | |||||||||
7,000 | O'Reilly Automotive, Inc. * | 207,830 | |||||||||
2,600 | Pacific Sunwear of California, Inc. * | 34,736 | |||||||||
1,500 | Pantry (The), Inc. * | 70,290 | |||||||||
3,300 | Payless ShoeSource, Inc. * | 77,418 | |||||||||
1,400 | Pier 1 Imports, Inc. | 8,946 | |||||||||
3,100 | RadioShack Corp. | 55,986 | |||||||||
5,850 | Rent-A-Center, Inc. * | 158,535 | |||||||||
700 | Retail Ventures, Inc. * | 10,031 | |||||||||
3,000 | Ross Stores, Inc. | 73,470 | |||||||||
600 | Ruddick Corp. | 15,474 | |||||||||
2,500 | Sonic Automotive, Inc. | 52,875 | |||||||||
7,800 | Supervalu, Inc. | 222,768 | |||||||||
1,800 | Talbots, Inc. | 39,618 | |||||||||
600 | Tween Brands, Inc. * | 20,436 | |||||||||
7,800 | United Auto Group, Inc. | 159,276 | |||||||||
3,000 | Williams-Sonoma, Inc. | 88,380 | |||||||||
700 | Zale Corp. * | 18,725 | |||||||||
2,513,264 | |||||||||||
Services — 10.3% | |||||||||||
3,700 | Allied Waste Industries, Inc. * | 38,258 | |||||||||
4,750 | Applebee's International, Inc. | 98,563 | |||||||||
666 | Aqua America, Inc. | 15,778 | |||||||||
1,500 | Banta Corp. | 70,575 |
See accompanying notes to the financial statements.
10
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Services — continued | |||||||||||
6,800 | BearingPoint, Inc. * | 56,848 | |||||||||
1,600 | Bob Evans Farms, Inc. | 45,344 | |||||||||
4,600 | Brinker International, Inc. | 176,962 | |||||||||
1,800 | Career Education Corp. * | 34,470 | |||||||||
2,700 | CBRL Group, Inc. | 102,168 | |||||||||
2,200 | Cenveo, Inc. * | 46,200 | |||||||||
700 | Corinthian Colleges, Inc. * | 8,484 | |||||||||
1,900 | Darden Restaurants, Inc. | 67,260 | |||||||||
2,950 | Factset Research Systems, Inc. | 130,095 | |||||||||
3,100 | Iron Mountain, Inc. * | 127,069 | |||||||||
2,900 | ITT Educational Services, Inc. * | 191,661 | |||||||||
2,800 | Jack in the Box, Inc. * | 134,344 | |||||||||
400 | Landry's Restaurants, Inc. | 10,940 | |||||||||
400 | Lee Enterprises, Inc. | 9,904 | |||||||||
3,100 | Manpower, Inc. | 183,241 | |||||||||
4,800 | Mediacom Communications Corp.-Class A * | 32,832 | |||||||||
4,100 | Monster Worldwide, Inc. * | 167,034 | |||||||||
2,000 | Nash Finch Co. | 45,700 | |||||||||
1,600 | New York Times Co.-Class A | 36,032 | |||||||||
2,600 | OSI Restaurant Partners, Inc. | 80,522 | |||||||||
1,000 | O'Charley's, Inc. * | 18,490 | |||||||||
3,000 | Papa John's International, Inc. * | 102,000 | |||||||||
2,400 | Performance Food Group Co. * | 59,064 | |||||||||
500 | R.H. Donnelley Corp. * | 27,160 | |||||||||
1,300 | Rare Hospitality International, Inc. * | 37,232 | |||||||||
800 | Reader's Digest Association (The), Inc. | 10,248 | |||||||||
800 | Regis Corp. | 29,352 | |||||||||
3,100 | Robert Half International, Inc. | 95,914 | |||||||||
2,300 | Ruby Tuesday, Inc. | 59,386 | |||||||||
1,100 | Ryan's Restaurant Group, Inc. * | 17,336 | |||||||||
3,000 | Sabre Holdings Corp.-Class A | 65,760 | |||||||||
3,400 | Sinclair Broadcast Group-Class A | 26,248 | |||||||||
5,700 | Six Flags, Inc. * | 29,754 | |||||||||
3,225 | Sonic Corp. * | 70,724 | |||||||||
1,000 | Stericycle, Inc. * | 66,690 |
See accompanying notes to the financial statements.
11
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Services — continued | |||||||||||
3,800 | Valassis Communications, Inc. * | 74,936 | |||||||||
2,900 | World Fuel Services Corp. | 104,516 | |||||||||
2,805,094 | |||||||||||
Technology — 13.3% | |||||||||||
1,600 | AAR Corp. * | 35,696 | |||||||||
1,200 | ADTRAN, Inc. | 29,844 | |||||||||
2,800 | Akamai Technologies, Inc. * | 109,760 | |||||||||
1,000 | Alliant Techsystems, Inc. * | 76,490 | |||||||||
800 | Amphenol Corp.-Class A | 45,976 | |||||||||
900 | Ansys, Inc. * | 42,066 | |||||||||
1,000 | AO Smith Corp. | 40,110 | |||||||||
2,700 | Applera Corp.-Applied Biosystems Group | 82,755 | |||||||||
3,700 | Arrow Electronics, Inc. * | 103,230 | |||||||||
4,700 | Avnet, Inc. * | 91,932 | |||||||||
4,000 | AVX Corp. | 66,440 | |||||||||
1,000 | Bankrate, Inc. * | 28,420 | |||||||||
3,900 | BEA Systems, Inc. * | 53,547 | |||||||||
800 | Black Box Corp. | 30,832 | |||||||||
4,100 | BMC Software, Inc. * | 109,142 | |||||||||
1,866 | Brightpoint, Inc. * | 31,050 | |||||||||
2,900 | Ceridian Corp. * | 69,223 | |||||||||
700 | Checkfree Corp. * | 25,060 | |||||||||
2,600 | CNET Networks, Inc. * | 24,518 | |||||||||
2,200 | CommScope, Inc. * | 64,262 | |||||||||
700 | Computer Programs & Systems, Inc. | 23,814 | |||||||||
900 | Concur Technologies, Inc. * | 12,537 | |||||||||
4,600 | Convergys Corp. * | 96,002 | |||||||||
400 | Curtiss-Wright Corp. | 12,436 | |||||||||
900 | Cymer, Inc. * | 37,035 | |||||||||
2,700 | Cypress Semiconductor Corp. * | 42,228 | |||||||||
1,600 | Deluxe Corp. | 28,672 | |||||||||
2,000 | Digital Insight Corp. * | 52,020 | |||||||||
1,900 | Electronics for Imaging * | 43,776 | |||||||||
1,000 | Energizer Holdings, Inc. * | 66,860 |
See accompanying notes to the financial statements.
12
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
2,900 | Foundry Networks, Inc. * | 35,293 | |||||||||
600 | Global Payments, Inc. | 22,830 | |||||||||
1,000 | Greatbatch, Inc. * | 24,460 | |||||||||
2,700 | Harris Corp. | 118,584 | |||||||||
2,800 | IKON Office Solutions, Inc. | 39,900 | |||||||||
3,900 | Informatica Corp. * | 57,096 | |||||||||
13,600 | Ingram Micro, Inc.-Class A * | 244,800 | |||||||||
4,900 | Intersil Corp.-Class A | 124,215 | |||||||||
2,300 | JDA Software Group, Inc. * | 38,157 | |||||||||
1,700 | Lam Research Corp. * | 72,743 | |||||||||
2,200 | Lightbridge, Inc. * | 26,180 | |||||||||
1,700 | Mantech International Corp.-Class A * | 51,748 | |||||||||
1,100 | Maximus, Inc. | 29,282 | |||||||||
1,300 | Micrel, Inc. * | 13,026 | |||||||||
2,400 | Microsemi Corp. * | 66,648 | |||||||||
500 | Neoware, Inc. * | 6,450 | |||||||||
14,800 | Novell, Inc. * | 98,716 | |||||||||
2,300 | Plexus Corp. * | 45,586 | |||||||||
4,100 | QLogic Corp. * | 75,358 | |||||||||
1,100 | Silicon Laboratories, Inc. * | 38,797 | |||||||||
1,000 | SYKES Enterprises, Inc. * | 20,110 | |||||||||
1,300 | Synopsys, Inc. * | 24,648 | |||||||||
2,300 | Syntel, Inc. | 50,393 | |||||||||
3,900 | Tech Data Corp. * | 136,071 | |||||||||
900 | Tektronix, Inc. | 25,506 | |||||||||
15,200 | Tellabs, Inc. * | 154,888 | |||||||||
1,400 | Thomas & Betts Corp. * | 63,224 | |||||||||
1,400 | Transaction Systems Architects, Inc. * | 46,438 | |||||||||
2,900 | Unisys Corp. * | 15,515 | |||||||||
1,900 | United Stationers, Inc. * | 87,077 | |||||||||
1,000 | Veeco Instruments, Inc. * | 24,460 | |||||||||
500 | Vital Images, Inc. * | 14,680 | |||||||||
1,400 | Webmethods, Inc. * | 11,046 |
See accompanying notes to the financial statements.
13
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
1,100 | WESCO International, Inc. * | 64,350 | |||||||||
4,900 | Western Digital Corp. * | 89,670 | |||||||||
3,633,678 | |||||||||||
Transportation — 0.4% | |||||||||||
1,400 | EGL, Inc. * | 42,798 | |||||||||
6,100 | ExpressJet Holdings, Inc. * | 42,639 | |||||||||
450 | Forward Air Corp. | 14,463 | |||||||||
800 | Genesee & Wyoming, Inc.-Class A * | 19,912 | |||||||||
119,812 | |||||||||||
Utility — 6.7% | |||||||||||
7,000 | American Tower Corp.-Class A * | 251,020 | |||||||||
500 | Black Hills Corp. | 17,405 | |||||||||
15,200 | Centerpoint Energy, Inc. | 219,640 | |||||||||
3,700 | CenturyTel, Inc. | 147,334 | |||||||||
6,800 | CMS Energy Corp. * | 99,552 | |||||||||
6,400 | Crown Castle International Corp. * | 219,904 | |||||||||
3,100 | Duquesne Light Holdings, Inc. | 61,039 | |||||||||
1,000 | Energy East Corp. | 24,250 | |||||||||
2,700 | Great Plains Energy, Inc. | 82,404 | |||||||||
1,950 | MDU Resources Group, Inc. | 47,775 | |||||||||
400 | National Fuel Gas Co. | 15,268 | |||||||||
300 | New Jersey Resources Corp. | 14,898 | |||||||||
1,800 | NII Holdings, Inc. * | 96,030 | |||||||||
2,400 | NSTAR | 79,032 | |||||||||
1,400 | OGE Energy Corp. | 52,136 | |||||||||
5,300 | Pepco Holdings, Inc. | 134,567 | |||||||||
2,500 | Puget Energy, Inc. | 56,575 | |||||||||
7,000 | TECO Energy, Inc. | 110,390 | |||||||||
300 | Telephone & Data Systems, Inc. | 12,723 | |||||||||
3,900 | Time Warner Telecom, Inc.-Class A * | 70,083 | |||||||||
400 | WPS Resources Corp. | 20,552 | |||||||||
1,832,577 | |||||||||||
TOTAL COMMON STOCKS (COST $22,714,540) | 26,180,210 |
See accompanying notes to the financial statements.
14
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 4.0% | |||||||||||
1,099,771 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a a maturity value of $1,099,880 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/13 and a market value, including accrued interest, of $1,121,767. | 1,099,771 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $1,099,771) | 1,099,771 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $23,814,311) | 27,279,981 | ||||||||||
Other Assets and Liabilities (net) — 0.0% | (3,199 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 27,276,782 |
See accompanying notes to the financial statements.
15
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
1 | Russell 2000 | September 2006 | $ | 360,850 | $ | 718 |
As of August 31, 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:
REIT - Real Estate Investment Trust
* Non-income producing security.
See accompanying notes to the financial statements.
16
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value (cost $23,814,311) (Note 2) | $ | 27,279,981 | |||||
Dividends and interest receivable | 27,466 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 13,500 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 6,913 | ||||||
Total assets | 27,327,860 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 12,556 | ||||||
Shareholder service fee | 3,425 | ||||||
Trustees and Chief Compliance Officer fees | 147 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 200 | ||||||
Accrued expenses | 34,750 | ||||||
Total liabilities | 51,078 | ||||||
Net assets | $ | 27,276,782 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 23,467,535 | |||||
Accumulated undistributed net investment income | 35,650 | ||||||
Accumulated net realized gain | 307,209 | ||||||
Net unrealized appreciation | 3,466,388 | ||||||
$ | 27,276,782 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 27,276,782 | |||||
Shares outstanding: | |||||||
Class III | 1,498,299 | ||||||
Net asset value per share: | |||||||
Class III | $ | 18.21 |
See accompanying notes to the financial statements.
17
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 201,365 | |||||
Interest | 13,203 | ||||||
Total investment income | 214,568 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 77,751 | ||||||
Shareholder service fee – Class III (Note 3) | 21,205 | ||||||
Custodian, fund accounting agent and transfer agent fees | 12,144 | ||||||
Audit and tax fees | 24,012 | ||||||
Legal fees | 276 | ||||||
Trustees fees and related expenses (Note 3) | 306 | ||||||
Registration fees | 1,840 | ||||||
Miscellaneous | 368 | ||||||
Total expenses | 137,902 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (38,548 | ) | |||||
Net expenses | 99,354 | ||||||
Net investment income (loss) | 115,214 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 2,794,099 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (4,018,411 | ) | |||||
Open futures contracts | 718 | ||||||
Net unrealized gain (loss) | (4,017,693 | ) | |||||
Net realized and unrealized gain (loss) | (1,223,594 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (1,108,380 | ) |
See accompanying notes to the financial statements.
18
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 115,214 | $ | 151,943 | |||||||
Net realized gain (loss) | 2,794,099 | 3,514,442 | |||||||||
Change in net unrealized appreciation (depreciation) | (4,017,693 | ) | (963,742 | ) | |||||||
Net increase (decrease) in net assets from operations | (1,108,380 | ) | 2,702,643 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (97,979 | ) | (144,604 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | (3,309,198 | ) | 2,106,548 | ||||||||
Purchase premiums (Notes 2 and 7): | |||||||||||
Class III | 2,442 | 40,000 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase permiums | (3,306,756 | ) | 2,146,548 | ||||||||
Total increase (decrease) in net assets | (4,513,115 | ) | 4,704,587 | ||||||||
Net assets: | |||||||||||
Beginning of period | 31,789,897 | 27,085,310 | |||||||||
End of period (including accumulated undistributed net investment income of $35,650 and $18,415, respectively) | $ | 27,276,782 | $ | 31,789,897 |
See accompanying notes to the financial statements.
19
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.07 | $ | 16.94 | $ | 14.80 | $ | 9.66 | $ | 11.76 | $ | 10.54 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss) | 0.08 | † | 0.11 | † | 0.08 | † | 0.08 | 0.11 | 0.15 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (0.87 | ) | 2.13 | 2.13 | 5.14 | (2.10 | ) | 1.23 | |||||||||||||||||||
Total from investment operations | (0.79 | ) | 2.24 | 2.21 | 5.22 | (1.99 | ) | 1.38 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.07 | ) | (0.11 | ) | (0.07 | ) | (0.08 | ) | (0.11 | ) | (0.16 | ) | |||||||||||||||
Total distributions | (0.07 | ) | (0.11 | ) | (0.07 | ) | (0.08 | ) | (0.11 | ) | (0.16 | ) | |||||||||||||||
Net asset value, end of period | $ | 18.21 | $ | 19.07 | $ | 16.94 | $ | 14.80 | $ | 9.66 | $ | 11.76 | |||||||||||||||
Total Return(a) | (4.17 | )%** | 13.25 | % | 14.99 | % | 54.21 | % | (17.00 | )% | 13.25 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 27,277 | $ | 31,790 | $ | 27,085 | $ | 24,529 | $ | 20,723 | $ | 37,544 | |||||||||||||||
Net expenses to average daily net assets | 0.70 | %* | 0.70 | % | 0.70 | % | 0.70 | % | 0.71 | % | 0.70 | % | |||||||||||||||
Net investment income to average daily net assets | 0.82 | %* | 0.61 | % | 0.56 | % | 0.62 | % | 0.90 | % | 1.30 | % | |||||||||||||||
Portfolio turnover rate | 25 | %** | 78 | % | 90 | % | 66 | % | 55 | % | 65 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.27 | %* | 0.27 | % | 0.25 | % | 0.31 | % | 0.18 | % | 0.20 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | — | (b) | $ | 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
20
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high after-tax total return. The Fund seeks to achieve its objective by outperforming the Russell 2500 Index (after tax), which is computed by GMO by adjusting the return of the Russell 2500 Index by its tax cost. The Fund typically makes equity investment in companies that issue stocks included in the Russell 2500 Index, and companies with similar size characteristics, and uses quantitative models integrated with tax management techniques to provide exposure to the U.S. small- and mid-cap company equity market to investors subject to U.S. federal income tax.
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 generally 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 pursuant to procedures approved by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts. 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
21
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 the Fund is unable to liquidate a futures position due to an i lliquid 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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
22
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no swap agreements outstanding at the end of the period.
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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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 six months ended A ugust 31, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each tax 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.
23
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP.
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 August 31, 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) | ||||||||||||
$ | 23,814,311 | $ | 4,580,115 | $ | (1,114,445 | ) | $ | 3,465,670 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
For the period ended August 31, 2006, the Fund had gross gains attributed to redemption in-kind transactions of $1,899,653.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al is
24
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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
The premium on cash purchases of Fund shares is currently 0.50%. 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 six months ended August 31, 2006 and the year ended February 28, 2006, the Fund received $2,442 and $40,000 in purchase premiums, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer t axes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
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, 2007 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 six months ended August 31, 2006 was $214 and $92, respectively. No remuneration was paid by the Fund to any other officer of the Trust.
25
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2006 aggregated $6,875,638 and $10,639,449, 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 August 31, 2006, 81.5% of the outstanding shares of the Fund were held by five 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 August 31, 2006, 1.1% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 26,961 | $ | 485,859 | 413,504 | $ | 7,960,000 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 2,660 | 50,115 | 3,224 | 56,937 | |||||||||||||||
Shares repurchased | (198,172 | ) | (3,845,172 | ) | (348,898 | ) | (5,910,389 | ) | |||||||||||
Purchase premiums and redemption fees | — | 2,442 | — | 40,000 | |||||||||||||||
Net increase (decrease) | (168,551 | ) | $ | (3,306,756 | ) | 67,830 | $ | 2,146,548 |
26
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Tax-Managed Small/Mid Cap Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee
27
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
28
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
29
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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.
30
GMO Tax-Managed Small/Mid Cap Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 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. 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 | $ | 958.30 | $ | 3.46 | |||||||||||
2) Hypothetical | 0.70 | % | $ | 1,000.00 | $ | 1,021.68 | $ | 3.57 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
31
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 99.7 | % | |||||
Short-Term Investments | 0.3 | ||||||
Swaps | 0.1 | ||||||
Call Options Purchased | 0.0 | ||||||
Futures | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Reverse Repurchase Agreements | (0.8 | ) | |||||
Other | 0.7 | ||||||
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 Short-Duration Investment Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 17.1% | |||||||||||
U.S. Government — 9.8% | |||||||||||
3,092,800 | U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (a) | 3,195,249 | |||||||||
U.S. Government Agency — 7.3% | |||||||||||
151,655 | Agency for International Development Floater (Support of Botswana), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 5.57%, due 10/01/12 | 151,086 | |||||||||
976,275 | Agency for International Development Floater (Support of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 5.57%, due 10/01/12 | 972,614 | |||||||||
919,775 | Agency for International Development Floater (Support of Honduras), Variable Rate, 3 mo. U.S. Treasury Bill x 117%, 4.71%, due 10/01/11 | 913,451 | |||||||||
47,993 | Agency for International Development Floater (Support of Peru), Series A, Variable Rate, 6 mo. U.S. Treasury Bill + .35%, 5.52%, due 05/01/14 | 47,663 | |||||||||
292,443 | Small Business Administration Pool #502320, Variable Rate, Prime - 2.18%, 6.06%, due 08/25/18 | 295,079 | |||||||||
2,379,893 | |||||||||||
TOTAL DEBT OBLIGATIONS (COST $5,696,855) | 5,575,142 | ||||||||||
MUTUAL FUNDS — 82.5% | |||||||||||
Affiliated Issuers — 82.5% | |||||||||||
1,031,440 | GMO Short-Duration Collateral Fund | 26,858,690 | |||||||||
9,192 | GMO Special Purpose Holding Fund (b) | 44,673 | |||||||||
TOTAL MUTUAL FUNDS (COST $26,330,939) | 26,903,363 | ||||||||||
TOTAL INVESTMENTS — 99.6% (Cost $32,027,794) | 32,478,505 | ||||||||||
Other Assets and Liabilities (net) — 0.4% | 139,690 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 32,618,195 |
See accompanying notes to the financial statements.
2
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 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) Security valued at fair value using methods determined in good faith by or at the discretion of the Trustees of GMO Trust (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 — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $5,696,855) (Note 2) | $ | 5,575,142 | |||||
Investments in affiliated issuers, at value (cost $26,330,939) (Notes 2 and 8) | 26,903,363 | ||||||
Cash | 94,714 | ||||||
Receivable for investments sold | 2,825 | ||||||
Interest receivable | 67,353 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 3,720 | ||||||
Total assets | 32,647,117 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 1,401 | ||||||
Shareholder service fee | 4,206 | ||||||
Trustees and Chief Compliance Officer fees | 102 | ||||||
Accrued expenses | 23,213 | ||||||
Total liabilities | 28,922 | ||||||
Net assets | $ | 32,618,195 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 36,622,521 | |||||
Accumulated undistributed net investment income | 311,420 | ||||||
Accumulated net realized loss | (4,766,457 | ) | |||||
Net unrealized appreciation | 450,711 | ||||||
$ | 32,618,195 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 32,618,195 | |||||
Shares outstanding: | |||||||
Class III | 3,580,483 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.11 |
See accompanying notes to the financial statements.
4
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 269,519 | |||||
Interest | 222,256 | ||||||
Total investment income | 491,775 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 7,906 | ||||||
Shareholder service fee – Class III (Note 3) | 23,718 | ||||||
Custodian, fund accounting agent and transfer agent fees | 2,208 | ||||||
Audit and tax fees | 15,364 | ||||||
Legal fees | 276 | ||||||
Trustees fees and related expenses (Note 3) | 309 | ||||||
Registration fees | 3,220 | ||||||
Miscellaneous | 276 | ||||||
Total expenses | 53,277 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (21,252 | ) | |||||
Net expenses | 32,025 | ||||||
Net investment income (loss) | 459,750 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 15,319 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 372,751 | ||||||
Net realized gain (loss) | 388,070 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 313,994 | ||||||
Net realized and unrealized gain (loss) | 702,064 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 1,161,814 |
See accompanying notes to the financial statements.
5
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 459,750 | $ | 882,535 | |||||||
Net realized gain (loss) | 388,070 | 123,558 | |||||||||
Change in net unrealized appreciation (depreciation) | 313,994 | 86,398 | |||||||||
Net increase (decrease) in net assets from operations | 1,161,814 | 1,092,491 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (145,321 | ) | (933,424 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | 2,147,435 | (311,728 | ) | ||||||||
Total increase (decrease) in net assets | 3,163,928 | (152,661 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 29,454,267 | 29,606,928 | |||||||||
End of period (including accumulated undistributed net investment income of $311,420 and distributions in excess of net investment income of $3,009, respectively) | $ | 32,618,195 | $ | 29,454,267 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.82 | $ | 8.77 | $ | 8.75 | $ | 8.68 | $ | 9.62 | $ | 9.92 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.13 | 0.27 | 0.23 | 0.12 | 0.08 | 0.30 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.20 | 0.07 | (0.01 | ) | 0.07 | (0.54 | ) | 0.07 | |||||||||||||||||||
Total from investment operations | 0.33 | 0.34 | 0.22 | 0.19 | (0.46 | ) | 0.37 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.04 | ) | (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 | (0.04 | ) | (0.29 | ) | (0.20 | ) | (0.12 | ) | (0.48 | ) | (0.67 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.11 | $ | 8.82 | $ | 8.77 | $ | 8.75 | $ | 8.68 | $ | 9.62 | |||||||||||||||
Total Return(c) | 3.76 | %** | 3.83 | % | 2.49 | % | 2.24 | % | (4.91 | )% | 3.73 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 32,618 | $ | 29,454 | $ | 29,607 | $ | 44,156 | $ | 55,316 | $ | 48,347 | |||||||||||||||
Net expenses to average daily net assets(d) | 0.20 | %* | 0.20 | % | 0.20 | % | 0.21 | % | 0.21 | % | 0.20 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 2.91 | %* | 3.01 | % | 2.57 | % | 1.36 | % | 0.88 | % | 3.04 | % | |||||||||||||||
Portfolio turnover rate | 3 | %** | 17 | % | 101 | % | 4 | % | 43 | % | 91 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.13 | % | 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 the underlying fund(s) (See Note 3).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
7
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks to provide current income to the extent consistent with the preservation of capital and liquidity. The Fund seeks to achieve this objective by investing a substantial portion of its assets in GMO Short-Duration Collateral Fund, which primarily invests in high quality U.S. and foreign floating rate fixed income securities, in particular asset-backed securities, issued by a wide range of private and government issuers. In addition, the Fund makes investments in high quality fixed income securities. The Fund's benchmark is the JPMorgan U.S. 3 Month Cash Index.
The financial statements of the series 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 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 generally 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 pursuant to procedures approved by the Trustees.
8
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 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 maker may differ from the value that would be realized if the securities were sold and the differences could be material. As of August 31, 2006, the total value of these securities represented 41.8% 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 April of 2006, SPHF entered into a settlement agreement with a defendant and the Fund indirectly received $319,134 (approximately $0.09 per share as of April 18, 2006) in conjunction with that settlement. The outcome of the remaining lawsuits against the 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.
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. Indexed securities held by the Fund at the end of the period are listed in the Fund's Schedule of Investments.
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. There were no repurchase agreements o utstanding at the end of the period.
9
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 six months ended A ugust 31, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each tax 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.
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.
As of August 31, 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) | ||||||||||||
$ | 32,778,681 | $ | — | $ | (300,176 | ) | $ | (300,176 | ) |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
10
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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 the 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 0.05% 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 at the annual rate of 0.15% for Class III shares.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, expenses indirectly incurred by investment in the underlying fund(s), fees and expenses of the independent
11
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 Fund's average daily net assets.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the six months ended August 31, 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 | ||||||||||||
0.004 | % | 0.000 | % | 0.050 | % | 0.009 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $217 and $92, respectively. No remuneration was paid by the Fund to any other officer of the Trust.
4. Purchases and sales of securities
For the six months ended August 31, 2006, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | — | $ | 181,345 | |||||||
Investments (non-U.S. Government securities) | 3,719,519 | 800,000 |
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.
12
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2006, 57.4% of the outstanding shares of the Fund were held by four 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 August 31, 2006, 5.1% of the Fund's shares were held by twelve related parties comprised of certain GMO employee accounts, and 19.5% 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 319,539 | $ | 2,872,560 | 240,607 | $ | 2,120,775 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 15,962 | 143,458 | 104,071 | 920,420 | |||||||||||||||
Shares repurchased | (95,918 | ) | (868,583 | ) | (379,864 | ) | (3,352,923 | ) | |||||||||||
Net increase (decrease) | 239,583 | $ | 2,147,435 | (35,186 | ) | $ | (311,728 | ) |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these issuers during the six months ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Short-Duration Collateral Fund | $ | 23,515,802 | $ | 3,719,519 | $ | 800,000 | $ | 269,519 | $ | — | $ | 26,858,690 | |||||||||||||||
GMO Special Purpose Holding Fund | 75,649 | — | — | — | 372,751 | 44,673 | |||||||||||||||||||||
Totals | $ | 23,591,451 | $ | 3,719,519 | $ | 800,000 | $ | 269,519 | $ | 372,751 | $ | 26,903,363 |
13
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Short-Duration Investment Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee
14
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
15
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
16
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | 0.21 | % | $ | 1,000.00 | $ | 1,037.60 | $ | 1.07 | |||||||||||
2) Hypothetical | 0.21 | % | $ | 1,000.00 | $ | 1,024.15 | $ | 1.07 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
17
GMO Domestic Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 98.4 | % | |||||
Swaps | 1.1 | ||||||
Preferred Stocks | 0.5 | ||||||
Short-Term Investments | 0.5 | ||||||
Call Options Purchased | 0.0 | ||||||
Futures | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Reverse Repurchase Agreements | (0.9 | ) | |||||
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 Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 9.4% | |||||||||||
Corporate Debt — 0.6% | |||||||||||
2,500,000 | Bank Austria Creditanstalt AG, 144A, 7.25%, due 02/15/17 | 2,837,600 | |||||||||
U.S. Government — 2.7% | |||||||||||
2,411,800 | U.S. Treasury Inflation Indexed Note, 4.25%, due 01/15/10 (a) (b) | 2,563,291 | |||||||||
8,783,552 | U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (a) | 9,074,507 | |||||||||
11,637,798 | |||||||||||
U.S. Government Agency — 6.1% | |||||||||||
10,000,000 | Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10%, 5.59%, due 02/01/27 | 9,925,000 | |||||||||
4,250,000 | Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. LIBOR + .30%, 5.76%, due 12/01/14 | 4,255,313 | |||||||||
4,087,636 | Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. U.S. Treasury Bill + .75%, 5.92%, due 03/30/19 | 4,100,410 | |||||||||
4,170,000 | Agency for International Development Floater (Support of Sri Lanka), Variable Rate, 6 mo. LIBOR + .20%, 5.66%, due 06/15/12 | 4,159,575 | |||||||||
4,033,338 | Agency for International Development Floater (Support of Zimbabwe), Variable Rate, 3 mo. U.S. Treasury Bill x 115%, 4.41%, due 01/01/12 | 3,985,442 | |||||||||
26,425,740 | |||||||||||
TOTAL DEBT OBLIGATIONS (COST $40,796,295) | 40,901,138 | ||||||||||
PREFERRED STOCKS — 0.5% | |||||||||||
Banking — 0.5% | |||||||||||
10,000 | Home Ownership Funding 2 Preferred 144A, 13.338% | 2,126,270 | |||||||||
TOTAL PREFERRED STOCKS (COST $3,176,670) | 2,126,270 |
See accompanying notes to the financial statements.
2
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 88.8% | |||||||||||
Affiliated Issuers — 88.8% | |||||||||||
14,880,983 | GMO Short-Duration Collateral Fund | 387,500,805 | |||||||||
1,483 | GMO Special Purpose Holding Fund (c) | 7,206 | |||||||||
TOTAL MUTUAL FUNDS (COST $379,450,713) | 387,508,011 | ||||||||||
SHORT-TERM INVESTMENTS — 0.2% | |||||||||||
Money Market Funds — 0.2% | |||||||||||
1,008,902 | Merrimac Cash Series-Premium Class | 1,008,902 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $1,008,902) | 1,008,902 | ||||||||||
TOTAL INVESTMENTS — 98.9% (Cost $424,432,580) | 431,544,321 | ||||||||||
Other Assets and Liabilities (net) — 1.1% | 4,607,103 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 436,151,424 |
See accompanying notes to the financial statements.
3
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
59 | U.S. Treasury Note 10 Yr. | December 2006 | $ | 6,335,125 | $ | 16,176 | |||||||||||||
Sales | |||||||||||||||||||
73 | U.S. Long Bond | December 2006 | $ | 8,107,562 | $ | (33,693 | ) | ||||||||||||
296 | U.S. Treasury Note 2 Yr. | December 2006 | 60,485,750 | (97,518 | ) | ||||||||||||||
72 | U.S. Treasury Note 5 Yr. | December 2006 | 7,567,875 | (17,072 | ) | ||||||||||||||
$ | (148,283 | ) |
As of August 31, 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) | |||||||||||||||||||||||||||||
8,500,000 | USD | 10/24/2013 | JP Morgan | (Pay) | 4.70 | % | 3 month LIBOR | ||||||||||||||||||||||||||||
Chase Bank | $ | 300,845 |
See accompanying notes to the financial statements.
4
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
177,000,000 | USD | 11/30/2006 | Lehman Brothers | 1 month | Return on | ||||||||||||||||||||||
LIBOR - 0.04% | Lehman Brothers | ||||||||||||||||||||||||||
U.S. Government | |||||||||||||||||||||||||||
Index | $ | 1,707,988 | |||||||||||||||||||||||||
25,000,000 | USD | 4/30/2007 | Lehman Brothers | 1 month LIBOR - 0.04% | Return on Lehman Brothers U.S. Government Index | 241,241 | |||||||||||||||||||||
75,000,000 | USD | 6/30/2007 | Lehman Brothers | 1 month LIBOR - 0.05% | Return on Lehman Brothers U.S. Government Index | 724,349 | |||||||||||||||||||||
175,000,000 | USD | 7/31/2007 | Lehman Brothers | 1 month LIBOR - 0.05% | Return on Lehman Brothers U.S. Government Index | 1,690,147 | |||||||||||||||||||||
$ | 4,363,725 |
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.
LIBOR - London Interbank Offered Rate
Variable rates - The rates shown on variable rate notes are the current interest rates at August 31, 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/or collateral on open swap contracts (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).
Currency Abbreviations:
USD - United States Dollar | |||
See accompanying notes to the financial statements.
5
GMO Domestic Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value, (cost $44,981,867) (Note 2) | $ | 44,036,310 | |||||
Investments in affiliated issuers, at value (cost $379,450,713) (Notes 2 and 8) | 387,508,011 | ||||||
Interest receivable | 306,158 | ||||||
Receivable for open swap contracts (Note 2) | 4,664,569 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 12,834 | ||||||
Total assets | 436,527,882 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 50,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 36,891 | ||||||
Shareholder service fee | 29,763 | ||||||
Trustees and Chief Compliance Officer fees | 934 | ||||||
Interest payable for open swap contracts | 124,289 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 79,375 | ||||||
Accrued expenses | 55,206 | ||||||
Total liabilities | 376,458 | ||||||
Net assets | $ | 436,151,424 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 431,589,731 | |||||
Accumulated undistributed net investment income | 4,166,893 | ||||||
Accumulated net realized loss | (11,249,403 | ) | |||||
Net unrealized appreciation | 11,644,203 | ||||||
$ | 436,151,424 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 116,636,416 | |||||
Class VI shares | $ | 319,515,008 | |||||
Shares outstanding: | |||||||
Class III | 11,691,072 | ||||||
Class VI | 31,986,940 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.98 | |||||
Class VI | $ | 9.99 |
See accompanying notes to the financial statements.
6
GMO Domestic Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 3,926,555 | |||||
Interest | 1,304,279 | ||||||
Dividends | 87,715 | ||||||
Total investment income | 5,318,549 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 231,442 | ||||||
Shareholder service fee – Class III (Note 3) | 93,323 | ||||||
Shareholder service fee – Class VI (Note 3) | 93,075 | ||||||
Custodian, fund accounting agent and transfer agent fees | 36,248 | ||||||
Audit and tax fees | 26,864 | ||||||
Legal fees | 6,348 | ||||||
Trustees fees and related expenses (Note 3) | 4,157 | ||||||
Registration fees | 2,944 | ||||||
Miscellaneous | 3,863 | ||||||
Total expenses | 498,264 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (73,600 | ) | |||||
Net expenses | 424,664 | ||||||
Net investment income (loss) | 4,893,885 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 2,168,910 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 60,124 | ||||||
Closed futures contracts | (989,604 | ) | |||||
Closed swap contracts | (8,985,096 | ) | |||||
Net realized gain (loss) | (7,745,666 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 4,828,303 | ||||||
Open futures contracts | (63,506 | ) | |||||
Open swap contracts | 5,745,915 | ||||||
Net unrealized gain (loss) | 10,510,712 | ||||||
Net realized and unrealized gain (loss) | 2,765,046 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 7,658,931 |
See accompanying notes to the financial statements.
7
GMO Domestic Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 4,893,885 | $ | 12,969,991 | |||||||
Net realized gain (loss) | (7,745,666 | ) | 5,079,419 | ||||||||
Change in net unrealized appreciation (depreciation) | 10,510,712 | 4,947,673 | |||||||||
Net increase (decrease) in net assets from operations | 7,658,931 | 22,997,083 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (152,289 | ) | (5,417,082 | ) | |||||||
Class VI | (566,887 | ) | (7,425,411 | ) | |||||||
Total distributions from net investment income | (719,176 | ) | (12,842,493 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (6,661,020 | ) | ||||||||
(719,176 | ) | (19,503,513 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (10,522,482 | ) | (618,625,270 | ) | |||||||
Class VI | (45,411,961 | ) | 363,977,331 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (55,934,443 | ) | (254,647,939 | ) | |||||||
Total increase (decrease) in net assets | (48,994,688 | ) | (251,154,369 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 485,146,112 | 736,300,481 | |||||||||
End of period (including accumulated undistributed net investment income of $4,166,893 and distributions in excess of net investment income of $7,816, respectively) | $ | 436,151,424 | $ | 485,146,112 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 9.81 | $ | 9.84 | $ | 10.07 | $ | 10.08 | $ | 9.68 | $ | 9.98 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.10 | 0.13 | 0.16 | 0.23 | 0.22 | 0.41 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.08 | 0.16 | 0.04 | 0.24 | 0.86 | 0.22 | |||||||||||||||||||||
Total from investment operations | 0.18 | 0.29 | 0.20 | 0.47 | 1.08 | 0.63 | |||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.01 | ) | (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 | (0.01 | ) | (0.32 | ) | (0.43 | ) | (0.48 | ) | (0.68 | ) | (0.93 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.98 | $ | 9.81 | $ | 9.84 | $ | 10.07 | $ | 10.08 | $ | 9.68 | |||||||||||||||
Total Return(c) | 1.86 | %** | 3.02 | % | 2.02 | % | 4.79 | % | 11.43 | % | 6.62 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 116,636 | $ | 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 | % | 0.25 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 2.12 | %* | 1.30 | % | 1.57 | % | 2.30 | % | 2.23 | % | 4.16 | % | |||||||||||||||
Portfolio turnover rate | 7 | %** | 24 | % | 11 | % | 15 | % | 71 | % | 19 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* | 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 the underlying fund(s) (See Note 3).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
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 each period)
Six Months Ended August 31, 2006 (Unaudited) | Period from July 26, 2005 (commencement of operations) through February 28, 2006 | ||||||||||
Net asset value, beginning of period | $ | 9.82 | $ | 9.93 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)(a)† | 0.10 | 0.24 | |||||||||
Net realized and unrealized gain (loss) | 0.09 | (0.14 | )(b) | ||||||||
Total from investment operations | 0.19 | 0.10 | |||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | (0.02 | ) | (0.21 | ) | |||||||
Total distributions | (0.02 | ) | (0.21 | ) | |||||||
Net asset value, end of period | $ | 9.99 | $ | 9.82 | |||||||
Total Return(c) | 1.91 | %** | 0.97 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 319,515 | $ | 359,958 | |||||||
Net expenses to average daily net assets(d) | 0.16 | %* | 0.16 | %* | |||||||
Net investment income to average daily net assets(a) | 2.11 | %* | 2.38 | %(e) | |||||||
Portfolio turnover rate | 7 | %** | 24 | %†† | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* | 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 the 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
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks total return in excess of the Lehman Brothers U.S. Government Index. The Fund invests most of its assets in shares of GMO Short-Duration Collateral Fund; U.S. investment-grade bonds, including asset-backed securities and U.S. government securities; and derivatives (including synthetic debt instruments) whose value is related to U.S. investment-grade bonds. The Fund also may invest a portion of its assets in foreign bonds and lower-rated securities.
As of August 31, 2006, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different level of shareholder servicing fees.
The financial statements of the series 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 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 generally 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 pursuant to procedures approved by the Trustees.
11
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 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. As of August 31, 2006, the total value of these securities represented 35.6% 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 April of 2006, SPHF entered into a settlement agreement with a defendant and the Fund indirectly received $51,475 in conjunction with that settlement. The outcome of the lawsuits against the 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. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may write call and put options. 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
12
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 writt en 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. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
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
13
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
lenders it acquires direct rights against the borrower on the loan. There were no loan agreements outstanding at the end of the period.
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. Indexed securities held by the Fund at the end of the period are listed in the Fund's Schedule of Investments.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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. Credit default swaps may be used to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where a party 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
14
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. There were no repurchase agreements o utstanding at the end of the period.
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. There were no reverse repurchase agreements outstanding at the end of the period.
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
15
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
portion of the Fund's earnings on the collateral. For the six months ended August 31, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each tax 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.
As of February 28, 2006, the Fund elected to defer to March 1, 2006 post-October capital losses of $3,814,789.
As of August 31, 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) | ||||||||||||
$ | 424,481,030 | $ | 8,470,073 | $ | (1,406,782 | ) | $ | 7,063,291 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
16
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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, if any, 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 capit al 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 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. 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 the 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 and 0.055% for Class VI shares.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 Fund's average daily net assets.
17
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder of the underlying fund(s). For the six months ended August 31, 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 | % | 0.006 | % | 0.008 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $2,685 and $1,380, respectively. No remuneration was paid by the Fund to any other officer of the Trust.
4. Purchases and sales of securities
For the six months ended August 31, 2006, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | — | $ | 871,383 | |||||||
Investments (non-U.S. Government securities) | 32,426,555 | 92,550,000 |
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 August 31, 2006, 68.2% 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.
18
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 2006, less than 0.1% of the Fund's shares were held by five related parties comprised of certain GMO employee accounts, and 87.2% 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 2,392,543 | $ | 23,495,142 | 6,195,721 | $ | 61,645,760 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 13,027 | 126,811 | 1,168,276 | 11,658,232 | |||||||||||||||
Shares repurchased | (3,479,077 | ) | (34,144,435 | ) | (69,417,895 | ) | (691,929,262 | ) | |||||||||||
Net increase (decrease) | (1,073,507 | ) | $ | (10,522,482 | ) | (62,053,898 | ) | $ | (618,625,270 | ) | |||||||||
Six Months Ended August 31, 2006 (Unaudited) | Period from July 26, 2005 (commencement of operations) through February 28, 2006 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 142,221 | $ | 1,389,455 | 35,958,245 | $ | 357,126,330 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 58,162 | 566,887 | 755,089 | 7,425,412 | |||||||||||||||
Shares repurchased | (4,868,232 | ) | (47,368,303 | ) | (58,545 | ) | (574,411 | ) | |||||||||||
Net increase (decrease) | (4,667,849 | ) | $ | (45,411,961 | ) | 36,654,789 | $ | 363,977,331 |
19
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of affiliated issuers during the six months ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Short-Duration Collateral Fund | $ | 440,095,699 | $ | 32,426,555 | $ | 92,300,000 | $ | 3,926,555 | $ | — | $ | 387,500,805 | |||||||||||||||
GMO Special Purpose Holding Fund | 12,202 | — | — | — | 60,124 | 7,206 | |||||||||||||||||||||
Totals | $ | 440,107,901 | $ | 32,426,555 | $ | 92,300,000 | $ | 3,926,555 | $ | 60,124 | $ | 387,508,011 |
20
GMO Domestic Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Domestic Bond Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to
21
GMO Domestic Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manag er to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
22
GMO Domestic Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
23
GMO Domestic Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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.
24
GMO Domestic Bond Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 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. 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 | 0.26 | % | $ | 1,000.00 | $ | 1,018.60 | $ | 1.32 | |||||||||||
2) Hypothetical | 0.26 | % | $ | 1,000.00 | $ | 1,023.89 | $ | 1.33 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.17 | % | $ | 1,000.00 | $ | 1,019.10 | $ | 0.87 | |||||||||||
2) Hypothetical | 0.17 | % | $ | 1,000.00 | $ | 1,024.35 | $ | 0.87 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
25
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 98.7 | % | |||||
Short-Term Investments | 18.6 | ||||||
Other | (17.3 | ) | |||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Technology | 23.3 | % | |||||
Retail Stores | 12.3 | ||||||
Health Care | 11.2 | ||||||
Services | 9.3 | ||||||
Financial | 8.9 | ||||||
Machinery | 8.6 | ||||||
Construction | 6.2 | ||||||
Consumer Goods | 4.3 | ||||||
Primary Process Industry | 3.7 | ||||||
Transportation | 3.5 | ||||||
Oil & Gas | 2.8 | ||||||
Manufacturing | 2.0 | ||||||
Food & Beverage | 1.5 | ||||||
Automotive | 0.9 | ||||||
Metals & Mining | 0.8 | ||||||
Utility | 0.7 | ||||||
100.0 | % |
1
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 98.7% | |||||||||||
Automotive — 0.9% | |||||||||||
2,700 | Goodyear Tire & Rubber Co. (The) * (a) | 36,720 | |||||||||
1,400 | Navistar International Corp. * | 32,116 | |||||||||
3,000 | Oshkosh Truck Corp. | 155,100 | |||||||||
223,936 | |||||||||||
Construction — 6.1% | |||||||||||
800 | American Woodmark Corp. (a) | 25,224 | |||||||||
900 | Beazer Homes USA, Inc. | 36,270 | |||||||||
200 | Brookfield Homes Corp. (a) | 4,720 | |||||||||
1,300 | Crane Co. | 51,974 | |||||||||
2,500 | Eagle Materials, Inc. (a) | 89,625 | |||||||||
1,900 | Florida Rock Industries, Inc. | 70,661 | |||||||||
1,000 | Granite Construction, Inc. | 53,650 | |||||||||
1,400 | Hovnanian Enterprises, Inc.-Class A * (a) | 37,114 | |||||||||
1,200 | Jacobs Engineering Group, Inc. * | 104,508 | |||||||||
1,000 | KB Home | 42,760 | |||||||||
400 | Kilroy Realty Corp. REIT | 31,628 | |||||||||
2,500 | Lennox International, Inc. | 58,850 | |||||||||
800 | M/I Homes, Inc. | 25,888 | |||||||||
1,900 | Martin Marietta Materials, Inc. | 156,484 | |||||||||
1,267 | MDC Holdings, Inc. (a) | 54,215 | |||||||||
300 | Meritage Homes Corp. * (a) | 12,285 | |||||||||
300 | NCI Building Systems, Inc. * | 16,302 | |||||||||
200 | NVR, Inc. * (a) | 102,730 | |||||||||
1,700 | Ryland Group, Inc. (a) | 72,539 | |||||||||
1,600 | Simpson Manufacturing Co., Inc. (a) | 42,160 | |||||||||
1,600 | Standard-Pacific Corp. | 38,288 | |||||||||
5,300 | Thor Industries, Inc. (a) | 223,554 | |||||||||
400 | Toll Brothers, Inc. * (a) | 10,568 | |||||||||
200 | Universal Forest Products, Inc. | 9,752 | |||||||||
1,900 | USG Corp. * (a) | 96,900 |
See accompanying notes to the financial statements.
2
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Construction — continued | |||||||||||
1,300 | Watsco, Inc. | 57,122 | |||||||||
1,100 | Winnebago Industries, Inc. (a) | 32,120 | |||||||||
1,557,891 | |||||||||||
Consumer Goods — 4.2% | |||||||||||
1,500 | Blyth, Inc. | 32,220 | |||||||||
400 | Brunswick Corp. | 11,480 | |||||||||
1,999 | Charles & Colvard, Ltd. (a) | 23,768 | |||||||||
1,400 | Columbia Sportswear Co. * (a) | 68,348 | |||||||||
600 | Deckers Outdoor Corp. * | 24,606 | |||||||||
2,200 | Ethan Allen Interiors, Inc. (a) | 74,250 | |||||||||
2,550 | Fossil, Inc. * | 47,991 | |||||||||
200 | Genesco, Inc. * | 5,496 | |||||||||
3,400 | Guess ?, Inc. * | 138,720 | |||||||||
400 | Herman Miller, Inc. | 11,296 | |||||||||
1,000 | HNI Corp. | 39,900 | |||||||||
700 | Kenneth Cole Productions, Inc.-Class A | 16,387 | |||||||||
2,100 | K-Swiss, Inc.-Class A | 57,771 | |||||||||
2,000 | Liz Claiborne, Inc. | 74,740 | |||||||||
1,100 | Matthews International Corp.-Class A | 39,160 | |||||||||
600 | Middleby Corp. * (a) | 47,124 | |||||||||
2,300 | Oakley, Inc. | 37,835 | |||||||||
1,000 | Oxford Industries, Inc. | 41,080 | |||||||||
2,300 | Playtex Products, Inc. * (a) | 30,245 | |||||||||
800 | Polaris Industries, Inc. | 30,480 | |||||||||
400 | Polo Ralph Lauren Corp. | 23,596 | |||||||||
1,800 | Select Comfort Corp. * (a) | 35,730 | |||||||||
1,750 | Steven Madden, Ltd. | 64,487 | |||||||||
2,400 | Timberland Co.-Class A * | 68,184 | |||||||||
2,600 | Tupperware Corp. | 46,826 | |||||||||
1,091,720 |
See accompanying notes to the financial statements.
3
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — 8.8% | |||||||||||
300 | Affiliated Managers Group, Inc. * (a) | 27,759 | |||||||||
300 | Arthur J. Gallagher & Co. | 8,040 | |||||||||
200 | BlackRock, Inc.-Class A | 26,030 | |||||||||
5,200 | Brown & Brown, Inc. | 155,688 | |||||||||
3,600 | CB Richard Ellis Group, Inc.-Class A * (a) | 82,800 | |||||||||
200 | Commerce Bancorp, Inc., NJ (a) | 6,662 | |||||||||
700 | CompuCredit Corp. * | 20,405 | |||||||||
1,000 | Corus Bankshares, Inc. (a) | 21,810 | |||||||||
1,200 | Cullen/Frost Bankers, Inc. | 70,752 | |||||||||
1,100 | Equifax, Inc. | 34,969 | |||||||||
2,600 | Fair Isaac Corp. | 91,026 | |||||||||
1,900 | Federated Investors, Inc.-Class B | 63,612 | |||||||||
600 | First Cash Financial Services, Inc. * | 12,498 | |||||||||
1,100 | First Marblehead Corp. (The) | 57,750 | |||||||||
200 | First Midwest Bancorp, Inc. | 7,470 | |||||||||
2,100 | Flagstar Bancorp, Inc. | 30,534 | |||||||||
1,000 | Fremont General Corp. | 14,280 | |||||||||
400 | Hancock Holding Co. | 20,736 | |||||||||
1,300 | Hanover Insurance Group (The), Inc. | 57,850 | |||||||||
2,050 | HCC Insurance Holdings, Inc. | 66,604 | |||||||||
1,100 | IndyMac Bancorp, Inc. | 43,010 | |||||||||
3,500 | Investment Technology Group, Inc. * | 161,735 | |||||||||
1,100 | Investors Financial Services Corp. | 50,996 | |||||||||
3,200 | Jefferies Group, Inc. | 79,744 | |||||||||
200 | Jones Lang LaSalle, Inc. | 16,652 | |||||||||
1,500 | Leucadia National Corp. | 38,595 | |||||||||
3,200 | MoneyGram International, Inc. | 100,480 | |||||||||
900 | Nara Bancorp, Inc. | 16,650 | |||||||||
1,300 | Nasdaq Stock Market, Inc. * | 37,063 | |||||||||
800 | Piper Jaffray Cos., Inc. * | 46,864 | |||||||||
300 | PMI Group (The), Inc. | 12,972 | |||||||||
900 | Pre-Paid Legal Services, Inc. (a) | 33,804 | |||||||||
600 | Radian Group, Inc. | 35,928 | |||||||||
2,300 | Raymond James Financial, Inc. | 63,756 |
See accompanying notes to the financial statements.
4
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
700 | Reinsurance Group of America, Inc. | 36,176 | |||||||||
1,200 | Ryder Systems, Inc. | 59,304 | |||||||||
600 | SEI Investment Co. | 30,624 | |||||||||
800 | StanCorp Financial Group, Inc. | 37,256 | |||||||||
200 | Student Loan Corp. | 36,760 | |||||||||
2,500 | TCF Financial Corp. | 65,175 | |||||||||
1,900 | United Rentals, Inc. * (a) | 41,154 | |||||||||
2,500 | Universal American Financial Corp. * | 38,325 | |||||||||
6,200 | W.R. Berkley Corp. | 217,000 | |||||||||
600 | Westamerica Bancorporation | 28,698 | |||||||||
1,100 | Wilmington Trust Corp. | 48,455 | |||||||||
2,254,451 | |||||||||||
Food & Beverage — 1.5% | |||||||||||
300 | Andersons (The), Inc. | 12,303 | |||||||||
1,700 | Brown-Forman Corp.-Class B | 130,866 | |||||||||
900 | Flowers Foods, Inc. | 24,435 | |||||||||
2,400 | Hansen Natural Corp. * | 66,048 | |||||||||
700 | Lancaster Colony Corp. | 30,898 | |||||||||
900 | Mannatech, Inc. (a) | 13,032 | |||||||||
900 | NBTY, Inc. * | 28,674 | |||||||||
1,599 | Sanderson Farms, Inc. (a) | 49,985 | |||||||||
400 | Smithfield Foods, Inc. * | 12,012 | |||||||||
500 | USANA Health Sciences, Inc. * (a) | 22,380 | |||||||||
390,633 | |||||||||||
Health Care — 11.1% | |||||||||||
2,200 | Abaxis, Inc. * (a) | 52,844 | |||||||||
2,300 | Alpharma, Inc.-Class A | 48,162 | |||||||||
2,100 | Apria Healthcare Group * | 42,819 | |||||||||
500 | Bausch & Lomb, Inc. | 24,205 | |||||||||
1,600 | BioMarin Pharmaceutical, Inc. * | 26,624 | |||||||||
1,500 | Cephalon, Inc. * (a) | 85,530 | |||||||||
2,200 | Cerner Corp. * (a) | 101,332 |
See accompanying notes to the financial statements.
5
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Health Care — continued | |||||||||||
300 | Community Health Systems, Inc. * | 11,628 | |||||||||
900 | Cutera, Inc. * | 20,898 | |||||||||
500 | Cytyc Corp. * | 11,945 | |||||||||
400 | DENTSPLY International, Inc. | 13,032 | |||||||||
3,800 | Endo Pharmaceuticals Holdings, Inc. * | 125,514 | |||||||||
6,000 | Health Net, Inc. * | 250,860 | |||||||||
2,600 | Henry Schein, Inc. * | 129,662 | |||||||||
2,100 | Hologic, Inc. * | 90,678 | |||||||||
2,100 | Idexx Laboratories, Inc. * | 193,221 | |||||||||
700 | Intuitive Surgical, Inc. * | 66,080 | |||||||||
500 | Invitrogen Corp. * | 30,425 | |||||||||
1,100 | Kendle International, Inc. * | 29,062 | |||||||||
5,700 | King Pharmaceuticals, Inc. * | 92,454 | |||||||||
100 | Kyphon, Inc. * | 3,621 | |||||||||
500 | Lifecell Corp. * | 15,090 | |||||||||
200 | LifePoint Hospitals, Inc. * | 6,810 | |||||||||
4,200 | Lincare Holdings, Inc. * | 155,526 | |||||||||
1,200 | Mentor Corp. | 58,248 | |||||||||
800 | Meridian Bioscience, Inc. | 19,088 | |||||||||
2,800 | Omnicare, Inc. | 126,868 | |||||||||
5,800 | OraSure Technologies, Inc. * | 39,788 | |||||||||
1,200 | Owens & Minor, Inc. | 38,604 | |||||||||
1,500 | Pediatrix Medical Group, Inc. * | 68,700 | |||||||||
1,100 | Per-Se Technologies, Inc. * (a) | 25,069 | |||||||||
6,300 | Pharmaceutical Product Development, Inc. | 240,156 | |||||||||
1,700 | PSS World Medical, Inc. * (a) | 32,980 | |||||||||
1,300 | Quidel Corp. * | 14,872 | |||||||||
1,400 | RehabCare Group, Inc. * | 20,552 | |||||||||
2,200 | ResMed, Inc. * (a) | 89,496 | |||||||||
3,800 | Respironics, Inc. * | 140,258 | |||||||||
600 | Somanetics Corp. * | 10,116 | |||||||||
2,600 | Techne Corp. * | 132,340 | |||||||||
3,000 | Thoratec Corp. * | 43,980 | |||||||||
100 | United Surgical Partners International, Inc. * | 2,822 |
See accompanying notes to the financial statements.
6
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Health Care — continued | |||||||||||
1,100 | Universal Health Services, Inc.-Class B | 62,282 | |||||||||
600 | VCA Antech, Inc. * | 21,252 | |||||||||
600 | Vertex Pharmaceuticals, Inc. * (a) | 20,670 | |||||||||
300 | Viropharma, Inc. * | 3,753 | |||||||||
2,839,916 | |||||||||||
Machinery — 8.5% | |||||||||||
600 | Bucyrus International, Inc.-Class A | 30,978 | |||||||||
2,500 | Cameron International Corp. * | 119,775 | |||||||||
800 | Cummins, Inc. | 91,856 | |||||||||
2,000 | Flowserve Corp. * | 102,280 | |||||||||
2,800 | FMC Technologies, Inc. * | 164,696 | |||||||||
5,300 | Grant Prideco, Inc. * | 220,109 | |||||||||
1,300 | Helix Energy Solutions Group, Inc. * | 49,998 | |||||||||
5,900 | JLG Industries, Inc. | 103,014 | |||||||||
3,575 | Joy Global, Inc. | 155,656 | |||||||||
700 | Kaydon Corp. | 26,677 | |||||||||
1,900 | Lincoln Electric Holdings, Inc. | 104,557 | |||||||||
2,100 | Manitowoc Co., Inc. (The) | 92,820 | |||||||||
2,100 | Maverick Tube Corp. * (a) | 134,967 | |||||||||
2,000 | MSC Industrial Direct Co., Inc.-Class A | 78,720 | |||||||||
300 | NATCO Group, Inc.-Class A * | 10,959 | |||||||||
700 | Nordson Corp. | 28,028 | |||||||||
900 | Oceaneering International, Inc. * | 32,373 | |||||||||
3,100 | Oil States International, Inc. * | 99,076 | |||||||||
200 | Rofin-Sinar Technologies, Inc. * | 10,952 | |||||||||
4,300 | RPC, Inc. | 87,892 | |||||||||
600 | Stanley Works (The) | 28,338 | |||||||||
7,500 | Terex Corp. * | 329,475 | |||||||||
900 | Tetra Technologies, Inc. * | 25,029 | |||||||||
400 | Tidewater, Inc. | 19,044 | |||||||||
200 | Universal Compression Holdings, Inc. * | 10,886 | |||||||||
300 | W-H Energy Services, Inc. * | 15,141 | |||||||||
2,173,296 |
See accompanying notes to the financial statements.
7
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Manufacturing — 2.0% | |||||||||||
200 | Ball Corp. | 8,068 | |||||||||
1,100 | Harsco Corp. | 87,516 | |||||||||
1,800 | Lamson & Sessions Co. (The) * (a) | 45,486 | |||||||||
600 | Mueller Industries, Inc. | 22,992 | |||||||||
1,700 | Pactiv Corp. * | 45,441 | |||||||||
7,000 | Reliance Steel & Aluminum Co. | 229,390 | |||||||||
800 | Timken Co. (The) | 25,632 | |||||||||
750 | Trinity Industries, Inc. | 25,020 | |||||||||
1,000 | Wabtec Corp. | 28,210 | |||||||||
517,755 | |||||||||||
Metals & Mining — 0.8% | |||||||||||
1,100 | Amcol International Corp. | 25,542 | |||||||||
900 | Arch Coal, Inc. | 29,475 | |||||||||
300 | CONSOL Energy, Inc. | 10,941 | |||||||||
1,500 | Stillwater Mining Co. * | 14,145 | |||||||||
5,100 | Titanium Metals Corp. * | 131,580 | |||||||||
211,683 | |||||||||||
Oil & Gas — 2.8% | |||||||||||
3,100 | Abraxas Petroleum Corp. * | 12,710 | |||||||||
1,400 | Cabot Oil & Gas Corp. | 71,484 | |||||||||
3,300 | Frontier Oil Corp. | 107,910 | |||||||||
1,500 | Giant Industries, Inc. * | 122,550 | |||||||||
300 | GMX Resources, Inc. * (a) | 9,558 | |||||||||
1,600 | Helmerich & Payne, Inc. | 39,248 | |||||||||
300 | Holly Corp. | 13,746 | |||||||||
1,600 | Patterson-UTI Energy, Inc. | 43,840 | |||||||||
200 | Pogo Producing Co. | 8,882 | |||||||||
400 | Pride International, Inc. * | 10,372 | |||||||||
300 | Rowan Cos., Inc. (a) | 10,260 | |||||||||
2,801 | St. Mary Land & Exploration Co. (a) | 114,281 | |||||||||
1,500 | Tesoro Corp. | 96,915 | |||||||||
200 | Todco-Class A * | 7,406 |
See accompanying notes to the financial statements.
8
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Oil & Gas — continued | |||||||||||
300 | Unit Corp. * | 15,813 | |||||||||
3,300 | Vaalco Energy, Inc. * | 27,126 | |||||||||
712,101 | |||||||||||
Primary Process Industry — 3.7% | |||||||||||
1,700 | Airgas, Inc. | 60,894 | |||||||||
5,200 | AK Steel Holding Corp. * | 65,572 | |||||||||
3,600 | Allegheny Technologies, Inc. | 206,460 | |||||||||
800 | Carpenter Technology Corp. | 76,672 | |||||||||
4,500 | Commercial Metals Co. | 97,155 | |||||||||
1,000 | Millipore Corp. * | 64,180 | |||||||||
600 | NewMarket Corp. | 37,158 | |||||||||
400 | Olympic Steel, Inc. | 11,060 | |||||||||
400 | Ryerson Tull, Inc. (a) | 8,472 | |||||||||
3,100 | Steel Dynamics, Inc. | 163,649 | |||||||||
600 | Steel Technologies, Inc. | 13,344 | |||||||||
2,300 | United States Steel Corp. | 133,791 | |||||||||
938,407 | |||||||||||
Retail Stores — 12.1% | |||||||||||
1,500 | Abercrombie & Fitch Co.-Class A | 96,795 | |||||||||
2,100 | Advance Auto Parts, Inc. | 63,252 | |||||||||
3,300 | American Eagle Outfitters, Inc. | 127,479 | |||||||||
2,600 | AnnTaylor Stores Corp. * (a) | 103,480 | |||||||||
800 | BJ's Wholesale Club, Inc. * | 21,080 | |||||||||
600 | CarMax, Inc. * | 22,614 | |||||||||
1,100 | CDW Corp. | 64,130 | |||||||||
2,700 | Charlotte Russe Holding, Inc. * | 72,090 | |||||||||
5,700 | Charming Shoppes, Inc. * | 75,012 | |||||||||
1,100 | Children's Place Retail Stores, Inc. * (a) | 63,767 | |||||||||
400 | Christopher & Banks Corp. | 9,740 | |||||||||
3,400 | Circuit City Stores, Inc. (a) | 80,274 | |||||||||
800 | Citi Trends, Inc. * (a) | 25,144 | |||||||||
5,100 | Claire's Stores, Inc. | 139,383 |
See accompanying notes to the financial statements.
9
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Retail Stores — continued | |||||||||||
900 | Conn's, Inc. * (a) | 17,955 | |||||||||
4,200 | Dollar Tree Stores, Inc. * (a) | 120,876 | |||||||||
5,600 | Dress Barn, Inc. * (a) | 98,840 | |||||||||
5,500 | Family Dollar Stores, Inc. | 140,635 | |||||||||
8,800 | Fastenal Co. | 322,784 | |||||||||
2,100 | Great Atlantic & Pacific Tea Co. (a) | 48,153 | |||||||||
800 | Group 1 Automotive, Inc. | 36,240 | |||||||||
2,100 | Gymboree Corp. (The) * | 70,455 | |||||||||
2,200 | Hibbett Sporting Goods, Inc. * | 53,966 | |||||||||
900 | Insight Enterprises, Inc. * | 16,209 | |||||||||
987 | JOS. A. Bank Clothiers, Inc. * (a) | 23,619 | |||||||||
1,700 | Longs Drug Stores Corp. | 77,231 | |||||||||
3,200 | Men's Wearhouse, Inc. | 113,440 | |||||||||
600 | NetFlix, Inc. * (a) | 12,006 | |||||||||
8,400 | O'Reilly Automotive, Inc. * | 249,396 | |||||||||
1,725 | Pacific Sunwear of California, Inc. * | 23,046 | |||||||||
1,100 | Pantry (The), Inc. * | 51,546 | |||||||||
1,200 | Pathmark Stores, Inc. * | 11,652 | |||||||||
3,700 | Payless ShoeSource, Inc. * (a) | 86,802 | |||||||||
5,000 | PetMed Express, Inc. * | 62,500 | |||||||||
1,700 | RadioShack Corp. | 30,702 | |||||||||
2,050 | Rent-A-Center, Inc. * | 55,555 | |||||||||
2,400 | Ross Stores, Inc. | 58,776 | |||||||||
1,700 | Talbots, Inc. | 37,417 | |||||||||
2,500 | Tiffany & Co. | 79,000 | |||||||||
900 | Tractor Supply Co. * | 38,322 | |||||||||
2,800 | Tween Brands, Inc. * | 95,368 | |||||||||
2,400 | Wild Oats Markets, Inc. * (a) | 39,216 | |||||||||
2,400 | Williams-Sonoma, Inc. | 70,704 | |||||||||
3,106,651 | |||||||||||
Services — 9.2% | |||||||||||
1,900 | 24/7 Real Media, Inc. * | 17,252 | |||||||||
2,400 | Administaff, Inc. | 82,920 |
See accompanying notes to the financial statements.
10
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Services — continued | |||||||||||
1,700 | Allied Waste Industries, Inc. * | 17,578 | |||||||||
1,100 | AMN Healthcare Services, Inc. * | 26,400 | |||||||||
2,875 | Applebee's International, Inc. | 59,656 | |||||||||
100 | Aramark Corp.-Class B | 3,279 | |||||||||
3,900 | Brinker International, Inc. | 150,033 | |||||||||
200 | Brink's Co. (The) | 11,394 | |||||||||
2,800 | Career Education Corp. * | 53,620 | |||||||||
700 | CBRL Group, Inc. | 26,488 | |||||||||
1,000 | CEC Entertainment, Inc. * | 31,880 | |||||||||
2,200 | Cenveo, Inc. * | 46,200 | |||||||||
500 | Choice Hotels International, Inc. | 18,955 | |||||||||
2,100 | Copart, Inc. * | 58,947 | |||||||||
1,500 | Corporate Executive Board Co. (The) | 131,460 | |||||||||
1,000 | CRA International, Inc. * | 44,990 | |||||||||
1,300 | Darden Restaurants, Inc. | 46,020 | |||||||||
3,550 | Factset Research Systems, Inc. | 156,555 | |||||||||
2,900 | Iron Mountain, Inc. * (a) | 118,871 | |||||||||
2,600 | ITT Educational Services, Inc. * | 171,834 | |||||||||
200 | Labor Ready, Inc. * | 3,426 | |||||||||
2,600 | Manpower, Inc. | 153,686 | |||||||||
5,300 | Monster Worldwide, Inc. * | 215,922 | |||||||||
3,600 | MPS Group, Inc. * | 50,616 | |||||||||
1,600 | OSI Restaurant Partners, Inc. | 49,552 | |||||||||
3,600 | Papa John's International, Inc. * | 122,400 | |||||||||
1,300 | Performance Food Group Co. * | 31,993 | |||||||||
700 | Pool Corp. | 26,649 | |||||||||
400 | Rare Hospitality International, Inc. * | 11,456 | |||||||||
800 | Regis Corp. | 29,352 | |||||||||
5,400 | Robert Half International, Inc. | 167,076 | |||||||||
1,900 | Ruby Tuesday, Inc. | 49,058 | |||||||||
3,100 | Sonic Corp. * | 67,983 | |||||||||
500 | Stericycle, Inc. * | 33,345 | |||||||||
1,800 | Valassis Communications, Inc. * | 35,496 | |||||||||
900 | World Fuel Services Corp. | 32,436 | |||||||||
2,354,778 |
See accompanying notes to the financial statements.
11
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Technology — 23.0% | |||||||||||
500 | AAR Corp. * (a) | 11,155 | |||||||||
1,000 | Acuity Brands, Inc. | 42,730 | |||||||||
5,400 | ADTRAN, Inc. | 134,298 | |||||||||
300 | Advent Software, Inc. * (a) | 9,825 | |||||||||
1,000 | Aeroflex, Inc. * | 10,420 | |||||||||
6,300 | Akamai Technologies, Inc. * (a) | 246,960 | |||||||||
200 | Alliance Data Systems Corp. * | 10,108 | |||||||||
600 | Alliant Techsystems, Inc. * | 45,894 | |||||||||
7,600 | Amkor Technology, Inc. * (a) | 43,092 | |||||||||
1,000 | Ansys, Inc. * | 46,740 | |||||||||
400 | aQuantive, Inc. * (a) | 9,920 | |||||||||
900 | Atheros Communications, Inc. * (a) | 14,643 | |||||||||
4,200 | Avnet, Inc. * | 82,152 | |||||||||
2,900 | AVX Corp. | 48,169 | |||||||||
700 | Bankrate, Inc. * (a) | 19,894 | |||||||||
8,700 | BEA Systems, Inc. * (a) | 119,451 | |||||||||
1,800 | Blue Coat Systems, Inc. * | 30,618 | |||||||||
7,500 | BMC Software, Inc. * | 199,650 | |||||||||
7,490 | Brightpoint, Inc. * | 124,634 | |||||||||
7,300 | Brocade Communications Systems, Inc. * | 45,260 | |||||||||
700 | Ceradyne, Inc. * (a) | 30,849 | |||||||||
3,300 | Ceridian Corp. * | 78,771 | |||||||||
900 | Checkfree Corp. * | 32,220 | |||||||||
9,900 | Citrix Systems, Inc. * | 303,732 | |||||||||
1,700 | CNET Networks, Inc. * (a) | 16,031 | |||||||||
3,500 | CommScope, Inc. * | 102,235 | |||||||||
700 | Computer Programs & Systems, Inc. | 23,814 | |||||||||
2,500 | Compuware Corp. * | 19,000 | |||||||||
1,900 | CSG Systems International, Inc. * | 51,148 | |||||||||
1,100 | Cymer, Inc. * (a) | 45,265 | |||||||||
1,900 | Daktronics, Inc. | 39,653 | |||||||||
500 | Diebold, Inc. | 20,955 | |||||||||
2,100 | Digital Insight Corp. * | 54,621 | |||||||||
600 | Diodes, Inc. * | 22,464 |
See accompanying notes to the financial statements.
12
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
2,900 | Distributed Energy Systems Corp. * (a) | 13,572 | |||||||||
1,600 | DST Systems, Inc. * (a) | 94,448 | |||||||||
2,800 | Electronics for Imaging * | 64,512 | |||||||||
2,500 | Encore Wire Corp. * (a) | 93,900 | |||||||||
1,900 | Energizer Holdings, Inc. * | 127,034 | |||||||||
4,600 | Foundry Networks, Inc. * | 55,982 | |||||||||
1,700 | General Cable Corp. * | 65,501 | |||||||||
500 | Global Imaging Systems, Inc. * | 10,965 | |||||||||
2,400 | Global Payments, Inc. | 91,320 | |||||||||
2,400 | Greatbatch, Inc. * | 58,704 | |||||||||
2,600 | Harris Corp. | 114,192 | |||||||||
3,700 | Informatica Corp. * | 54,168 | |||||||||
5,600 | Ingram Micro, Inc.-Class A * | 100,800 | |||||||||
1,250 | Innovative Solutions & Support, Inc. * (a) | 18,325 | |||||||||
1,600 | Intergraph Corp. * | 59,776 | |||||||||
4,000 | Intersil Corp.-Class A | 101,400 | |||||||||
100 | Itron, Inc. * (a) | 5,598 | |||||||||
1,100 | Komag, Inc. * (a) | 39,556 | |||||||||
2,000 | Kopin Corp. * | 7,500 | |||||||||
2,300 | Lam Research Corp. * | 98,417 | |||||||||
1,800 | LSI Logic Corp. * (a) | 14,490 | |||||||||
1,400 | Mantech International Corp.-Class A * | 42,616 | |||||||||
9,600 | MEMC Electronic Materials, Inc. * | 371,328 | |||||||||
1,000 | Metrologic Instruments, Inc. * | 16,140 | |||||||||
6,900 | Micrel, Inc. * | 69,138 | |||||||||
100 | Microsemi Corp. * | 2,777 | |||||||||
300 | MicroStrategy, Inc.-Class A * (a) | 27,360 | |||||||||
2,700 | Molex Inc. | 98,469 | |||||||||
1,600 | Multi-Fineline Electronix, Inc. * (a) | 36,128 | |||||||||
900 | Neoware, Inc. * | 11,610 | |||||||||
1,100 | Netlogic Microsystems, Inc. * (a) | 32,461 | |||||||||
4,900 | Novell, Inc. * | 32,683 | |||||||||
4,500 | OmniVision Technologies, Inc. * (a) | 74,700 | |||||||||
3,300 | ON Semiconductor Corp. * | 19,833 |
See accompanying notes to the financial statements.
13
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
800 | Orbital Sciences Corp. * | 14,472 | |||||||||
1,800 | Paxar Corp. * | 35,046 | |||||||||
4,300 | Plexus Corp. * | 85,226 | |||||||||
2,400 | QLogic Corp. * | 44,112 | |||||||||
1,700 | Quality Systems, Inc. | 68,170 | |||||||||
8,600 | Red Hat, Inc. * (a) | 199,864 | |||||||||
2,500 | RF Micro Devices, Inc. * | 16,550 | |||||||||
200 | Rogers Corp. * | 11,604 | |||||||||
700 | RSA Security, Inc. * | 19,495 | |||||||||
1,100 | Salesforce.com, Inc. * (a) | 37,928 | |||||||||
800 | ScanSource, Inc. * | 24,832 | |||||||||
3,800 | Silicon Laboratories, Inc. * (a) | 134,026 | |||||||||
700 | SiRF Technology Holdings, Inc. * (a) | 18,431 | |||||||||
700 | SPSS, Inc. * | 17,759 | |||||||||
1,400 | Supertex, Inc. * (a) | 49,518 | |||||||||
2,700 | Syntel, Inc. | 59,157 | |||||||||
700 | Talx Corp. | 17,290 | |||||||||
300 | Tech Data Corp. * | 10,467 | |||||||||
500 | Technitrol, Inc. | 14,155 | |||||||||
3,200 | Tektronix, Inc. | 90,688 | |||||||||
9,700 | Tellabs, Inc. * | 98,843 | |||||||||
1,900 | Thomas & Betts Corp. * | 85,804 | |||||||||
1,600 | Transaction Systems Architects, Inc. * | 53,072 | |||||||||
500 | Trident Microsystems, Inc. * | 10,315 | |||||||||
800 | TTM Technologies, Inc. * | 10,288 | |||||||||
700 | United Industrial Corp. | 37,709 | |||||||||
700 | United Stationers, Inc. * | 32,081 | |||||||||
200 | Valueclick, Inc. * | 3,530 | |||||||||
500 | Veeco Instruments, Inc. * | 12,230 | |||||||||
400 | VeriFone Holdings, Inc. * | 9,260 | |||||||||
3,000 | WESCO International, Inc. * | 175,500 | |||||||||
5,800 | Western Digital Corp. * | 106,140 | |||||||||
1,800 | Zoran Corp. * | 32,076 | |||||||||
5,897,412 |
See accompanying notes to the financial statements.
14
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
Transportation — 3.4% | |||||||||||
1,700 | Airtran Holdings, Inc. * (a) | 19,465 | |||||||||
300 | American Commercial Lines, Inc. * (a) | 15,750 | |||||||||
7,900 | AMR Corp. * | 163,135 | |||||||||
1,200 | Arkansas Best Corp. | 52,980 | |||||||||
1,500 | Celadon Group, Inc. * | 27,795 | |||||||||
3,500 | Continental Airlines, Inc.-Class B * (a) | 87,815 | |||||||||
2,800 | EGL, Inc. * (a) | 85,596 | |||||||||
1,300 | ExpressJet Holdings, Inc. * | 9,087 | |||||||||
1,400 | Forward Air Corp. | 44,996 | |||||||||
1,500 | Kirby Corp. * | 43,995 | |||||||||
2,100 | Landstar System, Inc. | 89,670 | |||||||||
700 | Old Dominion Freight Line, Inc. * | 22,344 | |||||||||
300 | Pacer International, Inc. | 8,259 | |||||||||
2,200 | Skywest, Inc. | 53,174 | |||||||||
1,300 | Swift Transportation Co. * | 30,147 | |||||||||
3,100 | US Airways Group, Inc. * | 130,975 | |||||||||
885,183 | |||||||||||
Utility — 0.6% | |||||||||||
3,900 | Centerpoint Energy, Inc. | 56,355 | |||||||||
400 | Crown Castle International Corp. * (a) | 13,744 | |||||||||
800 | NII Holdings, Inc. * | 42,680 | |||||||||
3,100 | Time Warner Telecom, Inc.-Class A * (a) | 55,707 | |||||||||
168,486 | |||||||||||
TOTAL COMMON STOCKS (COST $25,588,085) | 25,324,299 | ||||||||||
SHORT-TERM INVESTMENTS — 18.6% | |||||||||||
299,325 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $299,354 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/13 and market value, including accrued interest, of $305,311. | 299,325 |
See accompanying notes to the financial statements.
15
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — continued | |||||||||||
846,953 | Credit Suisse First Boston Corp. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $847,079 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $892,935. (b) | 846,953 | |||||||||
1,321,246 | Goldman Sachs Group Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $1,321,442 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $1,362,431. (b) | 1,321,246 | |||||||||
169,391 | Lehman Brothers Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $169,416 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $198,604. (b) | 169,391 | |||||||||
1,321,246 | Merrill Lynch & Co. Triparty Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $1,321,441 and an effective yield of 5.30%, collateralized by various corporate debt obligations with an aggregate market value of $1,360,309. (b) | 1,321,246 | |||||||||
819,718 | Morgan Stanley & Co. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $819,840 and an effective yield of 5.36%, collateralized by various corporate debt obligations with an aggregate market value of $872,976. (b) | 819,718 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $4,777,879) | 4,777,879 | ||||||||||
TOTAL INVESTMENTS — 117.3% (Cost $30,365,964) | 30,102,178 | ||||||||||
Other Assets and Liabilities (net) — (17.3%) | (4,439,265 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 25,662,913 |
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
* 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.
16
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $4,325,423 (cost $30,365,964) (Note 2) | $ | 30,102,178 | |||||
Dividends and interest receivable | 16,579 | ||||||
Receivable for collateral on futures contracts (Note 2) | 52,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 12,958 | ||||||
Total assets | 30,183,715 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 4,478,554 | ||||||
Payable for Fund shares repurchased | 1,640 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 6,845 | ||||||
Shareholder service fee | 3,312 | ||||||
Trustees and Chief Compliance Officer fees | 129 | ||||||
Accrued expenses | 30,322 | ||||||
Total liabilities | 4,520,802 | ||||||
Net assets | $ | 25,662,913 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 24,825,962 | |||||
Accumulated undistributed net investment income | 12,759 | ||||||
Accumulated net realized gain | 1,087,978 | ||||||
Net unrealized depreciation | (263,786 | ) | |||||
$ | 25,662,913 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 25,662,913 | |||||
Shares outstanding: | |||||||
Class III | 1,457,485 | ||||||
Net asset value per share: | |||||||
Class III | $ | 17.61 |
See accompanying notes to the financial statements.
17
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 91,160 | |||||
Interest (including securities lending income of $14,992) | 27,846 | ||||||
Total investment income | 119,006 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 44,742 | ||||||
Shareholder service fee – Class III (Note 3) | 21,649 | ||||||
Custodian, fund accounting agent and transfer agent fees | 35,144 | ||||||
Audit and tax fees | 24,767 | ||||||
Legal fees | 368 | ||||||
Trustees fees and related expenses (Note 3) | 312 | ||||||
Registration fees | 3,772 | ||||||
Miscellaneous | 460 | ||||||
Total expenses | 131,214 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (64,499 | ) | |||||
Net expenses | 66,715 | ||||||
Net investment income (loss) | 52,291 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 1,962,232 | ||||||
Closed futures contracts | 12,930 | ||||||
Net realized gain (loss) | 1,975,162 | ||||||
Change in net unrealized appreciation (depreciation) on investments | (4,288,323 | ) | |||||
Net realized and unrealized gain (loss) | (2,313,161 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (2,260,870 | ) |
See accompanying notes to the financial statements.
18
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 52,291 | $ | 109,706 | |||||||
Net realized gain (loss) | 1,975,162 | 7,326,155 | |||||||||
Change in net unrealized appreciation (depreciation) | (4,288,323 | ) | (2,622,842 | ) | |||||||
Net increase (decrease) in net assets from operations | (2,260,870 | ) | 4,813,019 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (57,715 | ) | (124,141 | ) | |||||||
Net realized gains | |||||||||||
Class III | (739,414 | ) | (8,526,333 | ) | |||||||
(797,129 | ) | (8,650,474 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (1,102,342 | ) | (5,297,238 | ) | |||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 19,714 | 137,656 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | (1,082,628 | ) | (5,159,582 | ) | |||||||
Total increase (decrease) in net assets | (4,140,627 | ) | (8,997,037 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 29,803,540 | 38,800,577 | |||||||||
End of period (including accumulated undistributed net investment income of $12,759 and $18,183, respectively) | $ | 25,662,913 | $ | 29,803,540 |
See accompanying notes to the financial statements.
19
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.67 | $ | 21.96 | $ | 21.78 | $ | 13.52 | $ | 16.48 | $ | 19.08 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.03 | 0.06 | 0.03 | — | (a) | (0.01 | ) | 0.01 | |||||||||||||||||||
Net realized and unrealized gain (loss) | (1.54 | ) | 2.93 | 1.96 | 8.28 | (2.95 | ) | (1.12 | ) | ||||||||||||||||||
Total from investment operations | (1.51 | ) | 2.99 | 1.99 | 8.28 | (2.96 | ) | (1.11 | ) | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.04 | ) | (0.07 | ) | (0.01 | ) | (0.02 | ) | — | — | |||||||||||||||||
From net realized gains | (0.51 | ) | (5.21 | ) | (1.80 | ) | — | — | (1.49 | ) | |||||||||||||||||
Total distributions | (0.55 | ) | (5.28 | ) | (1.81 | ) | (0.02 | ) | — | (1.49 | ) | ||||||||||||||||
Net asset value, end of period | $ | 17.61 | $ | 19.67 | $ | 21.96 | $ | 21.78 | $ | 13.52 | $ | 16.48 | |||||||||||||||
Total Return(b) | (7.79 | )% | 14.63 | % | 10.50 | % | 61.22 | % | (17.96 | )% | (6.36 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 25,663 | $ | 29,804 | $ | 38,801 | $ | 41,662 | $ | 17,669 | $ | 17,049 | |||||||||||||||
Net expenses to average daily net assets | 0.46 | % | 0.48 | % | 0.48 | % | 0.48 | % | 0.49 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 0.36 | % | 0.30 | % | 0.16 | % | 0.02 | % | (0.06 | )% | 0.07 | % | |||||||||||||||
Portfolio turnover rate | 56 | % | 87 | % | 110 | % | 97 | % | 116 | % | 118 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.45 | % | 0.35 | % | 0.26 | % | 0.24 | % | 0.37 | % | 0.33 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.08 | $ | 0.04 | $ | 0.06 | $ | 0.03 | $ | 0.02 |
(a) Net investment income 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 shareholders.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
20
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
1. Organization
GMO U.S. Small/Mid Cap Growth 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 Funds into classes.
The Fund commenced operations following an in-kind purchase of shares by GMO Small/Mid Cap Growth Fund (formerly GMO Small Cap Growth Fund) ("Predecessor Fund") effected as of the close of business on September 16, 2005. For tax purposes, this transaction met all requirements for a tax-free reorganization under the Internal Revenue Code, and consequently the Fund retained the Predecessor Fund's basis and holding period in each asset contributed in-kind. For accounting purposes, the Fund also recorded a cost for each in-kind asset contributed by the Predecessor Fund equal to such asset's historical cost. For tax and accounting purposes, the Fund is treated as a continuation of the Predecessor Fund's operations. Therefore, the Financial Statements reflect the performance and operational history of the Predecessor Fund prior to September 16, 2005.
The Fund seeks long-term capital growth. The Fund seeks to achieve its objective by outperforming the Russell 2500 Growth Index. The Fund typically makes equity investments in companies that issue stocks included in the Russell 2500 Index, and companies with similar size characteristics.
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 generally 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
21
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 pursuant to procedures approved by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. There were no futures contracts outstanding at the end of the period.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 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.
22
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no swap agreements outstanding at the end of the period.
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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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 August 31, 2006, the Fund had loaned securities having a market value of $4,325,423 collateralized by cash in the amount of $4,478,554 which was invested in short-term instruments.
23
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Taxes and distributions
The Fund intends to qualify each tax 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.
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 $851,651 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 August 31, 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) | ||||||||||||
$ | 30,380,112 | $ | 2,128,421 | $ | (2,406,355 | ) | $ | (277,934 | ) |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
24
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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, if any, 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 capit al 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 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 the 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 six months ended August 31, 2006 and the year ended February 28, 2006, the Fund received $5,225 and $38,857 in purchase premiums and $14,489 and $98,799 in redemption fees, respectively. The Manager will waive the purchase premium re lating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.31% of the Fund's 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.
25
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expense (excluding shareholder service fees, fees and expenses of the independent trustes of the Trust, fees and expenses for legal services not procured or provided by the Manager of the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 expenses, and transfer taxes) exceed 0.31% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $220 and $92, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $15,705,500 and $16,892,881, 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 August 31, 2006, 56.2% 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 August 31, 2006, 69.4% of the Fund's shares were held by accounts for which the Manager has investment discretion.
26
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares Sold | 58,404 | $ | 1,040,302 | 277,117 | $ | 6,003,947 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 42,332 | 767,387 | 413,988 | 8,499,314 | |||||||||||||||
Shares repurchased | (158,270 | ) | (2,910,031 | ) | (861,543 | ) | (18,064,112 | ) | |||||||||||
Redemption in-kind | — | — | (81,480 | ) | (1,736,387 | ) | |||||||||||||
Purchase premiums and redemptions fees | — | 19,714 | — | 137,656 | |||||||||||||||
Net increase (decrease) | (57,534 | ) | $ | (1,082,628 | ) | (251,918 | ) | $ | (5,159,582 | ) |
27
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO U.S. Small/Mid Cap Growth Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
Noting that the Fund is the successor to GMO Small/Mid Cap Growth Fund (the "Predecessor Fund"), a former series of the Trust that had an investment objective and policies and restrictions substantially identical to those of the Fund, the Trustees considered investment performance and fee and expense information of the Predecessor Fund for periods ending on or before September 16, 2005. In particular, the Trustees noted that the Fund's advisory fee was 0.02% lower than the Predecessor Fund's advisory fee.
In addition, the Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the
28
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to th e Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax
29
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
30
GMO U.S Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | 0.46 | % | $ | 1,000.00 | $ | 922.10 | $ | 2.23 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
31
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 98.8 | % | |||||
Short-Term Investments | 1.1 | ||||||
Other | 0.1 | ||||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Financial | 22.7 | % | |||||
Health Care | 19.9 | ||||||
Retail Stores | 15.1 | ||||||
Technology | 12.1 | ||||||
Utility | 7.0 | ||||||
Consumer Goods | 3.9 | ||||||
Food & Beverage | 3.3 | ||||||
Oil & Gas | 3.3 | ||||||
Services | 2.9 | ||||||
Transportation | 2.9 | ||||||
Manufacturing | 2.3 | ||||||
Machinery | 1.5 | ||||||
Automotive | 1.3 | ||||||
Construction | 0.8 | ||||||
Primary Process Industry | 0.6 | ||||||
Metals & Mining | 0.4 | ||||||
100.0 | % |
1
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 98.8% | |||||||||||
Automotive — 1.3% | |||||||||||
3,000 | Eaton Corp. | 199,500 | |||||||||
48,469 | Ford Motor Co. | 405,686 | |||||||||
5,200 | Harley-Davidson, Inc. | 304,252 | |||||||||
5,100 | Johnson Controls, Inc. | 366,843 | |||||||||
4,950 | Paccar, Inc. | 270,616 | |||||||||
1,546,897 | |||||||||||
Construction — 0.8% | |||||||||||
2,000 | Centex Corp. | 101,900 | |||||||||
2,533 | D.R. Horton, Inc. | 55,549 | |||||||||
500 | Fluor Corp. | 43,210 | |||||||||
900 | Jacobs Engineering Group, Inc. * | 78,381 | |||||||||
2,300 | KB Home | 98,348 | |||||||||
3,100 | Lennar Corp.-Class A | 139,004 | |||||||||
1,800 | Martin Marietta Materials, Inc. | 148,248 | |||||||||
4,300 | Masco Corp. | 117,863 | |||||||||
100 | NVR, Inc. * | 51,365 | |||||||||
3,000 | Pulte Homes, Inc. | 89,010 | |||||||||
922,878 | |||||||||||
Consumer Goods — 3.8% | |||||||||||
22,000 | Altria Group, Inc. | 1,837,660 | |||||||||
4,000 | Avon Products, Inc. | 114,840 | |||||||||
600 | Cintas Corp. | 22,218 | |||||||||
4,000 | Colgate-Palmolive Co. | 239,440 | |||||||||
7,200 | Eastman Kodak Co. | 153,144 | |||||||||
200 | Harman International Industries, Inc. | 16,224 | |||||||||
9,600 | International Game Technology | 371,328 | |||||||||
3,700 | Jones Apparel Group, Inc. | 115,810 | |||||||||
1,500 | Kimberly-Clark Corp. | 95,250 | |||||||||
1,300 | Leggett & Platt, Inc. | 29,965 | |||||||||
5,800 | Liz Claiborne, Inc. | 216,746 |
See accompanying notes to the financial statements.
2
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Consumer Goods — continued | |||||||||||
2,500 | Mohawk Industries, Inc. * | 177,200 | |||||||||
7,100 | Newell Rubbermaid, Inc. | 191,629 | |||||||||
1,800 | Reynolds American, Inc. | 117,126 | |||||||||
2,300 | UST, Inc. | 121,578 | |||||||||
2,300 | VF Corp. | 160,747 | |||||||||
5,500 | Whirlpool Corp. | 445,005 | |||||||||
4,425,910 | |||||||||||
Financial — 22.5% | |||||||||||
21,900 | Aflac, Inc. | 987,033 | |||||||||
3,600 | Allstate Corp. (The) | 208,584 | |||||||||
3,850 | AMBAC Financial Group, Inc. | 333,371 | |||||||||
37,200 | American International Group, Inc. | 2,374,104 | |||||||||
13,600 | AON Corp. | 470,152 | |||||||||
16,508 | Bank of America Corp. | 849,667 | |||||||||
5,400 | Bank of New York Co. (The), Inc. | 182,250 | |||||||||
7,300 | BB&T Corp. | 312,440 | |||||||||
1,800 | Bear Stearns Cos. (The), Inc. | 234,630 | |||||||||
3,300 | Brown & Brown, Inc. | 98,802 | |||||||||
700 | Capital One Financial Corp. | 51,170 | |||||||||
28,000 | Charles Schwab Corp. (The) | 456,680 | |||||||||
4,200 | Chubb Corp. | 210,672 | |||||||||
2,900 | CIT Group, Inc. | 130,674 | |||||||||
61,500 | Citigroup, Inc. | 3,035,025 | |||||||||
3,500 | Comerica, Inc. | 200,375 | |||||||||
11,800 | E*Trade Financial Corp. * | 278,362 | |||||||||
31,300 | Fannie Mae | 1,647,945 | |||||||||
3,700 | Federated Investors, Inc.-Class B | 123,876 | |||||||||
7,457 | Fidelity National Financial, Inc. | 299,995 | |||||||||
1,900 | Fifth Third Bancorp | 74,746 | |||||||||
1,400 | First American Corp. | 56,868 | |||||||||
300 | First Horizon National Corp. | 11,454 | |||||||||
500 | Franklin Resources, Inc. | 49,205 | |||||||||
7,200 | Freddie Mac | 457,920 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
900 | Golden West Financial Corp. | 67,941 | |||||||||
7,600 | Goldman Sachs Group, Inc. | 1,129,740 | |||||||||
1,600 | H&R Block, Inc. | 33,648 | |||||||||
1,100 | Hartford Financial Services Group, Inc. | 94,446 | |||||||||
1,400 | Janus Capital Group, Inc. | 24,892 | |||||||||
800 | Jefferies Group, Inc. | 19,936 | |||||||||
37,800 | JPMorgan Chase & Co. | 1,725,948 | |||||||||
2,000 | KeyCorp | 73,580 | |||||||||
10,000 | Lehman Brothers Holdings, Inc. | 638,100 | |||||||||
6,767 | Lincoln National Corp. | 410,757 | |||||||||
11,400 | Loews Corp. | 438,672 | |||||||||
3,000 | Marsh & McLennan Cos., Inc. | 78,480 | |||||||||
3,500 | MBIA, Inc. | 215,705 | |||||||||
8,600 | Mellon Financial Corp. | 320,178 | |||||||||
14,600 | Merrill Lynch & Co., Inc. | 1,073,538 | |||||||||
5,000 | Metlife, Inc. | 275,150 | |||||||||
3,200 | MGIC Investment Corp. | 185,184 | |||||||||
6,900 | Morgan Stanley | 453,951 | |||||||||
18,700 | National City Corp. | 646,646 | |||||||||
1,100 | Northern Trust Corp. | 61,589 | |||||||||
10,587 | Old Republic International Corp. | 221,268 | |||||||||
4,600 | PMI Group (The), Inc. | 198,904 | |||||||||
6,900 | PNC Financial Services Group, Inc. | 488,451 | |||||||||
2,900 | Principal Financial Group, Inc. | 154,396 | |||||||||
29,700 | Progressive Corp. (The) | 730,323 | |||||||||
2,600 | Prudential Financial, Inc. | 190,866 | |||||||||
3,000 | Radian Group, Inc. | 179,640 | |||||||||
9,100 | St. Paul Travelers Cos. (The), Inc. | 399,490 | |||||||||
5,800 | State Street Corp. | 358,440 | |||||||||
300 | T. Rowe Price Group, Inc. | 13,218 | |||||||||
4,200 | TD Ameritrade Holding Corp. | 73,584 | |||||||||
4,600 | Torchmark Corp. | 286,166 | |||||||||
13,000 | UnumProvident Corp. | 246,350 | |||||||||
3,000 | US Bancorp | 96,210 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
8,750 | W.R. Berkley Corp. | 306,250 | |||||||||
21,345 | Washington Mutual, Inc. | 894,142 | |||||||||
25,941,779 | |||||||||||
Food & Beverage — 3.2% | |||||||||||
7,000 | Anheuser-Busch Cos., Inc. | 345,660 | |||||||||
9,700 | Archer-Daniels-Midland Co. | 399,349 | |||||||||
1,800 | Brown-Forman Corp.-Class B | 138,564 | |||||||||
1,400 | Campbell Soup Co. | 52,598 | |||||||||
38,600 | Coca-Cola Co. (The) | 1,729,666 | |||||||||
5,700 | Dean Foods Co. * | 225,834 | |||||||||
2,700 | HJ Heinz Co. | 112,968 | |||||||||
600 | Hormel Foods Corp. | 21,990 | |||||||||
3,700 | Kraft Foods, Inc. | 125,467 | |||||||||
3,900 | Pepsi Bottling Group, Inc. | 136,539 | |||||||||
1,600 | PepsiCo, Inc. | 104,448 | |||||||||
11,200 | Sara Lee Corp. | 186,256 | |||||||||
10,400 | Tyson Foods, Inc.-Class A | 153,192 | |||||||||
3,732,531 | |||||||||||
Health Care — 19.7% | |||||||||||
3,700 | Abbott Laboratories | 180,190 | |||||||||
2,400 | Allergan, Inc. | 274,944 | |||||||||
17,400 | AmerisourceBergen Corp. | 768,384 | |||||||||
5,000 | Amgen, Inc. * | 339,650 | |||||||||
2,800 | Barr Pharmaceuticals, Inc. * | 158,200 | |||||||||
1,600 | Baxter International, Inc. | 71,008 | |||||||||
1,400 | Becton Dickinson & Co. | 97,580 | |||||||||
500 | Biogen Idec, Inc. * | 22,070 | |||||||||
1,200 | Biomet, Inc. | 39,252 | |||||||||
27,900 | Bristol-Myers Squibb Co. | 606,825 | |||||||||
14,300 | Cardinal Health, Inc. | 964,106 | |||||||||
5,800 | Caremark Rx, Inc. | 336,052 | |||||||||
2,500 | Cigna Corp. | 282,675 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Health Care — continued | |||||||||||
800 | Endo Pharmaceuticals Holdings, Inc. * | 26,424 | |||||||||
11,800 | Express Scripts, Inc. * | 992,144 | |||||||||
25,100 | Forest Laboratories, Inc. * | 1,254,498 | |||||||||
2,200 | Genentech, Inc. * | 181,544 | |||||||||
4,200 | Health Net, Inc. * | 175,602 | |||||||||
1,100 | Humana, Inc. * | 67,023 | |||||||||
400 | IMS Health, Inc. | 10,916 | |||||||||
18,700 | Johnson & Johnson | 1,209,142 | |||||||||
12,900 | King Pharmaceuticals, Inc. * | �� | 209,238 | ||||||||
3,800 | Lincare Holdings, Inc. * | 140,714 | |||||||||
22,200 | McKesson Corp. | 1,127,760 | |||||||||
700 | Medtronic, Inc. | 32,830 | |||||||||
103,600 | Merck & Co., Inc. | 4,200,980 | |||||||||
203,330 | Pfizer, Inc. | 5,603,775 | |||||||||
4,500 | Quest Diagnostics, Inc. | 289,260 | |||||||||
600 | St. Jude Medical, Inc. * | 21,846 | |||||||||
2,000 | Stryker Corp. | 96,060 | |||||||||
48,400 | UnitedHealth Group, Inc. | 2,514,380 | |||||||||
2,700 | Varian Medical Systems, Inc. * | 143,910 | |||||||||
178 | WellPoint, Inc. * | 13,779 | |||||||||
5,500 | Wyeth | 267,850 | |||||||||
22,720,611 | |||||||||||
Machinery — 1.4% | |||||||||||
5,000 | Baker Hughes, Inc. | 355,900 | |||||||||
3,200 | BJ Services Co. | 109,792 | |||||||||
9,700 | Caterpillar, Inc. | 643,595 | |||||||||
700 | Cummins, Inc. | 80,374 | |||||||||
2,600 | Deere & Co. | 203,060 | |||||||||
1,100 | Dover Corp | 53,482 | |||||||||
2,000 | Parker-Hannifin Corp. | 148,100 | |||||||||
1,700 | Terex Corp. * | 74,681 | |||||||||
1,668,984 |
See accompanying notes to the financial statements.
6
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Manufacturing — 2.3% | |||||||||||
2,100 | 3M Co. | 150,570 | |||||||||
3,800 | American Standard Cos., Inc. | 158,726 | |||||||||
37,600 | General Electric Co. | 1,280,656 | |||||||||
12,300 | Illinois Tool Works, Inc. | 539,970 | |||||||||
2,700 | ITT Industries, Inc. | 132,165 | |||||||||
200 | Precision Castparts Corp. | 11,688 | |||||||||
1,200 | Temple-Inland, Inc. | 53,424 | |||||||||
1,100 | Textron, Inc. | 92,246 | |||||||||
3,300 | United Technologies Corp. | 206,943 | |||||||||
2,626,388 | |||||||||||
Metals & Mining — 0.4% | |||||||||||
14,500 | Alcoa, Inc. | 414,555 | |||||||||
Oil & Gas — 3.3% | |||||||||||
15,100 | Anadarko Petroleum Corp. | 708,341 | |||||||||
2,600 | Apache Corp. | 169,728 | |||||||||
1,300 | Chevron Corp. | 83,720 | |||||||||
3,874 | ConocoPhillips | 245,728 | |||||||||
3,800 | Devon Energy Corp. | 237,462 | |||||||||
12,700 | Exxon Mobil Corp. | 859,409 | |||||||||
3,500 | Hess Corp. | 160,230 | |||||||||
5,500 | Marathon Oil Corp. | 459,250 | |||||||||
1,600 | Newfield Exploration Co. * | 69,184 | |||||||||
11,400 | Occidental Petroleum Corp. | 581,286 | |||||||||
3,000 | Sunoco, Inc. | 215,730 | |||||||||
3,790,068 | |||||||||||
Primary Process Industry — 0.6% | |||||||||||
200 | Air Products & Chemicals, Inc. | 13,258 | |||||||||
4,800 | E.I. du Pont de Nemours & Co. | 191,856 | |||||||||
300 | Ecolab, Inc. | 13,374 | |||||||||
2,700 | International Paper Co. | 93,879 | |||||||||
7,000 | Nucor Corp. | 342,090 | |||||||||
654,457 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Retail Stores — 14.9% | |||||||||||
900 | Abercrombie & Fitch Co.-Class A | 58,077 | |||||||||
15,000 | AutoNation, Inc. * | 291,450 | |||||||||
3,500 | AutoZone, Inc. * | 316,050 | |||||||||
11,400 | Bed Bath & Beyond, Inc. * | 384,522 | |||||||||
5,100 | Best Buy, Inc. | 239,700 | |||||||||
1,400 | CDW Corp. | 81,620 | |||||||||
2,200 | Chico's FAS, Inc. * | 40,568 | |||||||||
2,300 | Circuit City Stores, Inc. | 54,303 | |||||||||
9,400 | Costco Wholesale Corp. | 439,826 | |||||||||
8,800 | Dollar General Corp. | 113,168 | |||||||||
3,700 | Family Dollar Stores, Inc. | 94,609 | |||||||||
4,300 | Fastenal Co. | 157,724 | |||||||||
116,000 | Home Depot, Inc. | 3,977,640 | |||||||||
45,400 | Kroger Co. (The) | 1,080,974 | |||||||||
2,000 | Limited Brands, Inc. | 51,460 | |||||||||
98,200 | Lowe's Cos., Inc. | 2,657,292 | |||||||||
1,800 | Nordstrom, Inc. | 67,230 | |||||||||
14,300 | Office Depot, Inc. * | 526,812 | |||||||||
3,800 | Ross Stores, Inc. | 93,062 | |||||||||
25,200 | Safeway, Inc. | 779,436 | |||||||||
16,000 | Staples, Inc. | 360,960 | |||||||||
10,157 | Supervalu, Inc. | 290,084 | |||||||||
3,200 | Tiffany & Co. | 101,120 | |||||||||
11,400 | TJX Cos., Inc. | 304,950 | |||||||||
23,500 | Walgreen Co. | 1,162,310 | |||||||||
78,500 | Wal-Mart Stores, Inc. | 3,510,520 | |||||||||
600 | Williams-Sonoma, Inc. | 17,676 | |||||||||
17,253,143 | |||||||||||
Services — 2.9% | |||||||||||
1,100 | Allied Waste Industries, Inc. * | 11,374 | |||||||||
400 | CBS Corp.-Class B | 11,420 | |||||||||
3,800 | Darden Restaurants, Inc. | 134,520 | |||||||||
3,700 | Gannett Co., Inc. | 210,345 |
See accompanying notes to the financial statements.
8
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Services — continued | |||||||||||
3,300 | Manpower, Inc. | 195,063 | |||||||||
3,700 | McDonald's Corp. | 132,830 | |||||||||
10,100 | Moody's Corp. | 617,918 | |||||||||
5,400 | News Corp.-Class A | 102,762 | |||||||||
2,800 | Robert Half International, Inc. | 86,632 | |||||||||
33,900 | Starbucks Corp. * | 1,051,239 | |||||||||
5,300 | Sysco Corp. | 166,367 | |||||||||
4,800 | Walt Disney Co. (The) | 142,320 | |||||||||
8,000 | Waste Management, Inc. | 274,240 | |||||||||
2,800 | Wendy's International, Inc. | 178,920 | |||||||||
3,315,950 | |||||||||||
Technology — 12.0% | |||||||||||
400 | Adobe Systems, Inc. * | 12,976 | |||||||||
4,900 | Affiliated Computer Services, Inc.-Class A * | 251,566 | |||||||||
9,700 | Agilent Technologies, Inc. * | 311,952 | |||||||||
6,500 | Applera Corp.-Applied Biosystems Group | 199,225 | |||||||||
8,700 | Applied Materials, Inc. | 146,856 | |||||||||
3,700 | Arrow Electronics, Inc. * | 103,230 | |||||||||
1,000 | Autodesk, Inc. * | 34,760 | |||||||||
600 | Avery Dennison Corp. | 37,164 | |||||||||
7,300 | BEA Systems, Inc. * | 100,229 | |||||||||
6,500 | BMC Software, Inc. * | 173,030 | |||||||||
4,300 | Boeing Co. | 322,070 | |||||||||
4,300 | Citrix Systems, Inc. * | 131,924 | |||||||||
3,900 | Computer Sciences Corp. * | 184,782 | |||||||||
6,900 | Corning, Inc. * | 153,456 | |||||||||
9,000 | Danaher Corp. | 596,610 | |||||||||
46,100 | Dell, Inc. * | 1,039,555 | |||||||||
700 | Diebold, Inc. | 29,337 | |||||||||
1,700 | DST Systems, Inc. * | 100,351 | |||||||||
6,000 | Electronic Data Systems Corp. | 142,980 | |||||||||
11,100 | Emerson Electric Co. | 911,865 | |||||||||
400 | Energizer Holdings, Inc. * | 26,744 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
12,300 | First Data Corp. | 528,531 | |||||||||
3,500 | Fiserv, Inc. * | 154,595 | |||||||||
3,400 | General Dynamics Corp. | 229,670 | |||||||||
600 | Global Payments, Inc. | 22,830 | |||||||||
1,300 | Goodrich Corp. | 50,635 | |||||||||
300 | Google, Inc.-Class A * | 113,559 | |||||||||
2,300 | Harris Corp. | 101,016 | |||||||||
53,100 | Hewlett-Packard Co. | 1,941,336 | |||||||||
24,500 | Intel Corp. | 478,730 | |||||||||
4,600 | International Business Machines Corp. | 372,462 | |||||||||
500 | Intersil Corp.-Class A | 12,675 | |||||||||
7,000 | Intuit, Inc. * | 211,540 | |||||||||
2,200 | Jabil Circuit, Inc. | 59,026 | |||||||||
3,600 | Lexmark International, Inc. * | 201,852 | |||||||||
1,500 | Lockheed Martin Corp. | 123,900 | |||||||||
2,400 | Microchip Technology, Inc. | 81,984 | |||||||||
5,600 | Microsoft Corp. | 143,864 | |||||||||
24,500 | Motorola, Inc. | 572,810 | |||||||||
5,200 | National Semiconductor Corp. | 126,308 | |||||||||
6,600 | Northrop Grumman Corp. | 440,946 | |||||||||
6,800 | Nvidia Corp. * | 197,948 | |||||||||
1,300 | Oracle Corp. * | 20,345 | |||||||||
4,200 | Paychex, Inc. | 150,822 | |||||||||
5,400 | Pitney Bowes, Inc. | 235,386 | |||||||||
35,500 | Qualcomm, Inc. | 1,337,285 | |||||||||
1,800 | Raytheon Co. | 84,978 | |||||||||
2,000 | Rockwell Automation, Inc. | 112,760 | |||||||||
14,600 | Texas Instruments, Inc. | 475,814 | |||||||||
1,700 | Thermo Electron Corp. * | 66,640 | |||||||||
2,300 | W.W. Grainger, Inc. | 153,640 | |||||||||
13,814,549 |
See accompanying notes to the financial statements.
10
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Transportation — 2.8% | |||||||||||
7,500 | Burlington Northern Santa Fe Corp. | 502,125 | |||||||||
8,900 | CH Robinson Worldwide, Inc. | 407,798 | |||||||||
2,400 | CSX Corp. | 72,528 | |||||||||
8,400 | Expeditors International of Washington, Inc. | 334,908 | |||||||||
14,400 | FedEx Corp. | 1,454,832 | |||||||||
1,200 | JB Hunt Transport Services, Inc. | 23,580 | |||||||||
3,100 | Norfolk Southern Corp. | 132,463 | |||||||||
600 | Southwest Airlines, Inc. | 10,392 | |||||||||
4,300 | Union Pacific Corp. | 345,505 | |||||||||
3,284,131 | |||||||||||
Utility — 6.9% | |||||||||||
1,700 | Alltel Corp. | 92,157 | |||||||||
77,863 | AT&T, Inc. | 2,423,875 | |||||||||
48,000 | BellSouth Corp. | 1,954,560 | |||||||||
5,200 | Centerpoint Energy, Inc. | 75,140 | |||||||||
3,400 | CenturyTel, Inc. | 135,388 | |||||||||
2,700 | Edison International | 117,828 | |||||||||
4,600 | FirstEnergy Corp. | 262,476 | |||||||||
600 | NII Holdings, Inc. * | 32,010 | |||||||||
400 | Questar Corp. | 34,616 | |||||||||
29,800 | Qwest Communications International, Inc. * | 262,538 | |||||||||
700 | TXU Corp. | 46,347 | |||||||||
72,042 | Verizon Communications, Inc. | 2,534,438 | |||||||||
3,205 | Windstream Corp. | 42,306 | |||||||||
8,013,679 | |||||||||||
TOTAL COMMON STOCKS (COST $106,777,072) | 114,126,510 |
See accompanying notes to the financial statements.
11
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 1.1% | |||||||||||
1,206,377 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $1,206,496 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/13 and a market value, including accrued interest, of $1,230,505. | 1,206,377 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $1,206,377) | 1,206,377 | ||||||||||
TOTAL INVESTMENTS — 99.9% (Cost $107,983,449) | 115,332,887 | ||||||||||
Other Assets and Liabilities (net) — 0.1% | 144,291 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 115,477,178 |
Notes to Schedule of Investments:
* Non-income producing security.
See accompanying notes to the financial statements.
12
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value (cost $107,983,449) (Note 2) | $ | 115,332,887 | |||||
Dividends and interest receivable | 204,221 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 9,610 | ||||||
Total assets | 115,546,718 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 32,078 | ||||||
Shareholder service fee | 14,581 | ||||||
Trustees and Chief Compliance Officer fees | 259 | ||||||
Accrued expenses | 22,622 | ||||||
Total liabilities | 69,540 | ||||||
Net assets | $ | 115,477,178 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 111,364,581 | |||||
Accumulated undistributed net investment income | 313,287 | ||||||
Accumulated net realized loss | (3,550,128 | ) | |||||
Net unrealized appreciation | 7,349,438 | ||||||
$ | 115,477,178 | ||||||
Net assets attributable to: | |||||||
Class III | $ | 115,477,178 | |||||
Shares outstanding: | |||||||
Class III | 9,163,727 | ||||||
Net asset value per share: | |||||||
Class III | $ | 12.60 |
See accompanying notes to the financial statements.
13
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 1,111,418 | |||||
Interest | 37,071 | ||||||
Total investment income | 1,148,489 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 195,482 | ||||||
Shareholder service fee – Class III (Note 3) | 88,855 | ||||||
Custodian, fund accounting agent and transfer agent fees | 19,596 | ||||||
Audit and tax fees | 24,196 | ||||||
Legal fees | 1,104 | ||||||
Trustees fees and related expenses (Note 3) | 952 | ||||||
Registration fees | 2,484 | ||||||
Miscellaneous | 921 | ||||||
Total expenses | 333,590 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (47,932 | ) | |||||
Net expenses | 285,658 | ||||||
Net investment income (loss) | 862,831 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 915,928 | ||||||
Closed futures contracts | (2,139 | ) | |||||
Net realized gain (loss) | 913,789 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (3,349,136 | ) | |||||
Net realized and unrealized gain (loss) | (2,435,347 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (1,572,516 | ) |
See accompanying notes to the financial statements.
14
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 862,831 | $ | 1,503,502 | |||||||
Net realized gain (loss) | 913,789 | 2,540,673 | |||||||||
Change in net unrealized appreciation (depreciation) | (3,349,136 | ) | 2,939,967 | ||||||||
Net increase (decrease) in net assets from operations | (1,572,516 | ) | 6,984,142 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (765,152 | ) | (1,452,459 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | (3,524,508 | ) | 34,433,458 | ||||||||
Total increase (decrease) in net assets | (5,862,176 | ) | 39,965,141 | ||||||||
Net assets: | |||||||||||
Beginning of period | 121,339,354 | 81,374,213 | |||||||||
End of period (including accumulated undistributed net investment income of $313,287 and $215,608, respectively) | $ | 115,477,178 | $ | 121,339,354 |
See accompanying notes to the financial statements.
15
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 12.83 | $ | 12.14 | $ | 11.58 | $ | 8.62 | $ | 11.24 | $ | 12.08 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.09 | 0.20 | 0.16 | 0.14 | 0.14 | 0.16 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.24 | ) | 0.69 | 0.54 | 2.96 | (2.64 | ) | (0.86 | ) | ||||||||||||||||||
Total from investment operations | (0.15 | ) | 0.89 | 0.70 | 3.10 | (2.50 | ) | (0.70 | ) | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.08 | ) | (0.20 | ) | (0.14 | ) | (0.14 | ) | (0.12 | ) | (0.14 | ) | |||||||||||||||
Total distributions | (0.08 | ) | (0.20 | ) | (0.14 | ) | (0.14 | ) | (0.12 | ) | (0.14 | ) | |||||||||||||||
Net asset value, end of period | $ | 12.60 | $ | 12.83 | $ | 12.14 | $ | 11.58 | $ | 8.62 | $ | 11.24 | |||||||||||||||
Total Return(a) | (1.15 | )%** | 7.46 | % | 6.12 | %(b) | 36.21 | % | (22.33 | )% | (5.78 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 115,477 | $ | 121,339 | $ | 81,374 | $ | 62,027 | $ | 40,347 | $ | 27,495 | |||||||||||||||
Net expenses to average daily net assets | 0.48 | %* | 0.48 | % | 0.48 | % | 0.48 | % | 0.49 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 1.46 | %* | 1.65 | % | 1.39 | % | 1.34 | % | 1.41 | % | 1.36 | % | |||||||||||||||
Portfolio turnover rate | 39 | %** | 62 | % | 87 | % | 70 | % | 63 | % | 45 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.08 | %* | 0.08 | % | 0.08 | % | 0.13 | % | 0.16 | % | 0.36 | % |
(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.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
16
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high after-tax total return. The Fund seeks to achieve its objective by outperforming the S&P 500 Index (after tax), which is computed by GMO by adjusting the return of the S&P 500 Index by its tax cost. The Fund typically makes equity investments in companies that issue stocks included in the S&P 500 Index, and companies with similar size characteristics, and uses quantitative models integrated with tax management techniques to provide broad exposure to the U.S. equity market to investors subject to U.S. federal income tax.
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 generally 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 pursuant to procedures approved by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts. 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
17
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 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. There were no futures contracts outstanding at the end of the period.
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. 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 party 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 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
18
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no swap agreements outstanding at the end of the period.
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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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 six months ended A ugust 31, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each tax 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 Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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.
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 August 31, 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) | ||||||||||||
$ | 107,983,454 | $ | 11,363,338 | $ | (4,013,905 | ) | $ | 7,349,433 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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
20
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $676 and $368, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $44,835,067 and $47,844,454, 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
21
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 62.8% 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 August 31, 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 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). Transaction in Fund shares were as follows:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 180,465 | $ | 2,310,000 | 3,129,868 | $ | 39,103,839 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 43,955 | 550,932 | 72,670 | 886,419 | |||||||||||||||
Shares repurchased | (518,824 | ) | (6,385,440 | ) | (447,033 | ) | (5,556,800 | ) | |||||||||||
Net increase (decrease) | (294,404 | ) | $ | (3,524,508 | ) | 2,755,505 | $ | 34,433,458 |
22
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Tax-Managed U.S. Equities Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to
23
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
24
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
25
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | $ | 988.50 | $ | 2.41 | |||||||||||
2) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.79 | $ | 2.45 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
26
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.5 | % | |||||
Preferred Stocks | 0.9 | ||||||
Rights and Warrants | 0.0 | ||||||
Short-Term Investments | 0.3 | ||||||
Other | 2.3 | ||||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Financials | 26.3 | % | |||||
Consumer Discretionary | 14.9 | ||||||
Energy | 11.6 | ||||||
Health Care | 10.5 | ||||||
Materials | 10.2 | ||||||
Industrials | 8.7 | ||||||
Consumer Staples | 5.8 | ||||||
Utilities | 4.9 | ||||||
Telecommunication Services | 3.6 | ||||||
Information Technology | 3.5 | ||||||
100.0 | % |
1
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Country Summary | % of Equity Investments | ||||||
Japan | 25.1 | % | |||||
United Kingdom | 22.8 | ||||||
France | 10.4 | ||||||
Germany | 9.6 | ||||||
Netherlands | 5.9 | ||||||
Switzerland | 4.7 | ||||||
Italy | 2.7 | ||||||
Finland | 2.0 | ||||||
Australia | 1.8 | ||||||
Belgium | 1.4 | ||||||
South Korea | 1.4 | ||||||
Norway | 1.4 | ||||||
Canada | 1.3 | ||||||
Sweden | 1.2 | ||||||
Spain | 1.2 | ||||||
Taiwan | 1.0 | ||||||
Austria | 0.9 | ||||||
Russia | 0.9 | ||||||
Brazil | 0.8 | ||||||
Singapore | 0.8 | ||||||
China | 0.6 | ||||||
Ireland | 0.5 | ||||||
Hong Kong | 0.5 | ||||||
South Africa | 0.4 | ||||||
Mexico | 0.4 | ||||||
Israel | 0.1 | ||||||
India | 0.1 | ||||||
Thailand | 0.1 | ||||||
Poland | 0.0 | ||||||
Turkey | 0.0 | ||||||
Malaysia | 0.0 | ||||||
Philippines | 0.0 | ||||||
100.0 | % |
2
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 96.5% | |||||||||||
Australia — 1.8% | |||||||||||
84,857 | Australia and New Zealand Banking Group Ltd | 1,761,782 | |||||||||
201,719 | BHP Billiton Ltd | 4,249,003 | |||||||||
104,004 | Boral Ltd | 538,745 | |||||||||
45,208 | Commonwealth Bank of Australia | 1,575,466 | |||||||||
156,685 | General Property Trust Units | 546,393 | |||||||||
39,779 | National Australia Bank Ltd | 1,100,321 | |||||||||
55,986 | Rio Tinto Ltd | 3,107,063 | |||||||||
109,011 | Santos Ltd | 931,343 | |||||||||
49,785 | Woodside Petroleum Ltd | 1,601,602 | |||||||||
141,450 | Woolworths Ltd | 2,232,764 | |||||||||
17,644,482 | |||||||||||
Austria — 0.9% | |||||||||||
23,752 | Boehler Uddeholm (Bearer) | 1,278,003 | |||||||||
5,929 | Flughafen Wien AG | 480,644 | |||||||||
438 | Lenzing AG | 96,503 | |||||||||
87,050 | OMV AG | 4,646,250 | |||||||||
59,780 | Voestalpine AG | 2,264,973 | |||||||||
8,766,373 | |||||||||||
Belgium — 1.4% | |||||||||||
6,470 | Colruyt SA | 1,099,809 | |||||||||
18,354 | Delhaize Group | 1,397,015 | |||||||||
115,924 | Dexia | 2,978,088 | |||||||||
147,719 | Fortis | 5,752,089 | |||||||||
16,784 | Suez Lyon des Eaux VVPR Strip * | 215 | |||||||||
40,452 | UCB SA | 2,371,225 | |||||||||
13,598,441 | |||||||||||
Brazil — 0.2% | |||||||||||
8,719 | Banco do Brasil SA | 195,201 | |||||||||
19,900 | Compania Vale do Rio Doce | 426,959 | |||||||||
7,992,200 | Electrobras (Centro) | 174,457 |
See accompanying notes to the financial statements.
3
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Brazil — continued | |||||||||||
29,800 | Petroleo Brasileiro SA (Petrobras) | 660,493 | |||||||||
3,200 | Petroleo Brasileiro SA (Petrobras) ADR | 286,912 | |||||||||
6,000 | Unibanco-Uniao de Bancos Brasileiros SA GDR | 434,100 | |||||||||
2,178,122 | |||||||||||
Canada — 1.3% | |||||||||||
86,664 | Canadian Natural Resources | 4,549,997 | |||||||||
36,664 | EnCana Corp | 1,923,923 | |||||||||
15,700 | National Bank of Canada | 851,831 | |||||||||
71,200 | Petro-Canada | 3,040,478 | |||||||||
49,000 | Royal Bank of Canada | 2,171,374 | |||||||||
12,537,603 | |||||||||||
China — 0.6% | |||||||||||
296,000 | Aluminum Corp of China Ltd | 207,262 | |||||||||
1,808,000 | China Construction Bank Class H | 782,736 | |||||||||
310,000 | China Life Insurance Co Ltd Class H | 550,417 | |||||||||
218,000 | China Mobile Ltd * | 1,465,994 | |||||||||
1,166,000 | China Petroleum & Chemical Corp Class H | 690,267 | |||||||||
6,300 | China Telecom Corp Ltd ADR | 212,625 | |||||||||
546,300 | China Telecom Corp Ltd Class H | 184,002 | |||||||||
638,000 | CNOOC Ltd | 556,331 | |||||||||
954,000 | PetroChina Co Ltd Class H | 1,070,833 | |||||||||
5,720,467 | |||||||||||
Finland — 2.0% | |||||||||||
86,600 | Fortum Oyj | 2,327,092 | |||||||||
23,000 | Kemira Oyj | 372,665 | |||||||||
60,900 | Metso Oyj | 2,268,537 | |||||||||
288,100 | Nokia Oyj | 6,021,634 | |||||||||
25,300 | Orion Oyj * | 461,238 | |||||||||
70,750 | Rautaruukki Oyj | 2,068,055 | |||||||||
208,062 | Sampo Oyj Class A | 4,306,868 | |||||||||
70,500 | YIT Oyj | 1,531,376 | |||||||||
19,357,465 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
France — 10.2% | |||||||||||
55,125 | Axa | 2,050,303 | |||||||||
188,181 | BNP Paribas | 20,008,889 | |||||||||
4,173 | Bongrain SA | 288,394 | |||||||||
17,800 | Cap Gemini SA | 976,216 | |||||||||
38,074 | Carrefour SA | 2,350,524 | |||||||||
33,710 | Casino Guichard-Perrachon SA | 2,893,679 | |||||||||
5,024 | Chargeurs International SA * | 128,899 | |||||||||
36,812 | Cie de Saint-Gobain | 2,731,039 | |||||||||
124,976 | Credit Agricole SA | 5,078,384 | |||||||||
2,228 | Esso S.A.F. | 561,599 | |||||||||
9,891 | Lafarge SA | 1,275,171 | |||||||||
21,176 | L'Oreal SA | 2,217,354 | |||||||||
21,643 | LVMH Moet Hennessy Louis Vuitton SA | 2,229,481 | |||||||||
173,330 | Mittal Steel Company NV | 5,784,708 | |||||||||
86,816 | Peugeot SA | 4,898,408 | |||||||||
75,697 | Renault SA | 8,820,541 | |||||||||
8,419 | Sanofi-Aventis | 756,125 | |||||||||
20,533 | Schneider Electric SA | 2,190,228 | |||||||||
33,020 | Societe Generale | 5,333,465 | |||||||||
16,784 | Suez SA Class B | 718,285 | |||||||||
693 | Total Gabon | 558,867 | |||||||||
391,530 | Total SA | 26,439,241 | |||||||||
9,395 | Vallourec SA | 2,104,314 | |||||||||
100,394,114 | |||||||||||
Germany — 9.0% | |||||||||||
32,932 | Adidas AG | 1,576,093 | |||||||||
22,500 | Allianz AG (Registered) | 3,824,306 | |||||||||
60,461 | Altana AG | 3,569,672 | |||||||||
22,888 | Bayer AG | 1,135,901 | |||||||||
93,052 | Bayerische Motoren Werke AG | 4,813,403 | |||||||||
163,600 | Commerzbank AG | 5,713,863 | |||||||||
49,572 | DaimlerChrysler AG (Registered) | 2,613,891 |
See accompanying notes to the financial statements.
5
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Germany — continued | |||||||||||
82,600 | Depfa Bank Plc | 1,541,703 | |||||||||
69,600 | Deutsche Bank AG (Registered) | 7,955,885 | |||||||||
24,100 | Deutsche Boerse AG | 3,655,521 | |||||||||
46,259 | Deutsche Post AG (Registered) | 1,171,598 | |||||||||
71,870 | E. On AG | 9,123,191 | |||||||||
12,000 | IWKA AG * | 227,535 | |||||||||
42,300 | MAN AG | 3,236,574 | |||||||||
30,200 | Merck KGaA | 2,994,214 | |||||||||
59,900 | Muenchener Rueckversicherungs AG (Registered) | 9,005,781 | |||||||||
4,500 | Puma AG Rudolf Dassler Sport | 1,566,870 | |||||||||
38,020 | Salzgitter AG | 3,405,824 | |||||||||
9,100 | SAP AG | 1,737,357 | |||||||||
17,800 | Solarworld AG | 1,045,047 | |||||||||
104,661 | Suedzucker AG | 2,605,420 | |||||||||
217,625 | ThyssenKrupp AG | 7,403,667 | |||||||||
158,600 | TUI AG | 3,111,414 | |||||||||
71,671 | Volkswagen AG | 5,721,615 | |||||||||
88,756,345 | |||||||||||
Hong Kong — 0.5% | |||||||||||
320,400 | CLP Holdings Ltd | 2,026,040 | |||||||||
320,000 | Hang Lung Group Co Ltd | 865,890 | |||||||||
363,000 | Hong Kong Electric Holdings Ltd | 1,735,637 | |||||||||
4,627,567 | |||||||||||
India — 0.1% | |||||||||||
8,100 | Reliance Industries GDR | 130,233 | |||||||||
11,300 | Reliance Industries Ltd GDR | 540,705 | |||||||||
670,938 | |||||||||||
Ireland — 0.4% | |||||||||||
38,854 | Bank of Ireland | 737,568 | |||||||||
89,154 | CRH Plc | 3,085,998 | |||||||||
79,446 | Greencore Group | 416,635 | |||||||||
4,240,201 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Israel — 0.1% | |||||||||||
71,000 | Bank Hapoalim B.M. | 312,219 | |||||||||
11,000 | Check Point Software Technologies Ltd * | 204,490 | |||||||||
21,500 | Teva Pharmaceutical Industries ADR | 747,340 | |||||||||
1,264,049 | |||||||||||
Italy — 2.5% | |||||||||||
33,750 | Banca Intesa SPA-Di RISP | 214,836 | |||||||||
333,754 | Banca Monte dei Paschi di Siena SPA | 2,030,150 | |||||||||
73,556 | Banca Popolare di Verona | 2,185,952 | |||||||||
515,836 | ENI SPA | 15,772,295 | |||||||||
166,303 | Fiat SPA * | 2,383,769 | |||||||||
306,250 | UniCredito Italiano SPA | 2,440,470 | |||||||||
25,027,472 | |||||||||||
Japan — 24.5% | |||||||||||
16,270 | Acom Co Ltd | 726,044 | |||||||||
77,100 | Aeon Co Ltd | 1,934,375 | |||||||||
41,000 | AIOI Insurance Co Ltd | 286,040 | |||||||||
75,800 | Canon Inc | 3,765,617 | |||||||||
52,000 | Chiyoda Corp | 1,134,181 | |||||||||
131,900 | Chubu Electric Power Co Inc | 3,569,535 | |||||||||
12,000 | Chugoku Electric Power Co Inc | 253,769 | |||||||||
182,000 | Cosmo Oil Co Ltd | 797,886 | |||||||||
104,600 | Daiei Inc * | 2,006,316 | |||||||||
114,941 | Daiichi Sankyo Co Ltd | 3,166,942 | |||||||||
385,400 | Daikyo Inc * | 1,971,590 | |||||||||
8,500 | Daito Trust Construction Co Ltd | 440,182 | |||||||||
385,000 | Daiwa Securities Group Inc | 4,557,077 | |||||||||
218 | East Japan Railway Co | 1,606,372 | |||||||||
63,700 | Eisai Co Ltd | 3,025,330 | |||||||||
322,000 | Fuji Heavy Industries Ltd | 1,856,578 | |||||||||
268,000 | Furukawa Electric Co Ltd | 1,845,317 | |||||||||
776,500 | Haseko Corp * | 2,765,845 | |||||||||
671,400 | Honda Motor Co Ltd | 22,720,100 |
See accompanying notes to the financial statements.
7
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
21,600 | Hoya Corp | 781,921 | |||||||||
47,000 | Ibiden Co Ltd | 2,396,439 | |||||||||
675,000 | Ishikawajima-Harima Heavy Industries Co Ltd | 1,954,794 | |||||||||
426,000 | Isuzu Motors Ltd | 1,375,859 | |||||||||
633,000 | Itochu Corp | 5,286,204 | |||||||||
48,000 | JACCS Co Ltd | 524,531 | |||||||||
213,000 | Japan Steel Works Ltd (The) | 1,502,079 | |||||||||
58,000 | Kamigumi Co Ltd | 463,259 | |||||||||
34,000 | Kandenko Co | 237,721 | |||||||||
156,100 | Kansai Electric Power Co Inc | 3,739,816 | |||||||||
100,000 | Kao Corp | 2,662,206 | |||||||||
520,000 | Kobe Steel Ltd | 1,654,728 | |||||||||
270,000 | Komatsu Ltd | 4,899,972 | |||||||||
173,000 | Kubota Corp | 1,414,194 | |||||||||
36,000 | Kyudenko Corp | 195,332 | |||||||||
74,300 | Kyushu Electric Power Co Inc | 1,769,819 | |||||||||
566,000 | Marubeni Corp | 3,009,276 | |||||||||
473,000 | Mazda Motor Corp | 3,016,465 | |||||||||
312,400 | Mitsubishi Corp | 6,323,855 | |||||||||
143,000 | Mitsubishi Estate Co Ltd | 3,065,260 | |||||||||
635,000 | Mitsubishi Heavy Industries | 2,649,244 | |||||||||
777,000 | Mitsubishi Motors Corp * | 1,351,152 | |||||||||
836 | Mitsubishi UFJ Financial Group Inc | 11,341,052 | |||||||||
162,000 | Mitsui & Co | 2,337,489 | |||||||||
158,000 | Mitsui OSK Lines Ltd | 1,199,567 | |||||||||
377,284 | Mitsui Trust Holding Inc | 4,394,069 | |||||||||
841 | Mizuho Financial Group Inc | 6,774,471 | |||||||||
47,000 | Nagase & Co | 586,100 | |||||||||
76,000 | Nikon Corp | 1,368,855 | |||||||||
43,000 | Nippon Corp | 368,272 | |||||||||
112,000 | Nippon Sheet Glass | 539,247 | |||||||||
279,000 | Nippon Steel Corp | 1,161,020 | |||||||||
1,201 | Nippon Telegraph & Telephone Corp | 6,050,096 | |||||||||
228,000 | Nippon Yusen Kabushiki Kaisha | 1,408,028 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
94,000 | Nissan Chemical Industries Ltd | 1,213,788 | |||||||||
982,100 | Nissan Motor Co | 11,148,605 | |||||||||
78,100 | Nisshin Seifun Group Inc | 833,375 | |||||||||
147,900 | Nomura Holdings Inc | 2,837,675 | |||||||||
2,738 | NTT Docomo Inc | 4,232,583 | |||||||||
21,000 | Ono Pharmaceutical Co Ltd | 977,698 | |||||||||
15,720 | ORIX Corp | 4,150,325 | |||||||||
22,700 | Promise Co Ltd | 1,012,966 | |||||||||
1,643 | Resona Holdings Inc | 5,152,406 | |||||||||
250,400 | Ricoh Company Ltd | 4,899,123 | |||||||||
13,800 | Ryosan Co | 360,441 | |||||||||
53,000 | Shimizu Corp | 313,226 | |||||||||
48,000 | Shinko Electric Industries Co Ltd | 1,387,890 | |||||||||
36,400 | Sony Corp | 1,578,922 | |||||||||
59,000 | Sumitomo Heavy Industries Ltd | 507,452 | |||||||||
886,000 | Sumitomo Metal Industries Ltd | 3,630,052 | |||||||||
201,000 | Sumitomo Metal Mining Co Ltd | 2,815,156 | |||||||||
73,000 | Sumitomo Realty & Development Co Ltd | 2,139,918 | |||||||||
259,000 | Taiheiyo Cement Co Ltd | 970,624 | |||||||||
63,000 | Taisho Pharmaceutical Co Ltd | 1,229,823 | |||||||||
313,900 | Takeda Pharmaceutical Co Ltd | 20,741,997 | |||||||||
104,000 | Toho Zinc Co Ltd | 801,914 | |||||||||
79,800 | Tohoku Electric Power Co Inc | 1,805,943 | |||||||||
30,000 | Tokuyama Corp | 413,737 | |||||||||
68,400 | Tokyo Electric Power Co Inc | 1,948,129 | |||||||||
17,500 | Tokyo Electron Ltd | 1,146,119 | |||||||||
108,000 | TonenGeneral Sekiyu KK | 973,034 | |||||||||
240,000 | Toyota Motor Corp | 12,970,069 | |||||||||
23,900 | Yamada Denki Co Ltd | 2,550,684 | |||||||||
83,000 | Yaskawa Electric Corp | 951,726 | |||||||||
241,926,888 |
See accompanying notes to the financial statements.
9
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Malaysia — 0.0% | |||||||||||
49,000 | Malakoff Berhad | 129,208 | |||||||||
54,700 | Maxis Communications Berhad | 130,871 | |||||||||
260,079 | |||||||||||
Mexico — 0.4% | |||||||||||
16,000 | America Movil SA de CV Class L ADR | 596,960 | |||||||||
268,348 | Cemex SA de CV CPO * | 773,597 | |||||||||
43,000 | Fomento Economico Mexicano SA de CV | 405,060 | |||||||||
86,000 | Grupo Financiero Banorte SA de CV | 251,705 | |||||||||
120,000 | Grupo Mexico SA Class B | 382,775 | |||||||||
30,500 | Telefonos de Mexico SA de CV Class L ADR | 736,270 | |||||||||
98,874 | Wal-Mart de Mexico SA de CV Class V | 337,041 | |||||||||
3,483,408 | |||||||||||
Netherlands — 5.8% | |||||||||||
491,287 | ABN Amro Holdings NV | 14,014,495 | |||||||||
370,837 | Aegon NV | 6,626,332 | |||||||||
43,981 | Akzo Nobel NV | 2,532,939 | |||||||||
5,579 | Boskalis Westminster NV | 351,585 | |||||||||
25,690 | Euronext NV | 2,313,325 | |||||||||
2,671 | Gamma Holdings NV | 150,882 | |||||||||
90,907 | Heineken NV | 4,215,259 | |||||||||
532,822 | ING Groep NV | 23,084,804 | |||||||||
45,860 | Koninklijke DSM | 1,814,321 | |||||||||
9,008 | Koninklijke Ten Cate NV | 220,709 | |||||||||
19,206 | Koninklijke Vopak NV | 712,679 | |||||||||
19,535 | Koninklijke Wessanen NV | 271,233 | |||||||||
7,608 | Wereldhave NV | 799,059 | |||||||||
57,107,622 | |||||||||||
Norway — 1.3% | |||||||||||
21,304 | Frontline Ltd | 871,094 | |||||||||
229,305 | Norsk Hydro ASA | 5,906,392 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Norway — continued | |||||||||||
56,500 | Orkla ASA | 2,767,838 | |||||||||
129,865 | Statoil ASA | 3,506,240 | |||||||||
13,051,564 | |||||||||||
Philippines — 0.0% | |||||||||||
4,240 | Philippine Long Distance Telephone | 159,390 | |||||||||
Poland — 0.0% | |||||||||||
6,200 | KGHM Polska Miedz SA | 215,730 | |||||||||
9,300 | Polski Koncern Naftowy Orlen SA | 155,271 | |||||||||
371,001 | |||||||||||
Russia — 0.9% | |||||||||||
5,200 | Gazprom Neft ADR | 108,420 | |||||||||
7,000 | JSC Mining & Smelting Co ADR | 952,000 | |||||||||
31,800 | Lukoil ADR | 2,655,300 | |||||||||
16,700 | Mobile Telesystems ADR | 611,220 | |||||||||
64,150 | OAO Gazprom ADR | 3,021,465 | |||||||||
3,700 | Polyus Gold ADR * | 157,250 | |||||||||
5,200 | Surgutneftegaz ADR | 378,300 | |||||||||
7,300 | Unified Energy Systems GDR | 540,200 | |||||||||
4,200 | Vimpel-Communications ADR * | 228,144 | |||||||||
8,652,299 | |||||||||||
Singapore — 0.8% | |||||||||||
618,000 | Capitaland Ltd | 1,865,957 | |||||||||
304,000 | DBS Group Holdings Ltd | 3,470,632 | |||||||||
267,500 | Fraser & Neave Ltd | 675,434 | |||||||||
75,000 | Keppel Corp Ltd | 714,224 | |||||||||
579,861 | Singapore Telecommunications | 916,282 | |||||||||
7,642,529 |
See accompanying notes to the financial statements.
11
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
South Africa — 0.4% | |||||||||||
47,900 | Edgars Consolidated Stores Ltd | 188,123 | |||||||||
201,396 | FirstRand Ltd | 497,924 | |||||||||
2,800 | Impala Platinum Holdings Ltd | 518,649 | |||||||||
9,192 | Imperial Holdings Ltd * | 181,717 | |||||||||
51,400 | MTN Group Ltd | 407,373 | |||||||||
12,966 | Nedbank Group Ltd | 198,368 | |||||||||
20,700 | Remgro Ltd | 410,830 | |||||||||
165,700 | Sanlam Ltd | 347,874 | |||||||||
14,300 | Sasol Ltd | 496,706 | |||||||||
47,195 | Standard Bank Group Ltd | 509,062 | |||||||||
60,300 | Steinhoff International Holdings | 196,680 | |||||||||
11,900 | Telkom SA Ltd | 224,739 | |||||||||
4,178,045 | |||||||||||
South Korea — 1.3% | |||||||||||
7,500 | Dongkuk Steel Mill | 129,724 | |||||||||
2,660 | GS Engineering & Construction Corp | 181,401 | |||||||||
12,728 | Hana Financial Group Inc | 546,992 | |||||||||
8,400 | Hanjin Shipping | 191,758 | |||||||||
2,200 | Honam Petrochemical Co | 114,067 | |||||||||
5,750 | Hyundai Development Co | 234,707 | |||||||||
4,800 | Hyundai Mobis | 439,609 | |||||||||
9,000 | Hyundai Motor Co | 757,002 | |||||||||
4,700 | Hyundai Steel Co | 166,735 | |||||||||
700 | KCC Corporation | 177,371 | |||||||||
15,700 | KIA Motors Corp | 249,001 | |||||||||
13,050 | Kookmin Bank | 1,052,359 | |||||||||
17,200 | Korea Electric Power Corp | 660,161 | |||||||||
5,600 | Korean Air Lines Co Ltd | 175,814 | |||||||||
13,800 | KT Corp ADR | 304,980 | |||||||||
7,900 | KT Freetel Co Ltd | 228,364 | |||||||||
7,300 | KT&G Corp | 427,699 | |||||||||
4,600 | LG Chemicals Ltd | 187,027 | |||||||||
12,600 | LG Corp | 374,385 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
South Korea — continued | |||||||||||
4,400 | LG Electronics Inc | 293,667 | |||||||||
4,800 | POSCO | 1,201,960 | |||||||||
3,557 | Samsung Electronics Co Ltd | 2,397,401 | |||||||||
2,700 | Samsung SDI Co Ltd | 223,056 | |||||||||
17,500 | Shinhan Financial Group Co Ltd | 786,840 | |||||||||
600 | Shinsegae Co Ltd | 297,253 | |||||||||
11,700 | SK Corp | 751,541 | |||||||||
700 | SK Telecom Co Ltd | 136,721 | |||||||||
21,030 | SK Telecom Co Ltd ADR | 460,557 | |||||||||
10,200 | Woori Finance Holdings Co Ltd | 200,088 | |||||||||
13,348,240 | |||||||||||
Spain — 1.1% | |||||||||||
37,706 | ACS Actividades de Construccion y Servicios SA | 1,691,674 | |||||||||
19,990 | Endesa SA | 697,903 | |||||||||
148,722 | Iberdrola SA | 5,526,683 | |||||||||
114,883 | Repsol YPF SA | 3,305,333 | |||||||||
11,221,593 | |||||||||||
Sweden — 1.2% | |||||||||||
99,200 | Atlas Copco AB Class A | 2,559,075 | |||||||||
111,000 | Boliden AB | 2,082,273 | |||||||||
102,900 | Electrolux AB | 1,591,194 | |||||||||
27,500 | Holmen AB Class B | 1,151,538 | |||||||||
30,000 | Husqvarna AB Series B * | 323,936 | |||||||||
116,100 | Skanska AB Class B | 1,829,235 | |||||||||
43,800 | Swedish Match AB | 740,676 | |||||||||
150,700 | Tele2 AB Class B | 1,492,086 | |||||||||
11,770,013 | |||||||||||
Switzerland — 4.6% | |||||||||||
504,016 | ABB Ltd | 6,706,769 | |||||||||
6,497 | Bobst Group AG (Registered) | 277,643 | |||||||||
32,994 | Credit Suisse Group | 1,838,936 |
See accompanying notes to the financial statements.
13
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Switzerland — continued | |||||||||||
251 | Movenpick Holdings (Bearer) * | 71,101 | |||||||||
14,176 | Nestle SA (Registered) | 4,870,462 | |||||||||
60,948 | Roche Holding AG (Non Voting) | 11,229,772 | |||||||||
2,548 | Swisscom AG (Registered) | 855,835 | |||||||||
155,292 | UBS AG (Registered) | 8,778,549 | |||||||||
1,079 | Valora Holding AG | 242,376 | |||||||||
45,745 | Zurich Financial Services AG | 10,427,448 | |||||||||
45,298,891 | |||||||||||
Taiwan — 1.0% | |||||||||||
138,658 | Acer Inc | 213,928 | |||||||||
162,580 | Asustek Computer Inc | 363,942 | |||||||||
259,127 | AU Optronics Corp | 379,418 | |||||||||
18,161 | Catcher Technology Co | 141,975 | |||||||||
260,952 | Chi Mei Optoelectronics Corp | 308,530 | |||||||||
632,000 | China Development Financial Holding Corp | 243,772 | |||||||||
624,875 | China Steel Corp | 506,518 | |||||||||
226,440 | Chunghwa Telecom Co Ltd | 373,664 | |||||||||
272,023 | Compal Electronics Inc | 237,575 | |||||||||
115,724 | Delta Electronics Inc | 321,423 | |||||||||
282,765 | Far Eastern Textile Co Ltd | 198,372 | |||||||||
119,000 | Far Eastone Telecommunications Co Ltd | 128,772 | |||||||||
237,930 | Formosa Chemicals & Fibre Co | 342,978 | |||||||||
297,515 | Formosa Plastics Corp | 404,937 | |||||||||
25,968 | High Tech Computer Corp | 652,987 | |||||||||
143,800 | Hon Hai Precision Industry Co Ltd | 809,223 | |||||||||
220,604 | Lite-On Technology Corp * | 273,290 | |||||||||
68,200 | MediaTek Inc | 620,517 | |||||||||
585,000 | Mega Financial Holdings Co Ltd | 388,650 | |||||||||
243,080 | Nan Ya Plastics Corp | 328,554 | |||||||||
530,232 | Powerchip Semiconductor Corp | 349,811 | |||||||||
154,206 | Quanta Computer Inc | 220,879 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Taiwan — continued | |||||||||||
219,135 | Shin Kong Financial Holdings | 189,417 | |||||||||
171,002 | Siliconware Precision Industries Co | 202,014 | |||||||||
528,390 | Taishin Financial Holdings Co Ltd * | 251,618 | |||||||||
205,000 | Taiwan Cellular Corp | 190,741 | |||||||||
638,565 | Taiwan Semiconductor Manufacturing Co Ltd | 1,130,541 | |||||||||
5,594 | Taiwan Semiconductor Manufacturing Co Ltd ADR | 52,080 | |||||||||
183,874 | Wan Hai Lines Ltd | 99,238 | |||||||||
9,925,364 | |||||||||||
Thailand — 0.0% | |||||||||||
22,000 | Bangkok Dusit Medical Service Pcl (Foreign Registered) (a) | 16,816 | |||||||||
107,950 | Kasikornbank Pcl NVDR (a) | 179,323 | |||||||||
51,000 | PTT Pcl (Foreign Registered) (a) | 320,154 | |||||||||
516,293 | |||||||||||
Turkey — 0.0% | |||||||||||
50,023 | Akbank TAS | 271,822 | |||||||||
United Kingdom — 22.2% | |||||||||||
54,716 | Alliance & Leicester Plc | 1,069,480 | |||||||||
176,469 | Alliance Boots Plc | 2,590,706 | |||||||||
261,464 | Anglo American Plc | 11,313,177 | |||||||||
346,300 | AstraZeneca Plc | 22,472,668 | |||||||||
316,479 | Aviva Plc | 4,447,550 | |||||||||
274,355 | BAE Systems Plc | 1,935,125 | |||||||||
60,603 | Barclays Plc | 759,285 | |||||||||
210,891 | Barratt Developments Plc | 3,989,530 | |||||||||
226,977 | BBA Group Plc | 1,153,174 | |||||||||
68,876 | Berkeley Group Holdings Plc * | 1,681,022 | |||||||||
368,638 | BG Group Plc | 4,820,123 | |||||||||
138,731 | BHP Billiton Plc | 2,646,579 | |||||||||
119,337 | British American Tobacco Plc | 3,279,109 | |||||||||
1,828,012 | BT Group Plc | 8,592,622 | |||||||||
271,490 | Cadbury Schweppes Plc | 2,895,638 |
See accompanying notes to the financial statements.
15
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
940,196 | Centrica Plc | 5,281,748 | |||||||||
654,853 | DSG International Plc | 2,557,336 | |||||||||
209,300 | EMI Group Plc | 1,065,995 | |||||||||
61,855 | Gallaher Group Plc | 1,069,621 | |||||||||
938,431 | GlaxoSmithKline Plc | 26,623,611 | |||||||||
131,350 | GUS Plc | 2,440,046 | |||||||||
149,232 | Hanson Plc | 1,880,047 | |||||||||
368,268 | HBOS Plc | 7,032,833 | |||||||||
164,980 | Imperial Tobacco Group Plc | 5,687,138 | |||||||||
158,574 | Inchcape Plc | 1,498,402 | |||||||||
323,002 | J Sainsbury Plc | 2,191,780 | |||||||||
60,218 | Kelda Group Plc | 945,402 | |||||||||
402,607 | Kingfisher Plc | 1,808,678 | |||||||||
295,271 | Lloyds TSB Group Plc | 2,928,556 | |||||||||
170,328 | Man Group Plc | 1,369,769 | |||||||||
268,798 | Marks & Spencer Group Plc | 3,031,574 | |||||||||
92,250 | Next Plc | 2,927,816 | |||||||||
453,917 | Northern Foods Plc | 669,040 | |||||||||
289,380 | Rio Tinto Plc | 14,599,137 | |||||||||
1,126,088 | Royal & Sun Alliance Insurance Group | 2,969,403 | |||||||||
385,544 | Royal Bank of Scotland Group | 13,077,610 | |||||||||
212,792 | Royal Dutch Shell Group Class A | 7,337,690 | |||||||||
120,000 | Royal Dutch Shell Plc A Shares | 4,151,179 | |||||||||
151,763 | Royal Dutch Shell Plc B Shares | 5,424,641 | |||||||||
91,642 | Scottish & Southern Energy Plc | 2,101,988 | |||||||||
164,107 | Scottish Power Plc | 1,938,895 | |||||||||
68,925 | Scottish Power Plc (Deferred Shares) * (a) | — | |||||||||
112,374 | Tate & Lyle Plc | 1,566,721 | |||||||||
597,267 | Taylor Woodrow Plc | 3,900,800 | |||||||||
443,891 | Tomkins Plc | 2,406,680 | |||||||||
2,631,984 | Vodafone Group Inc | 5,704,009 | |||||||||
30,869 | Whitbread Plc | 719,684 | |||||||||
424,875 | Wimpey (George) Plc | 4,054,543 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
62,279 | Wolseley Plc | 1,356,262 | |||||||||
66,076 | Xstrata Plc | 2,973,693 | |||||||||
218,938,115 | |||||||||||
TOTAL COMMON STOCKS (COST $720,628,614) | 952,906,795 | ||||||||||
PREFERRED STOCKS — 0.9% | |||||||||||
Brazil — 0.5% | |||||||||||
17,900 | Banco Bradesco SA 6.08% | 586,592 | |||||||||
16,650 | Banco Itau Holding Financeira SA 3.02% | 500,975 | |||||||||
6,477,900 | Companhia Energetica de Minas Gerais 0.53% | 267,395 | |||||||||
29,300 | Companhia Vale do Rio Doce Class A 0.61% | 550,468 | |||||||||
9,364,000 | Electrobras (Centro) SA Class B 6.62% | 186,931 | |||||||||
9,850 | Gerdau Metalurgica SA 5.76% | 174,580 | |||||||||
20,200 | Gerdau SA 4.58% | 291,600 | |||||||||
93,963 | Investimentos Itau SA 3.18% | 396,625 | |||||||||
58,230 | Net Servicos de Comunicacoa SA * | 522,821 | |||||||||
70,224 | Petroleo Brasileiro SA (Petrobras) 0.93% | 1,418,892 | |||||||||
4,200 | Usinas Siderrurgicas de Minas Gerais SA 4.29% | 131,681 | |||||||||
5,028,560 | |||||||||||
Germany — 0.3% | |||||||||||
5,991 | RWE AG 2.74% | 492,919 | |||||||||
20,411 | Villeroy & Boch AG (Non Voting) 3.26% | 302,830 | |||||||||
40,841 | Volkswagen AG 2.70% | 2,306,465 | |||||||||
3,102,214 | |||||||||||
Italy — 0.1% | |||||||||||
435,821 | Compagnia Assicuratrice Unipol 3.80% | 1,315,589 | |||||||||
TOTAL PREFERRED STOCKS (COST $5,040,034) | 9,446,363 |
See accompanying notes to the financial statements.
17
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Switzerland — 0.0% | |||||||||||
2,548 | Swisscom AG Warrants, expires 09/13/06 * | 6,480 | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $3,970) | 6,480 | ||||||||||
SHORT-TERM INVESTMENTS — 0.3% | |||||||||||
2,700,000 | Bank Nationale de Paris Time Deposit, 5.27%, due 09/01/06 | 2,700,000 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $2,700,000) | 2,700,000 | ||||||||||
TOTAL INVESTMENTS — 97.7% (Cost $728,372,618) | 965,059,638 | ||||||||||
Other Assets and Liabilities (net) — 2.3% | 22,479,280 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 987,538,918 |
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) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
As of August 31, 2006, 93.0% of the Net Assets of the Fund were valued using fair value prices based on models used by a third party vendor (Note 2).
See accompanying notes to the financial statements.
18
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value (cost $728,372,618) (Note 2) | $ | 965,059,638 | |||||
Cash | 1,441,962 | ||||||
Foreign currency, at value (cost $18,310,802) (Note 2) | 18,338,734 | ||||||
Receivable for investments sold | 53,275 | ||||||
Receivable for Fund shares sold | 140,114 | ||||||
Dividends and interest receivable | 2,625,615 | ||||||
Foreign taxes receivable | 532,480 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 63,395 | ||||||
Total assets | 988,255,213 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 447,534 | ||||||
Shareholder service fee | 124,315 | ||||||
Trustees and Chief Compliance Officer fees | 1,693 | ||||||
Accrued expenses | 142,753 | ||||||
Total liabilities | 716,295 | ||||||
Net assets | $ | 987,538,918 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 720,268,727 | |||||
Accumulated undistributed net investment income | 11,189,431 | ||||||
Accumulated net realized gain | 19,348,356 | ||||||
Net unrealized appreciation | 236,732,404 | ||||||
$ | 987,538,918 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 987,538,918 | |||||
Shares outstanding: | |||||||
Class III | 51,097,364 | ||||||
Net asset value per share: | |||||||
Class III | $ | 19.33 |
See accompanying notes to the financial statements.
19
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $1,868,334) | $ | 16,949,180 | |||||
Interest | 455,668 | ||||||
Total investment income | 17,404,848 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 2,510,740 | ||||||
Shareholder service fee – Class III (Note 3) | 697,428 | ||||||
Custodian and fund accounting agent fees | 295,320 | ||||||
Transfer agent fees | 16,468 | ||||||
Audit and tax fees | 31,924 | ||||||
Legal fees | 8,556 | ||||||
Trustees fees and related expenses (Note 3) | 7,032 | ||||||
Registration fees | 3,680 | ||||||
Miscellaneous | 8,372 | ||||||
Total expenses | 3,579,520 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (360,732 | ) | |||||
Net expenses | 3,218,788 | ||||||
Net investment income (loss) | 14,186,060 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of CPMF tax of $960) (Note 2) | 19,629,551 | ||||||
Closed futures contracts | (1,617,117 | ) | |||||
Closed swap contracts | 281,084 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 1,115,916 | ||||||
Net realized gain (loss) | 19,409,434 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 34,611,490 | ||||||
Open futures contracts | (103,827 | ) | |||||
Open swap contracts | (4,423 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 73,029 | ||||||
Net unrealized gain (loss) | 34,576,269 | ||||||
Net realized and unrealized gain (loss) | 53,985,703 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 68,171,763 |
See accompanying notes to the financial statements.
20
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 14,186,060 | $ | 13,703,889 | |||||||
Net realized gain (loss) | 19,409,434 | 36,198,043 | |||||||||
Change in net unrealized appreciation (depreciation) | 34,576,269 | 80,168,248 | |||||||||
Net increase (decrease) in net assets from operations | 68,171,763 | 130,070,180 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (2,653,206 | ) | (12,608,317 | ) | |||||||
Net realized gains | |||||||||||
Class III | (20,274,502 | ) | (11,477,247 | ) | |||||||
(22,927,708 | ) | (24,085,564 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 112,711,991 | 163,686,368 | |||||||||
Total increase (decrease) in net assets | 157,956,046 | 269,670,984 | |||||||||
Net assets: | |||||||||||
Beginning of period | 829,582,872 | 559,911,888 | |||||||||
End of period (including accumulated undistributed net investment income of $11,189,431 and distributions in excess of net investment income of $343,423, respectively) | $ | 987,538,918 | $ | 829,582,872 |
See accompanying notes to the financial statements.
21
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 18.31 | $ | 15.78 | $ | 13.19 | $ | 8.73 | $ | 9.70 | $ | 10.79 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.29 | 0.35 | 0.26 | 0.21 | 0.19 | 0.25 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 1.19 | 2.77 | 2.61 | 4.55 | (0.90 | ) | (1.03 | ) | |||||||||||||||||||
Total from investment operations | 1.48 | 3.12 | 2.87 | 4.76 | (0.71 | ) | (0.78 | ) | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.05 | ) | (0.31 | ) | (0.28 | ) | (0.30 | ) | (0.26 | ) | (0.31 | ) | |||||||||||||||
From net realized gains | (0.41 | ) | (0.28 | ) | — | — | — | — | |||||||||||||||||||
Total distributions | (0.46 | ) | (0.59 | ) | (0.28 | ) | (0.30 | ) | (0.26 | ) | (0.31 | ) | |||||||||||||||
Net asset value, end of period | $ | 19.33 | $ | 18.31 | $ | 15.78 | $ | 13.19 | $ | 8.73 | $ | 9.70 | |||||||||||||||
Total Return(a) | 8.16 | %** | 20.04 | % | 21.94 | % | 54.99 | % | (7.47 | )% | (7.16 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 987,539 | $ | 829,583 | $ | 559,912 | $ | 291,360 | $ | 94,709 | $ | 75,287 | |||||||||||||||
Net expenses to average daily net assets | 0.69 | %* | 0.69 | % | 0.69 | % | 0.69 | % | 0.70 | % | 0.69 | % | |||||||||||||||
Net investment income to average daily net assets | 3.05 | %* | 2.10 | % | 1.91 | % | 1.87 | % | 1.98 | % | 2.49 | % | |||||||||||||||
Portfolio turnover rate | 14 | %** | 39 | % | 44 | % | 36 | % | 48 | % | 50 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.08 | %* | 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
22
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high after-tax total return. The Fund seeks to achieve its investment objective by outperforming the MSCI EAFE Index (after tax), which is computed by GMO by adjusting the return of the MSCI EAFE Index (Europe, Australasia, and Far East) by its tax cost. The Fund typically makes equity investments in non-U.S. companies that issue stocks included in the MSCI EAFE universe (which is larger than, but generally represented by, the MSCI EAFE Index), plus companies in Canada and emerging countries. GMO uses qualitative models integrated with tax management techniques to provide broad exposure to the international equity markets to investors subject to U.S. federal income tax. The Fund's investments in emerging countries generally will represent 15% or less of the Fund's total assets.
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 generally 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 pursuant to procedures approved by the Trustees. 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 are generally valued by a third party vendor using fair value prices based on models to the extent that these fair value prices are available.
23
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 including 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 lo ss 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. There were no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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,
24
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no futures contracts outstanding at the end of the period.
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
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.
25
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no indexed securities held by the Fund at the end of the period.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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. There were no swap agreements outstanding at the end of the period.
26
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 six months ended A ugust 31, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each tax 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 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. 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 six months ended August 31, 2006, the Fund incurred $960 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.
27
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 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) | ||||||||||||
$ | 728,414,094 | $ | 242,384,111 | $ | (5,738,567 | ) | $ | 236,645,544 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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.
28
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in U.S. 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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $4,732 and $2,484, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $228,417,110 and $126,665,162, 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
29
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 2.5% 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 5,439,535 | $ | 106,757,556 | 11,270,432 | $ | 188,430,360 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,038,261 | 19,384,349 | 924,678 | 15,871,319 | |||||||||||||||
Shares repurchased | (692,136 | ) | (13,429,914 | ) | (2,369,116 | ) | (40,615,311 | ) | |||||||||||
Net increase | 5,785,660 | $ | 112,711,991 | 9,825,994 | $ | 163,686,368 |
30
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Tax-Managed International Equities Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee
31
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
32
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
33
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | $ | 1,081.60 | $ | 3.62 | |||||||||||
2) Hypothetical | 0.69 | % | $ | 1,000.00 | $ | 1,021.73 | $ | 3.52 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
34
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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. Core Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 97.2 | % | |||||
Short-Term Investments | 6.0 | ||||||
Futures | 0.0 | ||||||
Other | (3.2 | ) | |||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Financial | 22.8 | % | |||||
Health Care | 19.5 | ||||||
Retail Stores | 15.1 | ||||||
Technology | 11.9 | ||||||
Utility | 7.0 | ||||||
Consumer Goods | 3.8 | ||||||
Oil & Gas | 3.6 | ||||||
Food & Beverage | 3.3 | ||||||
Services | 2.9 | ||||||
Transportation | 2.9 | ||||||
Manufacturing | 2.5 | ||||||
Machinery | 1.5 | ||||||
Automotive | 1.4 | ||||||
Construction | 0.8 | ||||||
Primary Process Industry | 0.6 | ||||||
Metals & Mining | 0.4 | ||||||
100.0 | % |
1
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 97.2% | |||||||||||
Automotive — 1.4% | |||||||||||
165,900 | Eaton Corp. | 11,032,350 | |||||||||
3,256,711 | Ford Motor Co. (a) | 27,258,671 | |||||||||
280,400 | Harley-Davidson, Inc. | 16,406,204 | |||||||||
271,745 | Johnson Controls, Inc. | 19,546,618 | |||||||||
194,700 | Paccar, Inc. | 10,644,249 | |||||||||
84,888,092 | |||||||||||
Construction — 0.8% | |||||||||||
169,600 | Centex Corp. | 8,641,120 | |||||||||
129,937 | D.R. Horton, Inc. | 2,849,518 | |||||||||
20,100 | Fluor Corp. | 1,737,042 | |||||||||
33,400 | Jacobs Engineering Group, Inc. * | 2,908,806 | |||||||||
116,900 | KB Home | 4,998,644 | |||||||||
190,600 | Lennar Corp.-Class A | 8,546,504 | |||||||||
89,000 | Martin Marietta Materials, Inc. | 7,330,040 | |||||||||
231,700 | Masco Corp. | 6,350,897 | |||||||||
5,700 | NVR, Inc. * | 2,927,805 | |||||||||
181,700 | Pulte Homes, Inc. | 5,391,039 | |||||||||
51,681,415 | |||||||||||
Consumer Goods — 3.7% | |||||||||||
1,113,000 | Altria Group, Inc. (a) | 92,968,890 | |||||||||
169,600 | Avon Products, Inc. | 4,869,216 | |||||||||
14,400 | Cintas Corp. (a) | 533,232 | |||||||||
224,200 | Colgate-Palmolive Co. | 13,420,612 | |||||||||
420,249 | Eastman Kodak Co. (a) | 8,938,696 | |||||||||
7,000 | Harman International Industries, Inc. | 567,840 | |||||||||
514,200 | International Game Technology | 19,889,256 | |||||||||
199,300 | Jones Apparel Group, Inc. | 6,238,090 | |||||||||
61,500 | Kimberly-Clark Corp. | 3,905,250 | |||||||||
25,700 | Leggett & Platt, Inc. | 592,385 | |||||||||
318,000 | Liz Claiborne, Inc. | 11,883,660 |
See accompanying notes to the financial statements.
2
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Consumer Goods — continued | |||||||||||
139,500 | Mohawk Industries, Inc. * (a) | 9,887,760 | |||||||||
303,800 | Newell Rubbermaid, Inc. | 8,199,562 | |||||||||
96,200 | Reynolds American, Inc. | 6,259,734 | |||||||||
125,800 | UST, Inc. (a) | 6,649,788 | |||||||||
124,100 | VF Corp. | 8,673,349 | |||||||||
309,000 | Whirlpool Corp. | 25,001,190 | |||||||||
228,478,510 | |||||||||||
Financial — 22.2% | |||||||||||
1,188,400 | Aflac, Inc. | 53,561,188 | |||||||||
188,000 | Allstate Corp. (The) | 10,892,720 | |||||||||
214,100 | AMBAC Financial Group, Inc. | 18,538,919 | |||||||||
1,957,800 | American International Group, Inc. | 124,946,796 | |||||||||
700,300 | AON Corp. | 24,209,371 | |||||||||
934,477 | Bank of America Corp. | 48,097,531 | |||||||||
293,800 | Bank of New York Co. (The), Inc. | 9,915,750 | |||||||||
293,400 | BB&T Corp. | 12,557,520 | |||||||||
96,800 | Bear Stearns Cos. (The), Inc. | 12,617,880 | |||||||||
185,300 | Brown & Brown, Inc. | 5,547,882 | |||||||||
1,505,000 | Charles Schwab Corp. (The) | 24,546,550 | |||||||||
259,300 | Chubb Corp. | 13,006,488 | |||||||||
153,000 | CIT Group, Inc. | 6,894,180 | |||||||||
3,258,300 | Citigroup, Inc. | 160,797,105 | |||||||||
206,900 | Comerica, Inc. | 11,845,025 | |||||||||
598,900 | E*Trade Financial Corp. * | 14,128,051 | |||||||||
1,656,554 | Fannie Mae | 87,217,568 | |||||||||
175,500 | Federated Investors, Inc.-Class B | 5,875,740 | |||||||||
392,320 | Fidelity National Financial, Inc. | 15,783,034 | |||||||||
108,900 | Fifth Third Bancorp (a) | 4,284,126 | |||||||||
62,300 | First American Corp. (a) | 2,530,626 | |||||||||
16,700 | First Horizon National Corp. | 637,606 | |||||||||
20,000 | Franklin Resources, Inc. | 1,968,200 | |||||||||
387,300 | Freddie Mac | 24,632,280 | |||||||||
48,700 | Golden West Financial Corp. | 3,676,363 |
See accompanying notes to the financial statements.
3
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
404,400 | Goldman Sachs Group, Inc. | 60,114,060 | |||||||||
75,800 | H&R Block, Inc. | 1,594,074 | |||||||||
70,100 | Hartford Financial Services Group, Inc. | 6,018,786 | |||||||||
33,000 | Janus Capital Group, Inc. | 586,740 | |||||||||
21,000 | Jefferies Group, Inc. | 523,320 | |||||||||
2,001,300 | JPMorgan Chase & Co. (a) | 91,379,358 | |||||||||
104,500 | KeyCorp | 3,844,555 | |||||||||
9,200 | Legg Mason, Inc. | 839,592 | |||||||||
584,200 | Lehman Brothers Holdings, Inc. | 37,277,802 | |||||||||
290,300 | Lincoln National Corp. | 17,621,210 | |||||||||
528,800 | Loews Corp. | 20,348,224 | |||||||||
230,000 | Marsh & McLennan Cos., Inc. | 6,016,800 | |||||||||
152,250 | MBIA, Inc. (a) | 9,383,167 | |||||||||
448,200 | Mellon Financial Corp. | 16,686,486 | |||||||||
771,700 | Merrill Lynch & Co., Inc. | 56,743,101 | |||||||||
257,800 | Metlife, Inc. (a) | 14,186,734 | |||||||||
188,500 | MGIC Investment Corp. | 10,908,495 | |||||||||
367,300 | Morgan Stanley | 24,164,667 | |||||||||
997,600 | National City Corp. (a) | 34,497,008 | |||||||||
65,300 | Northern Trust Corp. | 3,656,147 | |||||||||
364,400 | Old Republic International Corp. | 7,615,960 | |||||||||
266,700 | PMI Group (The), Inc. | 11,532,108 | |||||||||
358,600 | PNC Financial Services Group, Inc. | 25,385,294 | |||||||||
157,300 | Principal Financial Group, Inc. (a) | 8,374,652 | |||||||||
1,686,700 | Progressive Corp. (The) | 41,475,953 | |||||||||
133,900 | Prudential Financial, Inc. | 9,829,599 | |||||||||
177,700 | Radian Group, Inc. | 10,640,676 | |||||||||
525,700 | St. Paul Travelers Cos. (The), Inc. | 23,078,230 | |||||||||
309,400 | State Street Corp. | 19,120,920 | |||||||||
15,900 | T. Rowe Price Group, Inc. | 700,554 | |||||||||
360,400 | TD Ameritrade Holding Corp. | 6,314,208 | |||||||||
266,900 | Torchmark Corp. | 16,603,849 | |||||||||
834,500 | UnumProvident Corp. | 15,813,775 | |||||||||
248,100 | US Bancorp | 7,956,567 |
See accompanying notes to the financial statements.
4
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
450,450 | W.R. Berkley Corp. | 15,765,750 | |||||||||
1,071,804 | Washington Mutual, Inc. (a) | 44,897,870 | |||||||||
1,380,204,790 | |||||||||||
Food & Beverage — 3.2% | |||||||||||
366,800 | Anheuser-Busch Cos., Inc. | 18,112,584 | |||||||||
630,700 | Archer-Daniels-Midland Co. | 25,965,919 | |||||||||
94,900 | Brown-Forman Corp.-Class B | 7,305,402 | |||||||||
81,100 | Campbell Soup Co. | 3,046,927 | |||||||||
1,816,700 | Coca-Cola Co. (The) | 81,406,327 | |||||||||
266,000 | Dean Foods Co. * | 10,538,920 | |||||||||
148,500 | HJ Heinz Co. | 6,213,240 | |||||||||
214,000 | Kraft Foods, Inc. (a) | 7,256,740 | |||||||||
199,700 | Pepsi Bottling Group, Inc. (a) | 6,991,497 | |||||||||
126,800 | PepsiCo, Inc. | 8,277,504 | |||||||||
679,900 | Sara Lee Corp. | 11,306,737 | |||||||||
721,800 | Tyson Foods, Inc.-Class A | 10,632,114 | |||||||||
197,053,911 | |||||||||||
Health Care — 19.0% | |||||||||||
177,300 | Abbott Laboratories | 8,634,510 | |||||||||
166,400 | Allergan, Inc. | 19,062,784 | |||||||||
811,300 | AmerisourceBergen Corp. | 35,827,008 | |||||||||
229,000 | Amgen, Inc. * | 15,555,970 | |||||||||
149,300 | Barr Pharmaceuticals, Inc. * | 8,435,450 | |||||||||
91,600 | Baxter International, Inc. | 4,065,208 | |||||||||
53,600 | Becton Dickinson & Co. | 3,735,920 | |||||||||
40,000 | Biogen Idec, Inc. * | 1,765,600 | |||||||||
71,600 | Biomet, Inc. | 2,342,036 | |||||||||
1,374,652 | Bristol-Myers Squibb Co. | 29,898,681 | |||||||||
715,500 | Cardinal Health, Inc. | 48,239,010 | |||||||||
317,800 | Caremark Rx, Inc. | 18,413,332 | |||||||||
134,900 | Cigna Corp. | 15,253,143 | |||||||||
29,700 | Coventry Health Care, Inc. * | 1,610,928 |
See accompanying notes to the financial statements.
5
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Health Care — continued | |||||||||||
20,300 | Endo Pharmaceuticals Holdings, Inc. * | 670,509 | |||||||||
608,900 | Express Scripts, Inc. * | 51,196,312 | |||||||||
1,323,600 | Forest Laboratories, Inc. * | 66,153,528 | |||||||||
131,500 | Genentech, Inc. * | 10,851,380 | |||||||||
204,100 | Health Net, Inc. * | 8,533,421 | |||||||||
23,700 | Humana, Inc. * | 1,444,041 | |||||||||
21,500 | IMS Health, Inc. | 586,735 | |||||||||
803,600 | Johnson & Johnson | 51,960,776 | |||||||||
662,600 | King Pharmaceuticals, Inc. * (a) | 10,747,372 | |||||||||
236,366 | Lincare Holdings, Inc. * | 8,752,633 | |||||||||
1,174,300 | McKesson Corp. | 59,654,440 | |||||||||
42,100 | Medtronic, Inc. | 1,974,490 | |||||||||
5,494,200 | Merck & Co., Inc. | 222,789,810 | |||||||||
22,100 | Omnicare, Inc. | 1,001,351 | |||||||||
10,777,380 | Pfizer, Inc. | 297,024,593 | |||||||||
245,100 | Quest Diagnostics, Inc. | 15,755,028 | |||||||||
30,200 | St. Jude Medical, Inc. * | 1,099,582 | |||||||||
107,800 | Stryker Corp. | 5,177,634 | |||||||||
2,516,602 | UnitedHealth Group, Inc. | 130,737,474 | |||||||||
139,500 | Varian Medical Systems, Inc. * | 7,435,350 | |||||||||
12,222 | WellPoint, Inc. * | 946,105 | |||||||||
297,100 | Wyeth | 14,468,770 | |||||||||
1,181,800,914 | |||||||||||
Machinery — 1.4% | |||||||||||
278,800 | Baker Hughes, Inc. (a) | 19,844,984 | |||||||||
169,700 | BJ Services Co. | 5,822,407 | |||||||||
513,900 | Caterpillar, Inc. | 34,097,265 | |||||||||
42,300 | Cummins, Inc. | 4,856,886 | |||||||||
141,400 | Deere & Co. | 11,043,340 | |||||||||
66,000 | Dover Corp | 3,208,920 | |||||||||
800 | Halliburton Co. | 26,096 | |||||||||
106,300 | Parker-Hannifin Corp. | 7,871,515 | |||||||||
83,100 | Terex Corp. * | 3,650,583 | |||||||||
90,421,996 |
See accompanying notes to the financial statements.
6
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Manufacturing — 2.4% | |||||||||||
111,800 | 3M Co. | 8,016,060 | |||||||||
199,400 | American Standard Cos., Inc. | 8,328,938 | |||||||||
1,988,600 | General Electric Co. | 67,731,716 | |||||||||
655,800 | Illinois Tool Works, Inc. | 28,789,620 | |||||||||
136,600 | ITT Industries, Inc. | 6,686,570 | |||||||||
59,600 | Temple-Inland, Inc. | 2,653,392 | |||||||||
64,300 | Textron, Inc. | 5,392,198 | |||||||||
369,500 | United Technologies Corp. | 23,171,345 | |||||||||
150,769,839 | |||||||||||
Metals & Mining — 0.4% | |||||||||||
776,500 | Alcoa, Inc. | 22,200,135 | |||||||||
Oil & Gas — 3.5% | |||||||||||
776,800 | Anadarko Petroleum Corp. | 36,439,688 | |||||||||
151,900 | Apache Corp. | 9,916,032 | |||||||||
66,000 | Chevron Corp. | 4,250,400 | |||||||||
211,468 | ConocoPhillips | 13,413,415 | |||||||||
210,400 | Devon Energy Corp. (a) | 13,147,896 | |||||||||
999,900 | Exxon Mobil Corp. | 67,663,233 | |||||||||
185,400 | Hess Corp. (a) | 8,487,612 | |||||||||
240,600 | Marathon Oil Corp. | 20,090,100 | |||||||||
589,200 | Occidental Petroleum Corp. | 30,043,308 | |||||||||
204,200 | Sunoco, Inc. | 14,684,022 | |||||||||
218,135,706 | |||||||||||
Primary Process Industry — 0.6% | |||||||||||
21,200 | Air Products & Chemicals, Inc. | 1,405,348 | |||||||||
251,600 | E.I. du Pont de Nemours & Co. | 10,056,452 | |||||||||
14,000 | Ecolab, Inc. | 624,120 | |||||||||
152,000 | International Paper Co. | 5,285,040 | |||||||||
378,600 | Nucor Corp. | 18,502,182 | |||||||||
35,873,142 |
See accompanying notes to the financial statements.
7
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Retail Stores — 14.6% | |||||||||||
78,200 | Abercrombie & Fitch Co.-Class A | 5,046,246 | |||||||||
757,800 | AutoNation, Inc. * | 14,724,054 | |||||||||
153,700 | AutoZone, Inc. * | 13,879,110 | |||||||||
675,600 | Bed Bath & Beyond, Inc. * | 22,787,988 | |||||||||
287,900 | Best Buy Co., Inc. (a) | 13,531,300 | |||||||||
80,200 | CDW Corp. | 4,675,660 | |||||||||
332,600 | Chico's FAS, Inc. * | 6,133,144 | |||||||||
122,200 | Circuit City Stores, Inc. | 2,885,142 | |||||||||
500,400 | Costco Wholesale Corp. | 23,413,716 | |||||||||
466,500 | Dollar General Corp. | 5,999,190 | |||||||||
163,800 | Family Dollar Stores, Inc. | 4,188,366 | |||||||||
239,600 | Fastenal Co. | 8,788,528 | |||||||||
5,942,504 | Home Depot, Inc. | 203,768,462 | |||||||||
2,315,600 | Kroger Co. | 55,134,436 | |||||||||
120,000 | Limited Brands, Inc. | 3,087,600 | |||||||||
5,152,200 | Lowe's Cos., Inc. | 139,418,532 | |||||||||
119,200 | Nordstrom, Inc. | 4,452,120 | |||||||||
764,500 | Office Depot, Inc. * | 28,164,180 | |||||||||
245,600 | Ross Stores, Inc. | 6,014,744 | |||||||||
1,196,800 | Safeway, Inc. | 37,017,024 | |||||||||
859,700 | Staples, Inc. | 19,394,832 | |||||||||
499,125 | Supervalu, Inc. | 14,255,010 | |||||||||
191,100 | Tiffany & Co. | 6,038,760 | |||||||||
706,836 | TJX Cos., Inc. (a) | 18,907,863 | |||||||||
1,276,900 | Walgreen Co. | 63,155,474 | |||||||||
4,156,600 | Wal-Mart Stores, Inc. | 185,883,152 | |||||||||
16,200 | Williams-Sonoma, Inc. | 477,252 | |||||||||
911,221,885 | |||||||||||
Services — 2.8% | |||||||||||
22,100 | CBS Corp.-Class B | 630,955 | |||||||||
204,700 | Darden Restaurants, Inc. | 7,246,380 | |||||||||
235,200 | Gannett Co., Inc. | 13,371,120 | |||||||||
177,700 | Manpower, Inc. | 10,503,847 |
See accompanying notes to the financial statements.
8
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Services — continued | |||||||||||
197,000 | McDonald's Corp. | 7,072,300 | |||||||||
540,200 | Moody's Corp. | 33,049,436 | |||||||||
282,900 | News Corp.-Class A | 5,383,587 | |||||||||
134,200 | Robert Half International, Inc. | 4,152,148 | |||||||||
1,797,500 | Starbucks Corp. * (a) | 55,740,475 | |||||||||
285,300 | Sysco Corp. | 8,955,567 | |||||||||
250,900 | Walt Disney Co. (The) | 7,439,185 | |||||||||
434,100 | Waste Management, Inc. | 14,880,948 | |||||||||
34,600 | Weight Watchers International, Inc. | 1,469,116 | |||||||||
119,500 | Wendy's International, Inc. | 7,636,050 | |||||||||
177,531,114 | |||||||||||
Technology — 11.6% | |||||||||||
58,700 | Adobe Systems, Inc. * | 1,904,228 | |||||||||
216,200 | Affiliated Computer Services, Inc.-Class A * (a) | 11,099,708 | |||||||||
555,800 | Agilent Technologies, Inc. * | 17,874,528 | |||||||||
335,400 | Applera Corp.-Applied Biosystems Group | 10,280,010 | |||||||||
454,800 | Applied Materials, Inc. | 7,677,024 | |||||||||
189,400 | Arrow Electronics, Inc. * | 5,284,260 | |||||||||
45,860 | Autodesk, Inc. * | 1,594,094 | |||||||||
20,300 | Avery Dennison Corp. | 1,257,382 | |||||||||
460,200 | BEA Systems, Inc. * (a) | 6,318,546 | |||||||||
275,000 | BMC Software, Inc. * | 7,320,500 | |||||||||
215,300 | Boeing Co. | 16,125,970 | |||||||||
79,500 | Broadcom Corp.-Class A * | 2,340,480 | |||||||||
239,100 | Citrix Systems, Inc. * | 7,335,588 | |||||||||
209,800 | Computer Sciences Corp. * | 9,940,324 | |||||||||
456,100 | Corning, Inc. * | 10,143,664 | |||||||||
461,600 | Danaher Corp. | 30,599,464 | |||||||||
2,392,100 | Dell, Inc. * (a) | 53,941,855 | |||||||||
10,100 | Diebold, Inc. | 423,291 | |||||||||
92,400 | DST Systems, Inc. * (a) | 5,454,372 | |||||||||
316,300 | Electronic Data Systems Corp. | 7,537,429 | |||||||||
589,800 | Emerson Electric Co. | 48,452,070 |
See accompanying notes to the financial statements.
9
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
10,900 | Energizer Holdings, Inc. * | 728,774 | |||||||||
654,200 | First Data Corp. | 28,110,974 | |||||||||
119,000 | Fiserv, Inc. * | 5,256,230 | |||||||||
189,600 | General Dynamics Corp. | 12,807,480 | |||||||||
13,000 | Global Payments, Inc. | 494,650 | |||||||||
40,100 | Goodrich Corp. | 1,561,895 | |||||||||
16,400 | Google, Inc.-Class A * | 6,207,892 | |||||||||
26,000 | Harris Corp. | 1,141,920 | |||||||||
2,656,700 | Hewlett-Packard Co. | 97,128,952 | |||||||||
1,482,900 | Intel Corp. | 28,975,866 | |||||||||
246,800 | International Business Machines Corp. | 19,983,396 | |||||||||
361,200 | Intuit, Inc. * (a) | 10,915,464 | |||||||||
167,300 | Jabil Circuit, Inc. | 4,488,659 | |||||||||
191,200 | Lexmark International, Inc. * | 10,720,584 | |||||||||
79,100 | Lockheed Martin Corp. | 6,533,660 | |||||||||
132,900 | Microchip Technology, Inc. | 4,539,864 | |||||||||
289,900 | Microsoft Corp. | 7,447,531 | |||||||||
1,186,300 | Motorola, Inc. | 27,735,694 | |||||||||
299,600 | National Semiconductor Corp. | 7,277,284 | |||||||||
351,400 | Northrop Grumman Corp. | 23,477,034 | |||||||||
403,700 | Nvidia Corp. * | 11,751,707 | |||||||||
266,100 | Paychex, Inc. | 9,555,651 | |||||||||
295,100 | Pitney Bowes, Inc. | 12,863,409 | |||||||||
1,878,400 | Qualcomm, Inc. | 70,759,328 | |||||||||
104,100 | Raytheon Co. | 4,914,561 | |||||||||
114,500 | Rockwell Automation, Inc. | 6,455,510 | |||||||||
759,500 | Texas Instruments, Inc. | 24,752,105 | |||||||||
83,100 | Thermo Electron Corp. * (a) | 3,257,520 | |||||||||
128,000 | W.W. Grainger, Inc. | 8,550,400 | |||||||||
721,298,781 | |||||||||||
Transportation — 2.8% | |||||||||||
402,495 | Burlington Northern Santa Fe Corp. | 26,947,040 | |||||||||
475,900 | CH Robinson Worldwide, Inc. (a) | 21,805,738 |
See accompanying notes to the financial statements.
10
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
Transportation — continued | |||||||||||
142,000 | CSX Corp. | 4,291,240 | |||||||||
449,900 | Expeditors International of Washington, Inc. | 17,937,513 | |||||||||
762,200 | FedEx Corp. (a) | 77,005,066 | |||||||||
68,000 | JB Hunt Transport Services, Inc. | 1,336,200 | |||||||||
172,100 | Norfolk Southern Corp. | 7,353,833 | |||||||||
252,700 | Union Pacific Corp. | 20,304,445 | |||||||||
176,981,075 | |||||||||||
Utility — 6.8% | |||||||||||
94,200 | Alltel Corp. | 5,106,582 | |||||||||
4,092,322 | AT&T, Inc. | 127,393,984 | |||||||||
2,542,600 | BellSouth Corp. | 103,534,672 | �� | ||||||||
291,300 | Centerpoint Energy, Inc. | 4,209,285 | |||||||||
169,300 | CenturyTel, Inc. | 6,741,526 | |||||||||
149,300 | Edison International | 6,515,452 | |||||||||
222,400 | FirstEnergy Corp. | 12,690,144 | |||||||||
24,000 | Questar Corp. | 2,076,960 | |||||||||
1,623,400 | Qwest Communications International, Inc. * (a) | 14,302,154 | |||||||||
27,800 | TXU Corp. | 1,840,638 | |||||||||
3,962,422 | Verizon Communications, Inc. | 139,398,006 | |||||||||
423,809,403 | |||||||||||
TOTAL COMMON STOCKS (COST $5,887,081,173) | 6,052,350,708 | ||||||||||
SHORT-TERM INVESTMENTS — 6.0% | |||||||||||
156,238,703 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $156,254,110 and an effective yield of 3.55%, collateralized by U.S. Treasury Bonds, with rates ranging from 10.38%-12.00%, maturities ranging from 11/15/12-08/15/13, and an aggregate market value of $159,363,477. | 156,238,703 | |||||||||
40,747,228 | Credit Suisse First Boston Corp. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $40,753,283 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $42,959,449. (b) | 40,747,228 |
See accompanying notes to the financial statements.
11
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — continued | |||||||||||
63,565,675 | Goldman Sachs Group Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $63,575,122 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $65,547,082. (b) | 63,565,675 | |||||||||
8,149,446 | Lehman Brothers Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $8,150,657 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $9,554,895. (b) | 8,149,446 | |||||||||
63,565,675 | Merrill Lynch & Co. Tri Party Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $63,575,033 and an effective yield of 5.30%, collateralized by various U.S. government obligations with an aggregate market value of $65,445,005. (b) | 63,565,675 | |||||||||
39,436,931 | Morgan Stanley & Co. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $39,442,803 and an effective yield of 5.36%, collateralized by various corporate debt obligations with an aggregate market value of $41,999,203. (b) | 39,436,931 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $371,703,658) | 371,703,658 | ||||||||||
TOTAL INVESTMENTS — 103.2% (Cost $6,258,784,831) | 6,424,054,366 | ||||||||||
Other Assets and Liabilities (net) — (3.2%) | (195,417,573 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 6,228,636,793 |
See accompanying notes to the financial statements.
12
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
296 | S&P 500 | September 2006 | $ | 96,614,400 | $ | 2,624,248 |
As of August 31, 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).
See accompanying notes to the financial statements.
13
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $206,847,162 (cost $6,258,784,831) (Note 2) | $ | 6,424,054,366 | |||||
Receivable for Fund shares sold | 1,503,091 | ||||||
Dividends and interest receivable | 11,000,600 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 13,000,000 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 37,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 91,636 | ||||||
Total assets | 6,449,686,693 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 215,464,955 | ||||||
Payable for Fund shares repurchased | 3,229,555 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 1,625,399 | ||||||
Shareholder service fee | 475,085 | ||||||
Administration fee – Class M | 22,406 | ||||||
Trustees and Chief Compliance Officer fees | 15,050 | ||||||
Payable for 12b-1 fee – Class M | 55,922 | ||||||
Accrued expenses | 161,528 | ||||||
Total liabilities | 221,049,900 | ||||||
Net assets | $ | 6,228,636,793 |
See accompanying notes to the financial statements.
14
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 5,950,182,168 | |||||
Accumulated undistributed net investment income | 17,059,195 | ||||||
Accumulated net realized gain | 93,501,647 | ||||||
Net unrealized appreciation | 167,893,783 | ||||||
$ | 6,228,636,793 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 2,085,977,309 | |||||
Class IV shares | $ | 655,642,135 | |||||
Class VI shares | $ | 3,354,847,380 | |||||
Class M shares | $ | 132,169,969 | |||||
Shares outstanding: | |||||||
Class III | 146,775,571 | ||||||
Class IV | 46,198,519 | ||||||
Class VI | 236,424,767 | ||||||
Class M | 9,314,463 | ||||||
Net asset value per share: | |||||||
Class III | $ | 14.21 | |||||
Class IV | $ | 14.19 | |||||
Class VI | $ | 14.19 | |||||
Class M | $ | 14.19 |
See accompanying notes to the financial statements.
15
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 57,534,617 | |||||
Interest (including securities lending income of $99,125) | 4,134,111 | ||||||
Total investment income | 61,668,728 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 9,678,826 | ||||||
Shareholder service fee – Class III (Note 3) | 1,664,237 | ||||||
Shareholder service fee – Class IV (Note 3) | 341,467 | ||||||
Shareholder service fee – Class VI (Note 3) | 880,267 | ||||||
12b-1 fee – Class M (Note 3) | 176,892 | ||||||
Administration fee – Class M (Note 3) | 141,514 | ||||||
Custodian, fund accounting agent and transfer agent fees | 384,560 | ||||||
Audit and tax fees | 32,884 | ||||||
Legal fees | 62,192 | ||||||
Trustees fees and related expenses (Note 3) | 50,600 | ||||||
Registration fees | 35,512 | ||||||
Miscellaneous | 47,659 | ||||||
Total expenses | 13,496,610 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (559,041 | ) | |||||
Net expenses | 12,937,569 | ||||||
Net investment income (loss) | 48,731,159 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 121,808,377 | ||||||
Closed futures contracts | 1,021,093 | ||||||
Net realized gain (loss) | 122,829,470 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (247,957,421 | ) | |||||
Open futures contracts | 1,317,932 | ||||||
Net unrealized gain (loss) | (246,639,489 | ) | |||||
Net realized and unrealized gain (loss) | (123,810,019 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (75,078,860 | ) |
See accompanying notes to the financial statements.
16
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 48,731,159 | $ | 98,643,262 | |||||||
Net realized gain (loss) | 122,829,470 | 259,970,270 | |||||||||
Change in net unrealized appreciation (depreciation) | (246,639,489 | ) | (27,070,375 | ) | |||||||
Net increase (decrease) in net assets from operations | (75,078,860 | ) | 331,543,157 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class II | — | (6,329,602 | ) | ||||||||
Class III | (17,174,804 | ) | (37,696,193 | ) | |||||||
Class IV | (5,537,150 | ) | (13,845,669 | ) | |||||||
Class VI | (26,108,287 | ) | (37,270,977 | ) | |||||||
Class M | (870,813 | ) | (2,290,730 | ) | |||||||
Total distributions from net investment income | (49,691,054 | ) | (97,433,171 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (61,452,066 | ) | ||||||||
Class IV | — | (19,494,901 | ) | ||||||||
Class VI | — | (51,739,754 | ) | ||||||||
Class M | — | (3,533,452 | ) | ||||||||
Total distributions from realized gains | — | (136,220,173 | ) | ||||||||
(49,691,054 | ) | (233,653,344 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class II | — | (696,960,624 | ) | ||||||||
Class III | (710,892,429 | ) | 1,061,910,529 | ||||||||
Class IV | (80,251,453 | ) | (118,000,063 | ) | |||||||
Class VI | 874,168,716 | 750,247,751 | |||||||||
Class M | (21,708,014 | ) | (16,685,159 | ) | |||||||
Increase (decrease) in net assets resulting from net share transactions | 61,316,820 | 980,512,434 | |||||||||
Total increase (decrease) in net assets | (63,453,094 | ) | 1,078,402,247 | ||||||||
Net assets: | |||||||||||
Beginning of period | 6,292,089,887 | 5,213,687,640 | |||||||||
End of period (including accumulated undistributed net investment income of $17,059,195 and $18,019,090, respectively) | $ | 6,228,636,793 | $ | 6,292,089,887 |
See accompanying notes to the financial statements.
17
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.50 | $ | 14.28 | $ | 13.54 | $ | 9.98 | $ | 12.90 | $ | 13.95 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.11 | 0.24 | 0.19 | 0.16 | 0.15 | 0.18 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.29 | ) | 0.54 | 0.73 | 3.56 | (2.92 | ) | (1.05 | ) | ||||||||||||||||||
Total from investment operations | (0.18 | ) | 0.78 | 0.92 | 3.72 | (2.77 | ) | (0.87 | ) | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.11 | ) | (0.24 | ) | (0.18 | ) | (0.16 | ) | (0.15 | ) | (0.17 | ) | |||||||||||||||
From net realized gains | — | (0.32 | ) | — | — | — | (0.01 | ) | |||||||||||||||||||
Total distributions | (0.11 | ) | (0.56 | ) | (0.18 | ) | (0.16 | ) | (0.15 | ) | (0.18 | ) | |||||||||||||||
Net asset value, end of period | $ | 14.21 | $ | 14.50 | $ | 14.28 | $ | 13.54 | $ | 9.98 | $ | 12.90 | |||||||||||||||
Total Return(a) | (1.25 | )%** | 5.60 | % | 6.89 | % | 37.50 | % | (21.59 | )% | (6.23 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 2,085,977 | $ | 2,841,959 | $ | 1,739,392 | $ | 1,517,458 | $ | 1,141,725 | $ | 1,321,634 | |||||||||||||||
Net expenses to average daily net assets | 0.46 | %* | 0.47 | % | 0.48 | % | 0.48 | % | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 1.51 | %* | 1.69 | % | 1.46 | % | 1.32 | % | 1.34 | % | 1.33 | % | |||||||||||||||
Portfolio turnover rate | 39 | %** | 65 | % | 65 | % | 57 | % | 74 | % | 69 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.02 | % | 0.03 | % | 0.03 | % | 0.02 | % |
(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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
18
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.48 | $ | 14.26 | $ | 13.52 | $ | 9.97 | $ | 12.89 | $ | 13.94 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.11 | 0.25 | 0.20 | 0.16 | 0.16 | 0.18 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.29 | ) | 0.54 | 0.73 | 3.55 | (2.92 | ) | (1.04 | ) | ||||||||||||||||||
Total from investment operations | (0.18 | ) | 0.79 | 0.93 | 3.71 | (2.76 | ) | (0.86 | ) | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.11 | ) | (0.25 | ) | (0.19 | ) | (0.16 | ) | (0.16 | ) | (0.18 | ) | |||||||||||||||
From net realized gains | — | (0.32 | ) | — | — | — | (0.01 | ) | |||||||||||||||||||
Total distributions | (0.11 | ) | (0.57 | ) | (0.19 | ) | (0.16 | ) | (0.16 | ) | (0.19 | ) | |||||||||||||||
Net asset value, end of period | $ | 14.19 | $ | 14.48 | $ | 14.26 | $ | 13.52 | $ | 9.97 | $ | 12.89 | |||||||||||||||
Total Return(a) | (1.22 | )%** | 5.66 | % | 6.96 | % | 37.50 | % | (21.55 | )% | (6.20 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 655,642 | $ | 749,822 | $ | 866,206 | $ | 709,525 | $ | 463,254 | $ | 744,813 | |||||||||||||||
Net expenses to average daily net assets | 0.41 | %* | 0.43 | % | 0.44 | % | 0.44 | % | 0.44 | % | 0.44 | % | |||||||||||||||
Net investment income to average daily net assets | 1.56 | %* | 1.76 | % | 1.49 | % | 1.36 | % | 1.39 | % | 1.36 | % | |||||||||||||||
Portfolio turnover rate | 39 | %** | 65 | % | 65 | % | 57 | % | 74 | % | 69 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.02 | % | 0.03 | % | 0.03 | % | 0.02 | % |
(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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
19
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 14.47 | $ | 14.26 | $ | 13.52 | $ | 11.54 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.11 | 0.25 | 0.21 | 0.10 | |||||||||||||||
Net realized and unrealized gain (loss) | (0.27 | ) | 0.54 | 0.72 | 2.01 | ||||||||||||||
Total from investment operations | (0.16 | ) | 0.79 | 0.93 | 2.11 | ||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.12 | ) | (0.26 | ) | (0.19 | ) | (0.13 | ) | |||||||||||
In excess of net investment income | — | (0.32 | ) | — | — | ||||||||||||||
Total distributions | (0.12 | ) | (0.58 | ) | (0.19 | ) | (0.13 | ) | |||||||||||
Net asset value, end of period | $ | 14.19 | $ | 14.47 | $ | 14.26 | $ | 13.52 | |||||||||||
Total Return(b) | (1.12 | )%** | 5.64 | % | 7.01 | % | 18.41 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 3,354,847 | $ | 2,543,300 | $ | 1,750,325 | $ | 542,274 | |||||||||||
Net expenses to average daily net assets | 0.37 | %* | 0.38 | % | 0.39 | % | 0.39 | %* | |||||||||||
Net investment income to average daily net assets | 1.61 | %* | 1.78 | % | 1.56 | % | 1.17 | %* | |||||||||||
Portfolio turnover rate | 39 | %** | 65 | % | 65 | % | 57 | %*** | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.02 | % | 0.03 | %* |
(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 during the periods shown.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
*** Calculation represents the portfolio turnover rate of the Fund for the year ended February 29, 2004.
See accompanying notes to the financial statements.
20
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class M share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 14.47 | $ | 14.26 | $ | 13.52 | $ | 9.96 | $ | 12.89 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.09 | 0.20 | 0.16 | 0.12 | 0.11 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (0.28 | ) | 0.53 | 0.72 | 3.57 | (2.94 | ) | ||||||||||||||||
Total from investment operations | (0.19 | ) | 0.73 | 0.88 | 3.69 | (2.83 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.09 | ) | (0.20 | ) | (0.14 | ) | (0.13 | ) | (0.10 | ) | |||||||||||||
In excess of net investment income | — | (0.32 | ) | — | — | — | |||||||||||||||||
Total distributions | (0.09 | ) | (0.52 | ) | (0.14 | ) | (0.13 | ) | (0.10 | ) | |||||||||||||
Net asset value, end of period | $ | 14.19 | $ | 14.47 | $ | 14.26 | $ | 13.52 | $ | 9.96 | |||||||||||||
Total Return(b) | (1.33 | )%** | 5.22 | % | 6.61 | % | 37.23 | % | (22.03 | )%** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 132,170 | $ | 157,009 | $ | 171,316 | $ | 141,188 | $ | 60,242 | |||||||||||||
Net expenses to average daily net assets | 0.76 | %* | 0.77 | % | 0.78 | % | 0.78 | % | 0.78 | %* | |||||||||||||
Net investment income to average daily net assets | 1.22 | %* | 1.41 | % | 1.17 | % | 0.98 | % | 1.18 | %* | |||||||||||||
Portfolio turnover rate | 39 | %** | 65 | % | 65 | % | 57 | % | 74 | %*** | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.02 | % | 0.03 | % | 0.03 | %* |
(a) Period from April 15, 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 throughout the period.
* Annualized.
** Not annualized.
*** Calculation represents portfolio turnover rate for the Fund for the year ended February 28, 2003.
See accompanying notes to the financial statements.
21
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
1. Organization
GMO U.S. Core 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, 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 Funds into classes.
The Fund commenced operations following an in-kind purchase of shares by GMO U.S. Core Fund ("Predecessor Fund") effected as of the close of business on September 16, 2005. For tax purposes, this transaction met all requirements for a tax-free transaction under the Internal Revenue Code, and consequently the Fund retained the Predecessor Fund's basis and holding period in each asset contributed in-kind. For accounting purposes, the Fund recorded a cost for each in-kind asset contributed by the Predecessor Fund equal to such asset's historical cost. For tax and accounting purposes, the Fund is treated as a continuation of the Predecessor Fund's operations. Therefore, the Financial Statements reflect the performance and operational history of the Predecessor Fund prior to September 16, 2005.
The Fund seeks high total return. The Fund seeks to achieve its objective by outperforming the S&P 500 Index. The Fund typically makes equity investments in companies that issue stocks included in the S&P 500 Index, and companies with similar size characteristics.
Throughout the six months ended August 31, 2006, the Fund had four classes of shares outstanding: Class III, Class IV, Class VI, and Class M. Class M shares bear an administration fee and a 12b-1 fee while Classes 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.
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
22
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are generally 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 pursuant to procedures approved by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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
23
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no swap agreements outstanding at the end of the period.
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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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 August 31, 2006, the Fund had loaned securities
24
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
having a market value of $206,847,162 collateralized by cash in the amount of $215,464,955, which was invested in short-term instruments.
Taxes and distributions
The Fund intends to qualify each tax 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.
As of February 28, 2006, the Fund elected to defer to March 1, 2006 post-October capital losses of $10,053,867.
As of August 31, 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) | ||||||||||||
$ | 6,275,625,798 | $ | 422,113,095 | $ | (273,684,527 | ) | $ | 148,428,568 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
25
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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, if any, 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 capit al 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 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.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.31% of the Fund's 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, 0.10% for Class IV shares and 0.055% for Class VI shares.
Class M shares of the Fund pay GMO an administration fee monthly at the annual rate of 0.20% of the 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 up to 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 on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts.
26
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees (Classes III, IV and VI only), 12b-1 and administration fees (Class M only), fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 0.31% of the Fund's average daily net assets.
The Fund's portion of the fee paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $32,752 and $18,216, respectively. No remuneration was paid by the Fund 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 six month period ended August 31, 2006 aggregated 2,451,454,176 and $2,326,124,593, 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 August 31, 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 August 31, 2006, less than 0.1% of the Fund's shares were held by five related parties comprised of certain GMO employee accounts, and 57.9% of the Fund's shares were held by accounts for which the Manager has investment discretion.
27
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 4,492,813 | $ | 64,089,937 | 106,136,547 | $ | 1,518,927,314 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 997,907 | 14,176,656 | 6,478,842 | 91,687,691 | |||||||||||||||
Shares repurchased | (54,765,770 | ) | (789,159,022 | ) | (37,329,263 | ) | (533,739,876 | ) | |||||||||||
Redemption in Kind | — | — | (1,035,197 | ) | (14,964,600 | ) | |||||||||||||
Net increase (decrease) | (49,275,050 | ) | $ | (710,892,429 | ) | 74,250,929 | $ | 1,061,910,529 | |||||||||||
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 422,599 | $ | 5,924,000 | 25,446,957 | $ | 369,642,534 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 344,025 | 4,874,273 | 2,271,361 | 32,102,146 | |||||||||||||||
Shares repurchased | (6,367,563 | ) | (91,049,726 | ) | (36,653,149 | ) | (519,744,743 | ) | |||||||||||
Net increase (decrease) | (5,600,939 | ) | $ | (80,251,453 | ) | (8,934,831 | ) | $ | (118,000,063 | ) | |||||||||
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 66,054,714 | $ | 949,839,152 | 49,679,584 | $ | 704,266,353 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,845,590 | 26,108,287 | 6,302,404 | 89,010,731 | |||||||||||||||
Shares repurchased | (7,191,663 | ) | (101,778,723 | ) | (3,004,479 | ) | (43,029,333 | ) | |||||||||||
Net increase (decrease) | 60,708,641 | $ | 874,168,716 | 52,977,509 | $ | 750,247,751 |
28
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 90,393 | $ | 1,277,426 | 325,070 | $ | 4,556,579 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 61,345 | 870,813 | 412,026 | 5,824,182 | |||||||||||||||
Shares repurchased | (1,685,842 | ) | (23,856,253 | ) | (1,877,053 | ) | (26,673,662 | ) | |||||||||||
Redemption in Kind | — | — | (27,185 | ) | (392,258 | ) | |||||||||||||
Net increase (decrease) | (1,534,104 | ) | $ | (21,708,014 | ) | (1,167,142 | ) | $ | (16,685,159 | ) |
29
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO U.S. Core Equity Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
Noting that the Fund is the successor to GMO U.S. Core Fund (the "Predecessor Fund"), a former series of the Trust that had an investment objective and policies and restrictions substantially identical to those of the Fund, the Trustees considered investment performance and fee and expense information of the Predecessor Fund for periods ending on or before September 16, 2005. In particular, the Trustees noted that the Fund's advisory fee was 0.02% lower than the Predecessor Fund's advisory fee.
In addition, the Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The
30
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to th e Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to
31
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
32
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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.
33
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 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 | 0.46 | % | $ | 1,000.00 | $ | 987.50 | $ | 2.30 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.41 | % | $ | 1,000.00 | $ | 987.80 | $ | 2.05 | |||||||||||
2) Hypothetical | 0.41 | % | $ | 1,000.00 | $ | 1,023.14 | $ | 2.09 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.37 | % | $ | 1,000.00 | $ | 988.80 | $ | 1.85 | |||||||||||
2) Hypothetical | 0.37 | % | $ | 1,000.00 | $ | 1,023.34 | $ | 1.89 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 0.76 | % | $ | 1,000.00 | $ | 986.70 | $ | 3.81 | |||||||||||
2) Hypothetical | 0.76 | % | $ | 1,000.00 | $ | 1,021.37 | $ | 3.87 |
* Expenses are calculated using each Class's annualized expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
34
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 94.1 | % | |||||
Short-Term Investments | 5.5 | ||||||
Futures | 0.0 | ||||||
Other | 0.4 | ||||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Health Care | 33.1 | % | |||||
Retail Stores | 24.0 | ||||||
Utility | 10.8 | ||||||
Technology | 6.9 | ||||||
Consumer Goods | 5.5 | ||||||
Food & Beverage | 5.5 | ||||||
Oil & Gas | 4.3 | ||||||
Services | 4.1 | ||||||
Manufacturing | 2.3 | ||||||
Transportation | 1.8 | ||||||
Financial | 0.9 | ||||||
Automotive | 0.8 | ||||||
100.0 | % |
1
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 94.1% | |||||||||||
Automotive — 0.7% | |||||||||||
489,500 | Harley-Davidson, Inc. | 28,640,645 | |||||||||
Consumer Goods — 5.2% | |||||||||||
455,600 | Colgate-Palmolive Co. | 27,272,216 | |||||||||
380,000 | International Game Technology | 14,698,400 | |||||||||
210,300 | Kimberly-Clark Corp. | 13,354,050 | |||||||||
270,400 | Liz Claiborne, Inc. | 10,104,848 | |||||||||
1,837,200 | Procter & Gamble Co. | 113,722,680 | |||||||||
287,600 | VF Corp. | 20,100,364 | |||||||||
199,252,558 | |||||||||||
Financial — 0.8% | |||||||||||
677,800 | Brown & Brown, Inc. | 20,293,332 | |||||||||
190,300 | First American Corp. | 7,729,986 | |||||||||
1,500 | Old Republic International Corp. | 31,350 | |||||||||
150,800 | Progressive Corp. (The) | 3,708,172 | |||||||||
31,762,840 | |||||||||||
Food & Beverage — 5.1% | |||||||||||
183,900 | Anheuser-Busch Cos., Inc. | 9,080,982 | |||||||||
3,294,700 | Coca-Cola Co. (The) | 147,635,507 | |||||||||
168,100 | HJ Heinz Co. | 7,033,304 | |||||||||
516,900 | PepsiCo, Inc. | 33,743,232 | |||||||||
197,493,025 | |||||||||||
Health Care — 31.1% | |||||||||||
143,100 | Barr Pharmaceuticals, Inc. * | 8,085,150 | |||||||||
1,941,100 | Forest Laboratories, Inc. * | 97,016,178 | |||||||||
3,510,500 | Johnson & Johnson | 226,988,930 | |||||||||
83,000 | King Pharmaceuticals, Inc. * | 1,346,260 | |||||||||
6,000 | Lincare Holdings, Inc. * | 222,180 | |||||||||
262,200 | McKesson Corp. | 13,319,760 | |||||||||
6,085,200 | Merck & Co., Inc. | 246,754,860 |
See accompanying notes to the financial statements.
2
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Health Care — continued | |||||||||||
9,622,900 | Pfizer, Inc. | 265,207,124 | |||||||||
4,791,500 | UnitedHealth Group, Inc. | 248,918,425 | |||||||||
1,798,000 | Wyeth | 87,562,600 | |||||||||
1,195,421,467 | |||||||||||
Manufacturing — 2.2% | |||||||||||
673,700 | 3M Co. | 48,304,290 | |||||||||
428,000 | Illinois Tool Works, Inc. | 18,789,200 | |||||||||
247,300 | United Technologies Corp. | 15,508,183 | |||||||||
82,601,673 | |||||||||||
Oil & Gas — 4.1% | |||||||||||
2,326,200 | Exxon Mobil Corp. | 157,413,954 | |||||||||
Retail Stores — 22.6% | |||||||||||
753,100 | Best Buy Co., Inc. | 35,395,700 | |||||||||
8,000 | Dollar General Corp. | 102,880 | |||||||||
80,700 | Fastenal Co. | 2,960,076 | |||||||||
6,993,200 | Home Depot, Inc. | 239,796,828 | |||||||||
1,264,900 | Kroger Co. | 30,117,269 | |||||||||
8,421,700 | Lowe's Cos., Inc. | 227,891,202 | |||||||||
184,600 | Supervalu, Inc. | 5,272,176 | |||||||||
1,583,400 | Walgreen Co. | 78,314,964 | |||||||||
5,516,600 | Wal-Mart Stores, Inc. | 246,702,352 | |||||||||
866,553,447 | |||||||||||
Services — 3.9% | |||||||||||
451,200 | McDonald's Corp. | 16,198,080 | |||||||||
926,900 | Moody's Corp. | 56,707,742 | |||||||||
2,422,700 | Starbucks Corp. * | 75,127,927 | |||||||||
148,033,749 | |||||||||||
Technology — 6.5% | |||||||||||
536,000 | Affiliated Computer Services, Inc.-Class A * | 27,518,240 | |||||||||
682,500 | Danaher Corp. | 45,242,925 | |||||||||
206,200 | First Data Corp. | 8,860,414 | |||||||||
223,100 | International Business Machines Corp. | 18,064,407 |
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)
August 31, 2006 (Unaudited)
Shares Par Value ($) / | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
2,443,100 | Microsoft Corp. | 62,763,239 | |||||||||
455,400 | Pitney Bowes, Inc. | 19,850,886 | |||||||||
1,746,800 | Qualcomm, Inc. | 65,801,956 | |||||||||
248,102,067 | |||||||||||
Transportation — 1.7% | |||||||||||
663,400 | FedEx Corp. | 67,023,302 | |||||||||
Utility — 10.2% | |||||||||||
744,500 | Alltel Corp. | 40,359,345 | |||||||||
6,014,400 | AT&T, Inc. | 187,228,272 | |||||||||
192,800 | BellSouth Corp. | 7,850,816 | |||||||||
4,416,600 | Verizon Communications, Inc. | 155,375,988 | |||||||||
390,814,421 | |||||||||||
TOTAL COMMON STOCKS (COST $3,476,143,687) | 3,613,113,148 | ||||||||||
SHORT-TERM INVESTMENTS — 5.5% | |||||||||||
191,989,005 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $192,007,937 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 10.38%, maturity date of 11/15/12 and a market value, including accrued interest, of $195,828,785. | 191,989,005 | |||||||||
20,173,476 | Morgan Stanley & Co. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $20,175,437 and an effective yield of 3.50%, collateralized by a U.S. Treasury Note with a rate of 3.55%, maturity date of 01/15/08 and a market value, including accrued interest, of $20,576,945. | 20,173,476 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $212,162,481) | 212,162,481 | ||||||||||
TOTAL INVESTMENTS — 99.6% (Cost $3,688,306,168) | 3,825,275,629 | ||||||||||
Other Assets and Liabilities (net) — 0.4% | 13,746,272 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 3,839,021,901 |
See accompanying notes to the financial statements.
4
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
204 | S&P 500 | September 2006 | $ | 66,585,600 | $ | 847,475 |
As of August 31, 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.
See accompanying notes to the financial statements.
5
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value (cost $3,688,306,168) (Note 2) | $ | 3,825,275,629 | |||||
Receivable for Fund shares sold | 2,485,286 | ||||||
Dividends and interest receivable | 9,496,541 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 3,213,000 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 25,500 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 47,244 | ||||||
Total assets | 3,840,543,200 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 1,041,402 | ||||||
Shareholder service fee | 375,407 | ||||||
Trustees and Chief Compliance Officer fees | 5,793 | ||||||
Accrued expenses | 98,697 | ||||||
Total liabilities | 1,521,299 | ||||||
Net assets | $ | 3,839,021,901 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 3,685,607,247 | |||||
Accumulated undistributed net investment income | 12,417,442 | ||||||
Accumulated net realized gain | 3,180,276 | ||||||
Net unrealized appreciation | 137,816,936 | ||||||
$ | 3,839,021,901 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 1,206,572,393 | |||||
Class IV shares | $ | 2,632,449,508 | |||||
Shares outstanding: | |||||||
Class III | 58,174,898 | ||||||
Class IV | 126,861,177 | ||||||
Net asset value per share: | |||||||
Class III | $ | 20.74 | |||||
Class IV | $ | 20.75 |
See accompanying notes to the financial statements.
6
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 36,869,644 | |||||
Interest | 2,778,593 | ||||||
Total investment income | 39,648,237 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 5,585,318 | ||||||
Shareholder service fee – Class III (Note 3) | 741,034 | ||||||
Shareholder service fee – Class IV (Note 3) | 1,258,423 | ||||||
Custodian, fund accounting agent and transfer agent fees | 181,700 | ||||||
Audit and tax fees | 23,000 | ||||||
Legal fees | 30,544 | ||||||
Trustees fees and related expenses (Note 3) | 25,710 | ||||||
Registration fees | 10,672 | ||||||
Miscellaneous | 23,368 | ||||||
Total expenses | 7,879,769 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (260,360 | ) | |||||
Net expenses | 7,619,409 | ||||||
Net investment income (loss) | 32,028,828 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 8,317,365 | ||||||
Closed futures contracts | (779,226 | ) | |||||
Net realized gain (loss) | 7,538,139 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 2,499,320 | ||||||
Open futures contracts | 608,074 | ||||||
Net unrealized gain (loss) | 3,107,394 | ||||||
Net realized and unrealized gain (loss) | 10,645,533 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 42,674,361 |
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
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 32,028,828 | $ | 34,238,378 | |||||||
Net realized gain (loss) | 7,538,139 | 2,212,423 | |||||||||
Change in net unrealized appreciation (depreciation) | 3,107,394 | 120,095,854 | |||||||||
Net increase (decrease) in net assets from operations | 42,674,361 | 156,546,655 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (8,855,982 | ) | (8,981,477 | ) | |||||||
Class IV | (22,472,162 | ) | (15,500,649 | ) | |||||||
Total distributions from net investment income | (31,328,144 | ) | (24,482,126 | ) | |||||||
Net realized gains | |||||||||||
Class III | (1,035,913 | ) | (1,546,552 | ) | |||||||
Class IV | (2,563,315 | ) | (2,159,897 | ) | |||||||
Total distributions from net realized gains | (3,599,228 | ) | (3,706,449 | ) | |||||||
(34,927,372 | ) | (28,188,575 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 91,254,888 | 593,814,070 | |||||||||
Class IV | 626,515,137 | 988,898,698 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 717,770,025 | 1,582,712,768 | |||||||||
Total increase (decrease) in net assets | 725,517,014 | 1,711,070,848 | |||||||||
Net assets: | |||||||||||
Beginning of period | 3,113,504,887 | 1,402,434,039 | |||||||||
End of period (including accumulated undistributed net investment income of $12,417,442 and $11,716,758, respectively) | $ | 3,839,021,901 | $ | 3,113,504,887 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 20.81 | $ | 20.03 | $ | 19.93 | $ | 20.00 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.19 | 0.32 | 0.39 | 0.01 | |||||||||||||||
Net realized and unrealized gain (loss) | (0.05 | ) | 0.72 | (0.05 | ) | (0.08 | ) | ||||||||||||
Total from investment operations | 0.14 | 1.04 | 0.34 | (0.07 | ) | ||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.19 | ) | (0.22 | ) | (0.24 | ) | — | ||||||||||||
From net realized gains | (0.02 | ) | (0.04 | ) | — | — | |||||||||||||
Total distributions | (0.21 | ) | (0.26 | ) | (0.24 | ) | — | ||||||||||||
Net asset value, end of period | $ | 20.74 | $ | 20.81 | $ | 20.03 | $ | 19.93 | |||||||||||
Total Return(b) | 0.70 | %** | 5.28 | % | 1.72 | % | (0.35 | )%** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 1,206,572 | $ | 1,108,088 | $ | 463,848 | $ | 18,966 | |||||||||||
Net expenses to average daily net assets | 0.48 | %* | 0.48 | % | 0.48 | % | 0.47 | %* | |||||||||||
Net investment income to average daily net assets | 1.86 | %* | 1.58 | % | 1.98 | % | 1.22 | %* | |||||||||||
Portfolio turnover rate | 23 | %** | 52 | % | 66 | % | 2 | %** | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 20.82 | $ | 20.03 | $ | 19.93 | $ | 20.00 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.19 | 0.32 | 0.38 | 0.01 | |||||||||||||||
Net realized and unrealized gain (loss) | (0.05 | ) | 0.74 | (0.03 | ) | (0.08 | ) | ||||||||||||
Total from investment operations | 0.14 | 1.06 | 0.35 | (0.07 | ) | ||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.19 | ) | (0.23 | ) | (0.25 | ) | — | ||||||||||||
From net realized gains | (0.02 | ) | (0.04 | ) | — | — | |||||||||||||
Total distributions | (0.21 | ) | (0.27 | ) | (0.25 | ) | — | ||||||||||||
Net asset value, end of period | $ | 20.75 | $ | 20.82 | $ | 20.03 | $ | 19.93 | |||||||||||
Total Return(b) | 0.73 | %** | 5.37 | % | 1.75 | % | (0.35 | )%** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 2,632,450 | $ | 2,005,417 | $ | 938,586 | $ | 137,835 | |||||||||||
Net expenses to average daily net assets | 0.44 | %* | 0.44 | % | 0.44 | % | 0.44 | %* | |||||||||||
Net investment income to average daily net assets | 1.91 | %* | 1.62 | % | 1.92 | % | 0.99 | %* | |||||||||||
Portfolio turnover rate | 23 | %** | 52 | % | 66 | % | 2 | %** | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 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
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its objective by outperforming the S&P 500 Index. The Fund typically makes equity investments in companies that issue stocks included in the S&P 500 Index, and companies with similar size characteristics. The Fund typically holds fewer than 100 stocks. The Fund reserves the right to make tactical allocations of up to 20% of its assets to investments in cash and other high quality investments.
Throughout the six months ended August 31, 2006, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different level of shareholder service fees.
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 generally 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 pursuant to procedures approved by the Trustees.
11
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 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
12
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no swap agreements outstanding at the end of the period.
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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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 six months ended A ugust 31, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each tax 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.
13
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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.
As of August 31, 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) | ||||||||||||
$ | 3,700,173,983 | $ | 234,612,652 | $ | (109,511,006 | ) | $ | 125,101,646 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
14
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 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.
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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $17,983 and $8,924, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $1,406,855,266 and $740,923,661, 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
15
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 21.3% 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 August 31, 2006, 0.1% of the Fund's shares were held by ten related parties, comprised of certain GMO employee accounts, and 53.0% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 22,374,609 | $ | 453,450,085 | 43,846,709 | $ | 874,138,746 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 405,243 | 8,140,014 | 457,932 | 9,093,758 | |||||||||||||||
Shares repurchased | (17,850,789 | ) | (370,335,211 | ) | (14,220,768 | ) | (289,418,434 | ) | |||||||||||
Net increase (decrease) | 4,929,063 | $ | 91,254,888 | 30,083,873 | $ | 593,814,070 | |||||||||||||
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 32,190,446 | $ | 659,938,363 | 49,970,954 | $ | 999,519,390 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,144,203 | 23,001,226 | 843,645 | 16,747,719 | |||||||||||||||
Shares repurchased | (2,785,632 | ) | (56,424,452 | ) | (1,350,936 | ) | (27,368,411 | ) | |||||||||||
Net increase (decrease) | 30,549,017 | $ | 626,515,137 | 49,463,663 | $ | 988,898,698 |
16
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO U.S. Quality Equity Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to
17
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
18
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
19
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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.
20
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 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. 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 | $ | 1,007.00 | $ | 2.43 | |||||||||||
2) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.79 | $ | 2.45 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.44 | % | $ | 1,000.00 | $ | 1,007.30 | $ | 2.23 | |||||||||||
2) Hypothetical | 0.44 | % | $ | 1,000.00 | $ | 1,022.99 | $ | 2.24 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
21
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.3 | % | |||||
Short-Term Investments | 6.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Futures | 0.0 | ||||||
Other | (2.4 | ) | |||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Financial | 23.3 | % | |||||
Health Care | 19.8 | ||||||
Retail Stores | 15.1 | ||||||
Technology | 12.1 | ||||||
Utility | 7.0 | ||||||
Oil & Gas | 3.7 | ||||||
Food & Beverage | 3.3 | ||||||
Services | 3.0 | ||||||
Transportation | 3.0 | ||||||
Manufacturing | 2.6 | ||||||
Consumer Goods | 2.1 | ||||||
Machinery | 1.6 | ||||||
Automotive | 1.5 | ||||||
Construction | 0.9 | ||||||
Primary Process Industry | 0.6 | ||||||
Metals & Mining | 0.4 | ||||||
100.0 | % |
1
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 96.3% | |||||||||||
Automotive — 1.4% | |||||||||||
9,100 | Eaton Corp. | 605,150 | |||||||||
173,193 | Ford Motor Co. (a) | 1,449,625 | |||||||||
14,600 | Harley-Davidson, Inc. | 854,246 | |||||||||
15,000 | Johnson Controls, Inc. | 1,078,950 | |||||||||
14,400 | Paccar, Inc. | 787,248 | |||||||||
4,775,219 | |||||||||||
Construction — 0.9% | |||||||||||
9,000 | Centex Corp. | 458,550 | |||||||||
5,400 | D.R. Horton, Inc. | 118,422 | |||||||||
1,300 | Fluor Corp. | 112,346 | |||||||||
2,100 | Jacobs Engineering Group, Inc. * | 182,889 | |||||||||
6,200 | KB Home | 265,112 | |||||||||
10,100 | Lennar Corp.-Class A | 452,884 | |||||||||
5,000 | Martin Marietta Materials, Inc. | 411,800 | |||||||||
15,900 | Masco Corp. | 435,819 | |||||||||
400 | NVR, Inc. * (a) | 205,460 | |||||||||
9,600 | Pulte Homes, Inc. | 284,832 | |||||||||
2,928,114 | |||||||||||
Consumer Goods — 2.0% | |||||||||||
9,800 | Avon Products, Inc. | 281,358 | |||||||||
800 | Cintas Corp. | 29,624 | |||||||||
11,900 | Colgate-Palmolive Co. | 712,334 | |||||||||
22,400 | Eastman Kodak Co. (a) | 476,448 | |||||||||
27,800 | International Game Technology | 1,075,304 | |||||||||
10,500 | Jones Apparel Group, Inc. | 328,650 | |||||||||
4,400 | Kimberly-Clark Corp. | 279,400 | |||||||||
1,400 | Leggett & Platt, Inc. | 32,270 | |||||||||
16,400 | Liz Claiborne, Inc. | 612,868 | |||||||||
7,700 | Mohawk Industries, Inc. * (a) | 545,776 | |||||||||
18,100 | Newell Rubbermaid, Inc. | 488,519 |
See accompanying notes to the financial statements.
2
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Consumer Goods — continued | |||||||||||
7,100 | VF Corp. | 496,219 | |||||||||
15,900 | Whirlpool Corp. (a) | 1,286,469 | |||||||||
6,645,239 | |||||||||||
Financial — 22.4% | |||||||||||
62,700 | Aflac, Inc. | 2,825,889 | |||||||||
12,800 | Allstate Corp. (The) | 741,632 | |||||||||
11,000 | AMBAC Financial Group, Inc. | 952,490 | |||||||||
106,600 | American International Group, Inc. | 6,803,212 | |||||||||
38,400 | AON Corp. | 1,327,488 | |||||||||
52,888 | Bank of America Corp. | 2,722,145 | |||||||||
16,800 | Bank of New York Co. (The), Inc. | 567,000 | |||||||||
18,100 | BB&T Corp. | 774,680 | |||||||||
5,300 | Bear Stearns Cos. (The), Inc. | 690,855 | |||||||||
11,100 | Brown & Brown, Inc. | 332,334 | |||||||||
400 | Capital One Financial Corp. | 29,240 | |||||||||
75,200 | Charles Schwab Corp. (The) | 1,226,512 | |||||||||
12,400 | Chubb Corp. | 621,984 | |||||||||
7,900 | CIT Group, Inc. | 355,974 | |||||||||
177,100 | Citigroup, Inc. | 8,739,885 | |||||||||
12,400 | Comerica, Inc. | 709,900 | |||||||||
33,000 | E*Trade Financial Corp. * | 778,470 | |||||||||
88,400 | Fannie Mae | 4,654,260 | |||||||||
9,700 | Federated Investors, Inc.-Class B | 324,756 | |||||||||
21,555 | Fidelity National Financial, Inc. | 867,158 | |||||||||
8,600 | Fifth Third Bancorp (a) | 338,324 | |||||||||
4,700 | First American Corp. | 190,914 | |||||||||
4,800 | First Horizon National Corp. | 183,264 | |||||||||
23,700 | Freddie Mac | 1,507,320 | |||||||||
4,000 | Golden West Financial Corp. (a) | 301,960 | |||||||||
22,100 | Goldman Sachs Group, Inc. | 3,285,165 | |||||||||
8,000 | H&R Block, Inc. | 168,240 | |||||||||
4,100 | Hartford Financial Services Group, Inc. | 352,026 | |||||||||
1,200 | Huntington Bancshares, Inc. | 28,704 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
2,100 | Janus Capital Group, Inc. | 37,338 | |||||||||
2,300 | Jefferies Group, Inc. | 57,316 | |||||||||
108,600 | JPMorgan Chase & Co. | 4,958,676 | |||||||||
8,400 | KeyCorp | 309,036 | |||||||||
30,600 | Lehman Brothers Holdings, Inc. | 1,952,586 | |||||||||
18,600 | Lincoln National Corp. | 1,129,020 | |||||||||
12,000 | Marsh & McLennan Cos., Inc. | 313,920 | |||||||||
9,900 | MBIA, Inc. (a) | 610,137 | |||||||||
24,600 | Mellon Financial Corp. | 915,858 | |||||||||
42,300 | Merrill Lynch & Co., Inc. | 3,110,319 | |||||||||
17,100 | Metlife, Inc. (a) | 941,013 | |||||||||
9,400 | MGIC Investment Corp. | 543,978 | |||||||||
20,900 | Morgan Stanley | 1,375,011 | |||||||||
56,500 | National City Corp. | 1,953,770 | |||||||||
3,100 | Northern Trust Corp. | 173,569 | |||||||||
28,225 | Old Republic International Corp. | 589,903 | |||||||||
9,900 | PMI Group (The), Inc. | 428,076 | |||||||||
20,200 | PNC Financial Services Group, Inc. | 1,429,958 | |||||||||
9,000 | Principal Financial Group, Inc. | 479,160 | |||||||||
88,200 | Progressive Corp. (The) | 2,168,838 | |||||||||
7,000 | Prudential Financial, Inc. | 513,870 | |||||||||
9,100 | Radian Group, Inc. | 544,908 | |||||||||
27,400 | St. Paul Travelers Cos. (The), Inc. | 1,202,860 | |||||||||
16,500 | State Street Corp. | 1,019,700 | |||||||||
800 | T. Rowe Price Group, Inc. | 35,248 | |||||||||
22,600 | TD Ameritrade Holding Corp. | 395,952 | |||||||||
13,100 | Torchmark Corp. | 814,951 | |||||||||
43,300 | UnumProvident Corp. | 820,535 | |||||||||
18,100 | US Bancorp | 580,467 | |||||||||
24,300 | W.R. Berkley Corp. | 850,500 | |||||||||
58,566 | Washington Mutual, Inc. | 2,453,330 | |||||||||
75,111,584 |
See accompanying notes to the financial statements.
4
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Food & Beverage — 3.2% | |||||||||||
21,200 | Anheuser-Busch Cos., Inc. | 1,046,856 | |||||||||
34,800 | Archer-Daniels-Midland Co. | 1,432,716 | |||||||||
5,100 | Brown-Forman Corp.-Class B | 392,598 | |||||||||
4,700 | Campbell Soup Co. | 176,579 | |||||||||
96,700 | Coca-Cola Co. (The) | 4,333,127 | |||||||||
14,900 | Dean Foods Co. * | 590,338 | |||||||||
8,300 | HJ Heinz Co. | 347,272 | |||||||||
12,300 | Kraft Foods, Inc. | 417,093 | |||||||||
11,100 | Pepsi Bottling Group, Inc. (a) | 388,611 | |||||||||
6,600 | PepsiCo, Inc. | 430,848 | |||||||||
35,700 | Sara Lee Corp. | 593,691 | |||||||||
39,300 | Tyson Foods, Inc.-Class A | 578,889 | |||||||||
10,728,618 | |||||||||||
Health Care — 19.1% | |||||||||||
9,200 | Abbott Laboratories | 448,040 | |||||||||
8,200 | Allergan, Inc. | 939,392 | |||||||||
45,500 | AmerisourceBergen Corp. | 2,009,280 | |||||||||
12,700 | Amgen, Inc. * | 862,711 | |||||||||
9,300 | Barr Pharmaceuticals, Inc. * | 525,450 | |||||||||
5,300 | Baxter International, Inc. | 235,214 | |||||||||
3,100 | Becton Dickinson & Co. | 216,070 | |||||||||
1,500 | Biogen Idec, Inc. * | 66,210 | |||||||||
6,500 | Biomet, Inc. | 212,615 | |||||||||
77,800 | Bristol-Myers Squibb Co. | 1,692,150 | |||||||||
40,100 | Cardinal Health, Inc. | 2,703,542 | |||||||||
16,700 | Caremark Rx, Inc. | 967,598 | |||||||||
7,000 | Cigna Corp. | 791,490 | |||||||||
2,100 | Endo Pharmaceuticals Holdings, Inc. * | 69,363 | |||||||||
33,900 | Express Scripts, Inc. * | 2,850,312 | |||||||||
72,400 | Forest Laboratories, Inc. * | 3,618,552 | |||||||||
6,900 | Genentech, Inc. * | 569,388 | |||||||||
10,900 | Health Net, Inc. * | 455,729 | |||||||||
600 | Humana, Inc. * | 36,558 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Health Care — continued | |||||||||||
1,100 | IMS Health, Inc. | 30,019 | |||||||||
43,920 | Johnson & Johnson | 2,839,867 | |||||||||
36,600 | King Pharmaceuticals, Inc. * | 593,652 | |||||||||
11,900 | Lincare Holdings, Inc. * | 440,657 | |||||||||
62,100 | McKesson Corp. | 3,154,680 | |||||||||
2,100 | Medtronic, Inc. | 98,490 | |||||||||
293,200 | Merck & Co., Inc. | 11,889,260 | |||||||||
575,090 | Pfizer, Inc. | 15,849,480 | |||||||||
14,300 | Quest Diagnostics, Inc. | 919,204 | |||||||||
2,800 | St. Jude Medical, Inc. * | 101,948 | |||||||||
10,900 | Stryker Corp. | 523,527 | |||||||||
135,224 | UnitedHealth Group, Inc. | 7,024,887 | |||||||||
7,600 | Varian Medical Systems, Inc. * | 405,080 | |||||||||
1,262 | WellPoint, Inc. * | 97,692 | |||||||||
15,600 | Wyeth | 759,720 | |||||||||
63,997,827 | |||||||||||
Machinery — 1.5% | |||||||||||
15,500 | Baker Hughes, Inc. | 1,103,290 | |||||||||
7,800 | BJ Services Co. | 267,618 | |||||||||
28,600 | Caterpillar, Inc. | 1,897,610 | |||||||||
2,400 | Cummins, Inc. (a) | 275,568 | |||||||||
7,800 | Deere & Co. | 609,180 | |||||||||
3,800 | Dover Corp | 184,756 | |||||||||
5,700 | Parker-Hannifin Corp. | 422,085 | |||||||||
4,700 | Terex Corp. * | 206,471 | |||||||||
4,966,578 | |||||||||||
Manufacturing — 2.5% | |||||||||||
7,100 | 3M Co. | 509,070 | |||||||||
12,200 | American Standard Cos., Inc. | 509,594 | |||||||||
110,900 | General Electric Co. | 3,777,254 | |||||||||
35,800 | Illinois Tool Works, Inc. | 1,571,620 |
See accompanying notes to the financial statements.
6
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Manufacturing — continued | |||||||||||
7,700 | ITT Industries, Inc. | 376,915 | |||||||||
3,400 | Temple-Inland, Inc. | 151,368 | |||||||||
3,600 | Textron, Inc. | 301,896 | |||||||||
21,000 | United Technologies Corp. | 1,316,910 | |||||||||
8,514,627 | |||||||||||
Metals & Mining — 0.4% | |||||||||||
42,800 | Alcoa, Inc. | 1,223,652 | |||||||||
Oil & Gas — 3.5% | |||||||||||
43,100 | Anadarko Petroleum Corp. | 2,021,821 | |||||||||
7,000 | Apache Corp. | 456,960 | |||||||||
4,700 | Chevron Corp. | 302,680 | |||||||||
12,151 | ConocoPhillips | 770,738 | |||||||||
11,400 | Devon Energy Corp. | 712,386 | |||||||||
55,600 | Exxon Mobil Corp. | 3,762,452 | |||||||||
10,100 | Hess Corp. | 462,378 | |||||||||
12,600 | Marathon Oil Corp. | 1,052,100 | |||||||||
32,400 | Occidental Petroleum Corp. | 1,652,076 | |||||||||
9,700 | Sunoco, Inc. | 697,527 | |||||||||
11,891,118 | |||||||||||
Primary Process Industry — 0.6% | |||||||||||
1,400 | Air Products & Chemicals, Inc. | 92,806 | |||||||||
15,400 | E.I. du Pont de Nemours & Co. | 615,538 | |||||||||
700 | Ecolab, Inc. | 31,206 | |||||||||
8,600 | International Paper Co. | 299,022 | |||||||||
20,500 | Nucor Corp. | 1,001,835 | |||||||||
2,040,407 | |||||||||||
Retail Stores — 14.6% | |||||||||||
3,600 | Abercrombie & Fitch Co.-Class A | 232,308 | |||||||||
43,100 | AutoNation, Inc. * | 837,433 | |||||||||
8,800 | AutoZone, Inc. * | 794,640 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Retail Stores — continued | |||||||||||
34,200 | Bed Bath & Beyond, Inc. * | 1,153,566 | |||||||||
15,400 | Best Buy Co., Inc. | 723,800 | |||||||||
4,700 | CDW Corp. | 274,010 | |||||||||
15,100 | Chico's FAS, Inc. * | 278,444 | |||||||||
5,000 | Circuit City Stores, Inc. (a) | 118,050 | |||||||||
27,000 | Costco Wholesale Corp. (a) | 1,263,330 | |||||||||
24,500 | Dollar General Corp. | 315,070 | |||||||||
11,000 | Family Dollar Stores, Inc. | 281,270 | |||||||||
13,100 | Fastenal Co. | 480,508 | |||||||||
320,600 | Home Depot, Inc. | 10,993,374 | |||||||||
121,600 | Kroger Co. | 2,895,296 | |||||||||
6,200 | Limited Brands, Inc. | 159,526 | |||||||||
279,500 | Lowe's Cos., Inc. | 7,563,270 | |||||||||
3,400 | Nordstrom, Inc. | 126,990 | |||||||||
38,300 | Office Depot, Inc. * | 1,410,972 | |||||||||
8,900 | Ross Stores, Inc. | 217,961 | |||||||||
62,600 | Safeway, Inc. | 1,936,218 | |||||||||
47,000 | Staples, Inc. | 1,060,320 | |||||||||
27,265 | Supervalu, Inc. | 778,688 | |||||||||
1,400 | Target Corp. | 67,746 | |||||||||
8,800 | Tiffany & Co. | 278,080 | |||||||||
39,400 | TJX Cos., Inc. | 1,053,950 | |||||||||
68,500 | Walgreen Co. | 3,388,010 | |||||||||
224,700 | Wal-Mart Stores, Inc. | 10,048,584 | |||||||||
1,900 | Williams-Sonoma, Inc. | 55,974 | |||||||||
48,787,388 | |||||||||||
Services — 2.9% | |||||||||||
4,700 | CBS Corp.-Class B | 134,185 | |||||||||
8,800 | Darden Restaurants, Inc. | 311,520 | |||||||||
14,200 | Gannett Co., Inc. | 807,270 | |||||||||
9,900 | Manpower, Inc. | 585,189 | |||||||||
10,400 | McDonald's Corp. | 373,360 | |||||||||
29,300 | Moody's Corp. | 1,792,574 |
See accompanying notes to the financial statements.
8
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Services — continued | |||||||||||
19,200 | News Corp.-Class A | 365,376 | |||||||||
8,200 | Robert Half International, Inc. | 253,708 | |||||||||
97,900 | Starbucks Corp. * | 3,035,879 | |||||||||
12,500 | Sysco Corp. | 392,375 | |||||||||
16,200 | Walt Disney Co. (The) | 480,330 | |||||||||
23,600 | Waste Management, Inc. | 809,008 | |||||||||
1,100 | Weight Watchers International, Inc. | 46,706 | |||||||||
5,100 | Wendy's International, Inc. | 325,890 | |||||||||
9,713,370 | |||||||||||
Technology — 11.6% | |||||||||||
2,000 | Adobe Systems, Inc. * | 64,880 | |||||||||
11,400 | Affiliated Computer Services, Inc.-Class A * (a) | 585,276 | |||||||||
29,600 | Agilent Technologies, Inc. * | 951,936 | |||||||||
18,200 | Applera Corp.-Applied Biosystems Group | 557,830 | |||||||||
23,700 | Applied Materials, Inc. | 400,056 | |||||||||
10,700 | Arrow Electronics, Inc. * | 298,530 | |||||||||
1,500 | Avery Dennison Corp. | 92,910 | |||||||||
23,300 | BEA Systems, Inc. * | 319,909 | |||||||||
15,500 | BMC Software, Inc. * | 412,610 | |||||||||
12,300 | Boeing Co. | 921,270 | |||||||||
14,000 | Citrix Systems, Inc. * | 429,520 | |||||||||
11,500 | Computer Sciences Corp. * | 544,870 | |||||||||
23,200 | Corning, Inc. * | 515,968 | |||||||||
25,100 | Danaher Corp. | 1,663,879 | |||||||||
129,500 | Dell, Inc. * | 2,920,225 | |||||||||
4,300 | DST Systems, Inc. * (a) | 253,829 | |||||||||
17,200 | Electronic Data Systems Corp. | 409,876 | |||||||||
32,300 | Emerson Electric Co. | 2,653,445 | |||||||||
1,700 | Energizer Holdings, Inc. * | 113,662 | |||||||||
35,200 | First Data Corp. | 1,512,544 | |||||||||
7,800 | Fiserv, Inc. * | 344,526 | |||||||||
7,800 | General Dynamics Corp. | 526,890 | |||||||||
800 | Global Payments, Inc. | 30,440 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
5,900 | Goodrich Corp. | 229,805 | |||||||||
800 | Google, Inc.-Class A * | 302,824 | |||||||||
2,300 | Harris Corp. | 101,016 | |||||||||
141,400 | Hewlett-Packard Co. | 5,169,584 | |||||||||
78,500 | Intel Corp. | 1,533,890 | |||||||||
14,300 | International Business Machines Corp. | 1,157,871 | |||||||||
1,300 | Intersil Corp.-Class A | 32,955 | |||||||||
18,000 | Intuit, Inc. * | 543,960 | |||||||||
7,900 | Jabil Circuit, Inc. | 211,957 | |||||||||
11,500 | Lexmark International, Inc. * (a) | 644,805 | |||||||||
5,100 | Lockheed Martin Corp. | 421,260 | |||||||||
7,300 | Microchip Technology, Inc. | 249,368 | |||||||||
21,800 | Microsoft Corp. | 560,042 | |||||||||
62,800 | Motorola, Inc. | 1,468,264 | |||||||||
15,700 | National Semiconductor Corp. | 381,353 | |||||||||
19,000 | Northrop Grumman Corp. | 1,269,390 | |||||||||
17,400 | Nvidia Corp. * | 506,514 | |||||||||
6,300 | Oracle Corp. * | 98,595 | |||||||||
12,000 | Paychex, Inc. | 430,920 | |||||||||
16,800 | Pitney Bowes, Inc. | 732,312 | |||||||||
102,500 | Qualcomm, Inc. | 3,861,175 | |||||||||
5,900 | Raytheon Co. | 278,539 | |||||||||
6,900 | Rockwell Automation, Inc. | 389,022 | |||||||||
40,100 | Texas Instruments, Inc. | 1,306,859 | |||||||||
4,500 | Thermo Electron Corp. * (a) | 176,400 | |||||||||
5,900 | W.W. Grainger, Inc. | 394,120 | |||||||||
38,977,681 | |||||||||||
Transportation — 2.9% | |||||||||||
22,000 | Burlington Northern Santa Fe Corp. | 1,472,900 | |||||||||
25,900 | CH Robinson Worldwide, Inc. | 1,186,738 | |||||||||
8,200 | CSX Corp. | 247,804 | |||||||||
24,400 | Expeditors International of Washington, Inc. | 972,828 | |||||||||
41,500 | FedEx Corp. | 4,192,745 |
See accompanying notes to the financial statements.
10
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Transportation — continued | |||||||||||
4,200 | JB Hunt Transport Services, Inc. | 82,530 | |||||||||
9,600 | Norfolk Southern Corp. | 410,208 | |||||||||
13,500 | Union Pacific Corp. | 1,084,725 | |||||||||
9,650,478 | |||||||||||
Utility — 6.8% | |||||||||||
5,000 | Alltel Corp. | 271,050 | |||||||||
220,087 | AT&T, Inc. | 6,851,308 | |||||||||
138,000 | BellSouth Corp. | 5,619,360 | |||||||||
16,600 | Centerpoint Energy, Inc. | 239,870 | |||||||||
11,700 | CenturyTel, Inc. | 465,894 | |||||||||
6,100 | Edison International | 266,204 | |||||||||
10,600 | FirstEnergy Corp. | 604,836 | |||||||||
400 | Questar Corp. | 34,616 | |||||||||
88,600 | Qwest Communications International, Inc. * (a) | 780,566 | |||||||||
1,200 | TXU Corp. | 79,452 | |||||||||
213,184 | Verizon Communications, Inc. | 7,499,813 | |||||||||
22,712,969 | |||||||||||
TOTAL COMMON STOCKS (COST $315,251,095) | 322,664,869 | ||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Technology — 0.0% | |||||||||||
844 | Raytheon Co. Warrants, Expires 06/16/11 * | 11,774 | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $0) | 11,774 |
See accompanying notes to the financial statements.
11
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 6.1% | |||||||||||
11,725,863 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $11,727,019 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12%, maturity date of 08/15/13 and a market value including accrued interest of $11,960,380. | 11,725,863 | |||||||||
1,668,133 | Credit Suisse First Boston Corp. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $1,668,381 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $1,758,698. (b) | 1,668,133 | |||||||||
2,602,288 | Goldman Sachs Group Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $2,602,675 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $2,683,404. (b) | 2,602,288 | |||||||||
333,627 | Lehman Brothers Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $333,677 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $391,164. (b) | 333,627 | |||||||||
2,602,288 | Merrill Lynch & Co. Tri Party Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $2,602,671 and an effective yield of 5.30%, collateralized by various U.S. government obligations with an aggregate market value of $2,679,225. (b) | 2,602,288 | |||||||||
1,614,492 | Morgan Stanley & Co. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $1,614,732 and an effective yield of 5.36%, collateralized by various corporate debt obligations with an aggregate market value of $1,719,388. (b) | 1,614,492 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $20,546,691) | 20,546,691 | ||||||||||
TOTAL INVESTMENTS — 102.4% (Cost $335,797,786) | 343,223,334 | ||||||||||
Other Assets and Liabilities (net) — (2.4%) | (8,105,809 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 335,117,525 |
See accompanying notes to the financial statements.
12
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
19 | S&P 500 | September 2006 | $ | 6,201,600 | $ | 125,516 |
As of August 31, 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).
See accompanying notes to the financial statements.
13
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $8,461,733 (cost $335,797,786) (Note 2) | $ | 343,223,334 | |||||
Dividends and interest receivable | 599,754 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 299,250 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 2,375 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 16,399 | ||||||
Total assets | 344,141,112 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 8,820,828 | ||||||
Payable for Fund shares repurchased | 40,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 92,446 | ||||||
Shareholder service fee | 36,470 | ||||||
Trustees and Chief Compliance Officer fees | 707 | ||||||
Accrued expenses | 33,136 | ||||||
Total liabilities | 9,023,587 | ||||||
Net assets | $ | 335,117,525 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 331,287,288 | |||||
Accumulated undistributed net investment income | 951,757 | ||||||
Accumulated net realized loss | (4,672,584 | ) | |||||
Net unrealized appreciation | 7,551,064 | ||||||
$ | 335,117,525 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 187,681,345 | |||||
Class IV shares | $ | 147,436,180 | |||||
Shares outstanding: | |||||||
Class III | 15,475,913 | ||||||
Class IV | 12,149,807 | ||||||
Net asset value per share: | |||||||
Class III | $ | 12.13 | |||||
Class IV | $ | 12.13 |
See accompanying notes to the financial statements.
14
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 3,162,656 | |||||
Interest (including securities lending income of $5,538) | 203,354 | ||||||
Total investment income | 3,366,010 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 575,118 | ||||||
Shareholder service fee – Class III (Note 3) | 151,070 | ||||||
Shareholder service fee – Class IV (Note 3) | 77,243 | ||||||
Custodian, fund accounting agent and transfer agent fees | 51,796 | ||||||
Audit and tax fees | 25,576 | ||||||
Legal fees | 3,588 | ||||||
Trustees fees and related expenses (Note 3) | 2,944 | ||||||
Registration fees | 2,760 | ||||||
Miscellaneous | 2,760 | ||||||
Total expenses | 892,855 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (85,468 | ) | |||||
Net expenses | 807,387 | ||||||
Net investment income (loss) | 2,558,623 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 10,537,150 | ||||||
Closed futures contracts | 91,110 | ||||||
Net realized gain (loss) | 10,628,260 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (19,301,619 | ) | |||||
Open futures contracts | 87,301 | ||||||
Net unrealized gain (loss) | (19,214,318 | ) | |||||
Net realized and unrealized gain (loss) | (8,586,058 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (6,027,435 | ) |
See accompanying notes to the financial statements.
15
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 2,558,623 | $ | 6,147,961 | |||||||
Net realized gain (loss) | 10,628,260 | 20,204,840 | |||||||||
Change in net unrealized appreciation (depreciation) | (19,214,318 | ) | (7,038,717 | ) | |||||||
Net increase (decrease) in net assets from operations | (6,027,435 | ) | 19,314,084 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (2,351,936 | ) | (2,769,665 | ) | |||||||
Class IV | (1,685,846 | ) | (1,840,585 | ) | |||||||
Total distributions from net investment income | (4,037,782 | ) | (4,610,250 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (4,972,971 | ) | ||||||||
Class IV | — | (3,238,317 | ) | ||||||||
Total distributions from net realized gains | — | (8,211,288 | ) | ||||||||
(4,037,782 | ) | (12,821,538 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (30,224,564 | ) | (1,410,664 | ) | |||||||
Class IV | 1,685,846 | 5,078,901 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | (28,538,718 | ) | 3,668,237 | ||||||||
Total increase (decrease) in net assets | (38,603,935 | ) | 10,160,783 | ||||||||
Net assets: | |||||||||||
Beginning of period | 373,721,460 | 363,560,677 | |||||||||
End of period (including accumulated undistributed net investment income of $951,757 and $2,430,916, respectively) | $ | 335,117,525 | $ | 373,721,460 |
See accompanying notes to the financial statements.
16
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 12.45 | $ | 12.24 | $ | 11.76 | $ | 8.69 | $ | 11.23 | $ | 12.29 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.09 | 0.20 | 0.17 | 0.13 | 0.12 | 0.15 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.27 | ) | 0.44 | 0.54 | 3.07 | (2.55 | ) | (1.07 | ) | ||||||||||||||||||
Total from investment operations | (0.18 | ) | 0.64 | 0.71 | 3.20 | (2.43 | ) | (0.92 | ) | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.14 | ) | (0.15 | ) | (0.18 | ) | (0.13 | ) | (0.11 | ) | (0.14 | ) | |||||||||||||||
From net realized gains | — | (0.28 | ) | (0.05 | ) | — | — | — | |||||||||||||||||||
Total distributions | (0.14 | ) | (0.43 | ) | (0.23 | ) | (0.13 | ) | (0.11 | ) | (0.14 | ) | |||||||||||||||
Net asset value, end of period | $ | 12.13 | $ | 12.45 | $ | 12.24 | $ | 11.76 | $ | 8.69 | $ | 11.23 | |||||||||||||||
Total Return(a) | (1.47 | )%** | 5.40 | % | 6.16 | % | 37.06 | % | (21.69 | )% | (7.53 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 187,681 | $ | 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 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 1.45 | %* | 1.68 | % | 1.43 | % | 1.26 | % | 1.26 | % | 1.24 | % | |||||||||||||||
Portfolio turnover rate | 39 | %** | 63 | % | 68 | % | 63 | % | 62 | % | 85 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
17
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002(a) | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 12.46 | $ | 12.25 | $ | 11.76 | $ | 8.69 | $ | 11.23 | $ | 12.32 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.09 | 0.21 | 0.16 | 0.13 | 0.13 | 0.10 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.28 | ) | 0.44 | 0.56 | 3.07 | (2.55 | ) | (1.08 | ) | ||||||||||||||||||
Total from investment operations | (0.19 | ) | 0.65 | 0.72 | 3.20 | (2.42 | ) | (0.98 | ) | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.14 | ) | (0.16 | ) | (0.18 | ) | (0.13 | ) | (0.12 | ) | (0.11 | ) | |||||||||||||||
From net realized gains | — | (0.28 | ) | (0.05 | ) | — | — | — | |||||||||||||||||||
Total distributions | (0.14 | ) | (0.44 | ) | (0.23 | ) | (0.13 | ) | (0.12 | ) | (0.11 | ) | |||||||||||||||
Net asset value, end of period | $ | 12.13 | $ | 12.46 | $ | 12.25 | $ | 11.76 | $ | 8.69 | $ | 11.23 | |||||||||||||||
Total Return(b) | (1.53 | )%** | 5.44 | % | 6.25 | % | 37.12 | % | (21.65 | )% | (8.00 | )%** | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 147,436 | $ | 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 | % | 0.44 | %* | |||||||||||||||
Net investment income to average daily net assets | 1.49 | %* | 1.72 | % | 1.37 | % | 1.31 | % | 1.35 | % | 1.37 | %* | |||||||||||||||
Portfolio turnover rate | 39 | %** | 63 | % | 68 | % | 63 | % | 62 | % | 85 | %†† | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 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.
18
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its objective by outperforming the S&P 500 Index. The Fund typically makes equity investments in companies that issue stocks included in the S&P 500 Index, and companies with similar size characteristics, other than tobacco-producing companies.
Throughout the six months ended August 31, 2006, the Fund offered two classes of shares: Class III and Class IV. Each class of shares bears a different level of shareholder servicing fees.
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 generally 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 pursuant to procedures approved by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts. 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
19
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 the Fund is unable to liquidate a futures position due to an i lliquid 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. 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 party 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 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
20
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no swap agreements outstanding at the end of the period.
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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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 August 31, 2006, the Fund had loaned securities having a market value of $8,461,733, collateralized by cash in the amount of $8,820,828, which was invested in short-term instruments.
Taxes and distributions
The Fund intends to qualify each tax 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.
21
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP.
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 August 31, 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) | ||||||||||||
$ | 338,693,842 | $ | 19,910,490 | $ | (15,380,998 | ) | $ | 4,529,492 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
22
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 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.
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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $1,932 and $1,012, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $130,152,524 and $161,993,852, 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;
23
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 60.0% 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 August 31, 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 425,402 | $ | 5,070,000 | 777,388 | $ | 9,327,972 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 167,709 | 2,053,564 | 583,997 | 6,995,119 | |||||||||||||||
Shares repurchased | (3,118,464 | ) | (37,348,128 | ) | (1,470,266 | ) | (17,733,755 | ) | |||||||||||
Net increase (decrease) | (2,525,353 | ) | $ | (30,224,564 | ) | (108,881 | ) | $ | (1,410,664 | ) | |||||||||
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | — | $ | — | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 137,774 | 1,685,846 | 423,945 | 5,078,901 | |||||||||||||||
Shares repurchased | — | — | — | — | |||||||||||||||
Net increase (decrease) | 137,774 | $ | 1,685,846 | 423,945 | $ | 5,078,901 |
24
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Tobacco-Free Core Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to
25
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manag er to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
26
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
27
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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.
28
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 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. 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 | $ | 985.30 | $ | 2.40 | |||||||||||
2) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.79 | $ | 2.45 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.44 | % | $ | 1,000.00 | $ | 984.70 | $ | 2.20 | |||||||||||
2) Hypothetical | 0.44 | % | $ | 1,000.00 | $ | 1,022.99 | $ | 2.24 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
29
GMO Taiwan Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 95.0 | % | |||||
Short-Term Investments | 1.0 | ||||||
Other | 4.0 | ||||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Information Technology | 61.3 | % | |||||
Materials | 11.7 | ||||||
Financials | 10.0 | ||||||
Telecommunication Services | 5.8 | ||||||
Industrials | 5.6 | ||||||
Consumer Discretionary | 3.9 | ||||||
Energy | 0.9 | ||||||
Consumer Staples | 0.8 | ||||||
100.0 | % |
1
GMO Taiwan Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 95.0% | |||||||||||
Taiwan — 95.0% | |||||||||||
1,010,000 | Accton Technology Corp * | 492,254 | |||||||||
3,712,540 | Acer Inc | 5,727,874 | |||||||||
1,647,000 | Advanced Semiconductor Engineering Inc * | 1,684,349 | |||||||||
2,358,000 | Arima Computer Corp * | 429,223 | |||||||||
3,300,221 | Asia Cement Corp | 2,189,955 | |||||||||
8,230,739 | Asustek Computer Inc | 18,424,831 | |||||||||
3,134,753 | AU Optronics Corp | 4,589,957 | |||||||||
187,202 | Catcher Technology Co | 1,463,463 | |||||||||
342,000 | Cathay Real Estate Development Co Ltd * | 191,159 | |||||||||
826,000 | Chang Hwa Bank * | 488,705 | |||||||||
2,846,180 | Cheng Loong Corp | 907,838 | |||||||||
237,962 | Cheng Uei Precision Industry Co | 875,539 | |||||||||
7,702,000 | China Bills Finance Corp | 1,874,431 | |||||||||
16,854,037 | China Development Financial Holding Corp | 6,500,868 | |||||||||
969,000 | China Manmade Fibers * | 165,743 | |||||||||
628,000 | China Steel Corp | 509,051 | |||||||||
2,008,918 | Chinatrust Financial Holding Co | 1,315,725 | |||||||||
2,522,770 | Chung Hung Steel Corp * | 982,697 | |||||||||
1,527,200 | Chung Hwa Pulp Corp | 688,200 | |||||||||
2,480,000 | Chunghwa Picture Tubes Ltd * | 489,494 | |||||||||
4,672,620 | Chunghwa Telecom Co Ltd | 7,710,601 | |||||||||
5,406 | Chunghwa Telecom Co Ltd ADR | 93,578 | |||||||||
166,100 | Compal Communications Inc | 704,427 | |||||||||
2,039,334 | Compal Electronics Inc | 1,781,080 | |||||||||
1,264,000 | Compeq Manufacturing Co Ltd * | 555,750 | |||||||||
916,700 | Continental Engineering Corp | 484,799 | |||||||||
338,000 | Coretronic Corp | 415,844 | |||||||||
3,307,113 | Delta Electronics Inc | 9,185,483 | |||||||||
58,140 | DFI | 100,095 | |||||||||
239,966 | Dimerco Express Taiwan Corp | 263,040 | |||||||||
634,000 | Elitegroup Computer Systems * | 339,770 | |||||||||
350,000 | Eternal Chemical Co Ltd | 462,470 | |||||||||
3,072,505 | Evergreen Marine Corp | 1,700,434 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Taiwan — continued | |||||||||||
3,570,772 | Far Eastern International Bank | 1,133,662 | |||||||||
4,252,267 | Far Eastern Textile Co Ltd | 2,983,147 | |||||||||
924,000 | Far Eastone Telecommunications Co Ltd | 999,877 | |||||||||
4,974,060 | Federal Corp | 2,955,632 | |||||||||
4,174,169 | Formosa Chemicals & Fibre Co | 6,017,102 | |||||||||
1,247,077 | Formosa Petrochemical Corp | 2,463,489 | |||||||||
5,213,424 | Formosa Plastics Corp | 7,095,813 | |||||||||
3,277,260 | Formosa Taffeta Co Ltd | 1,623,363 | |||||||||
269,100 | Foxconn Technology Co Ltd | 2,029,536 | |||||||||
2,251,000 | Fubon Financial Holding Co Ltd | 1,675,928 | |||||||||
5,264,080 | Goldsun Development & Construction Co Ltd * | 2,109,873 | |||||||||
2,593,000 | Grand Pacific Petrochem * | 670,003 | |||||||||
676,512 | High Tech Computer Corp | 17,011,470 | |||||||||
4,873,875 | Hon Hai Precision Industry Co Ltd | 27,427,338 | |||||||||
123,000 | Hotai Motor Company Ltd | 244,880 | |||||||||
1,147,395 | Hua Nan Financial Holdings Co Ltd | 721,659 | |||||||||
7,544,151 | Inventec Co Ltd | 4,583,594 | |||||||||
6,249,920 | KGI Securities Co Ltd * | 1,855,113 | |||||||||
2,559,896 | Kinpo Electronics | 863,080 | |||||||||
178,500 | Largan Precision Co Ltd | 3,689,956 | |||||||||
428,400 | Lee Chang Yung Chem Industries | 304,177 | |||||||||
319,555 | Les Enphants Co Ltd | 220,259 | |||||||||
2,738,040 | Lite-On Technology Corp * | 3,391,960 | |||||||||
5,259,039 | Macronix International * | 1,512,894 | |||||||||
531,657 | MediaTek Inc | 4,837,276 | |||||||||
7,324,000 | Mega Financial Holdings Co Ltd | 4,865,768 | |||||||||
1,877,565 | Micro-Star International Co Ltd | 875,803 | |||||||||
483,000 | Mosel Vitelic Inc * | 218,029 | |||||||||
297,000 | Nien Hsing Textile Co Ltd | 153,262 | |||||||||
214,230 | Nien Made Enterprise | 168,446 | |||||||||
242,529 | Novatek Microelectronics | 1,193,316 | |||||||||
304,000 | Optimax Technology Corp * | 244,379 | |||||||||
1,540,560 | Oriental Union Chemical | 823,079 | |||||||||
387,947 | Phoenix Precision Technology Corp | 574,338 | |||||||||
1,647,678 | Quanta Computer Inc | 2,360,077 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Taiwan — continued | |||||||||||
904,000 | Quanta Display Inc * | 375,214 | |||||||||
1,957,515 | Realtek Semiconductor Corp | 2,470,421 | |||||||||
30,000 | Richtek Technology Corp | 229,476 | |||||||||
5,562,000 | Sampo Corp * | 613,593 | |||||||||
1,281,843 | Shin Kong Financial Holdings | 1,108,008 | |||||||||
724,694 | Siliconware Precision Industries Co | 856,122 | |||||||||
3,301,473 | Sinopac Holdings Co | 1,445,356 | |||||||||
2,570,516 | Systex Corp | 692,222 | |||||||||
1,003,000 | Taichung Commercial Bank * | 178,995 | |||||||||
4,229,634 | Taishin Financial Holdings Co Ltd * | 2,014,137 | |||||||||
7,121,000 | Taiwan Cellular Corp | 6,625,702 | |||||||||
7,846,900 | Taiwan Cement Corp | 5,228,142 | |||||||||
122,000 | Taiwan FU Hsing Ind Co Ltd | 113,844 | |||||||||
21,951,042 | Taiwan Semiconductor Manufacturing Co Ltd | 38,863,017 | |||||||||
242,469 | Taiwan Semiconductor Manufacturing Co Ltd ADR | 2,257,386 | |||||||||
3,235,000 | Taiwan TEA Corp * | 597,319 | |||||||||
4,595,000 | Tatung Co * | 1,450,694 | |||||||||
291,607 | Tsann Kuen Enterprises Co Ltd | 316,345 | |||||||||
1,128,900 | TSRC Corp | 647,498 | |||||||||
1,030,000 | Tung Ho Steel Enterprise | 762,801 | |||||||||
192,918 | TXC Corp | 284,851 | |||||||||
1,044,000 | U-Ming Marine Transport Co | 1,096,631 | |||||||||
1,840,000 | Uni-President Enterprises Corp | 1,400,971 | |||||||||
278,000 | Via Technologies Inc * | 224,177 | |||||||||
9,513,578 | Walsin Lihwa Corp * | 3,869,662 | |||||||||
2,692,209 | Wan Hai Lines Ltd | 1,453,006 | |||||||||
4,003,000 | Waterland Financial Holdings | 1,130,937 | |||||||||
533,330 | WUS Printed Circuit Co Ltd | 180,411 | |||||||||
775,195 | Ya Hsin Industrial Co Ltd | 603,366 | |||||||||
3,842,252 | Yang Ming Marine Transport | 1,931,013 | |||||||||
3,780,000 | Yieh Phui Enterprise | 1,399,220 | |||||||||
303,967 | Yulon Motor Co Ltd | 293,114 | |||||||||
190,653 | Zyxel Communications Corp | 234,151 | |||||||||
264,634,107 | |||||||||||
TOTAL COMMON STOCKS (COST $236,043,678) | 264,634,107 |
See accompanying notes to the financial statements.
4
GMO Taiwan Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 1.0% | |||||||||||
2,800,000 | Bank Nationale de Paris Time Deposit, 5.27%, due 09/01/06 | 2,800,000 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $2,800,000) | 2,800,000 | ||||||||||
TOTAL INVESTMENTS — 96.0% (Cost $238,843,678) | 267,434,107 | ||||||||||
Other Assets and Liabilities (net) — 4.0% | 11,114,667 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 278,548,774 |
Notes to Schedule of Investments:
ADR - American Depositary Receipt
* Non-income producing security.
As of August 31, 2006, 94.2% of the Net Assets of the Fund were valued using fair value prices based on models used 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 — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value (cost $238,843,678) (Note 2) | $ | 267,434,107 | |||||
Cash | 29,546 | ||||||
Foreign currency, at value (cost $8,248,426) (Note 2) | 8,214,555 | ||||||
Receivable for investments sold | 1,866 | ||||||
Dividends and interest receivable | 3,285,176 | ||||||
Total assets | 278,965,250 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 188,976 | ||||||
Shareholder service fee | 34,996 | ||||||
Trustees and Chief Compliance Officer fees | 630 | ||||||
Accrued expenses | 191,874 | ||||||
Total liabilities | 416,476 | ||||||
Net assets | $ | 278,548,774 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 237,531,282 | |||||
Accumulated undistributed net investment income | 5,989,474 | ||||||
Accumulated net realized gain | 6,486,563 | ||||||
Net unrealized appreciation | 28,541,455 | ||||||
$ | 278,548,774 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 278,548,774 | |||||
Shares outstanding: | |||||||
Class III | 9,986,001 | ||||||
Net asset value per share: | |||||||
Class III | $ | 27.89 |
See accompanying notes to the financial statements.
6
GMO Taiwan Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $1,966,500) | $ | 7,970,681 | |||||
Interest | 40,357 | ||||||
Total investment income | 8,011,038 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 1,133,452 | ||||||
Shareholder service fee – Class III (Note 3) | 209,899 | ||||||
Custodian and fund accounting agent fees | 382,444 | ||||||
Transfer agent fees | 13,892 | ||||||
Audit and tax fees | 31,924 | ||||||
Legal fees | 3,220 | ||||||
Trustees fees and related expenses (Note 3) | 2,321 | ||||||
Miscellaneous | 3,220 | ||||||
Total expenses | 1,780,372 | ||||||
Net investment income (loss) | 6,230,666 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 7,015,029 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (61,085 | ) | |||||
Net realized gain (loss) | 6,953,944 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (10,956,016 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (46,371 | ) | |||||
Net unrealized gain (loss) | (11,002,387 | ) | |||||
Net realized and unrealized gain (loss) | (4,048,443 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | 2,182,223 |
See accompanying notes to the financial statements.
7
GMO Taiwan Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 6,230,666 | $ | 5,045,022 | |||||||
Net realized gain (loss) | 6,953,944 | 10,851,497 | |||||||||
Change in net unrealized appreciation (depreciation) | (11,002,387 | ) | 8,761,024 | ||||||||
Net increase (decrease) in net assets from operations | 2,182,223 | 24,657,543 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (5,967,696 | ) | ||||||||
Net realized gains | |||||||||||
Class III | (6,481,591 | ) | (2,977,161 | ) | |||||||
(6,481,591 | ) | (8,944,857 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (8,524,335 | ) | 50,702,181 | ||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 122,004 | 369,510 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | (8,402,331 | ) | 51,071,691 | ||||||||
Total increase (decrease) in net assets | (12,701,699 | ) | 66,784,377 | ||||||||
Net assets: | |||||||||||
Beginning of period | 291,250,473 | 224,466,096 | |||||||||
End of period (including accumulated undistributed net investment income of $5,989,474 and distributions in excess of net investment income of $241,192, respectively) | $ | 278,548,774 | $ | 291,250,473 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 28.34 | $ | 26.79 | $ | 29.67 | $ | 20.28 | $ | 20.00 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.64 | 0.52 | 0.13 | (0.10 | ) | (0.12 | ) | ||||||||||||||||
Net realized and unrealized gain (loss) | (0.42 | ) | 1.91 | (1.45 | ) | 10.03 | 0.40 | ||||||||||||||||
Total from investment operations | 0.22 | 2.43 | (1.32 | ) | 9.93 | 0.28 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | — | (0.59 | ) | — | (0.02 | ) | — | ||||||||||||||||
From net realized gains | (0.67 | ) | (0.29 | ) | (1.56 | ) | (0.52 | ) | — | ||||||||||||||
Total distributions | (0.67 | ) | (0.88 | ) | (1.56 | ) | (0.54 | ) | — | ||||||||||||||
Net asset value, end of period | $ | 27.89 | $ | 28.34 | $ | 26.79 | $ | 29.67 | $ | 20.28 | |||||||||||||
Total Return(b) | 0.78 | %** | 9.13 | % | (3.82 | )% | 49.53 | % | 1.40 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 278,549 | $ | 291,250 | $ | 224,466 | $ | 181,313 | $ | 41,167 | |||||||||||||
Net expenses to average daily net assets | 1.27 | %* | 1.28 | % | 1.34 | % | 1.36 | % | 1.76 | %* | |||||||||||||
Net investment income to average daily net assets | 2.24 | %(c)** | 1.95 | % | 0.53 | % | (0.40 | )% | (1.43 | )%* | |||||||||||||
Portfolio turnover rate | 8 | %** | 31 | % | 88 | % | 86 | % | 50 | %** | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 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.
(c) The ratio for the six months ended August 31, 2006, 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.
See accompanying notes to the financial statements.
9
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its objective by outperforming the MSCI Taiwan Index. The Fund typically makes equity investments in companies doing business in, or otherwise tied economically to, Taiwan.
Shares of the Fund are not publicly offered and are 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 generally 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 pursuant to procedures approved by the Trustees. 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 are generally valued by a third party vendor using fair value prices based on models to the extent that these fair value prices are available.
10
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 including 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 lo ss 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. There were no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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,
11
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no futures contracts outstanding at the end of the period.
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
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)
August 31, 2006 (Unaudited)
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. There were no indexed securities held by the Fund at the end of the period.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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. There were no swap agreements outstanding at the end of the period.
13
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 six months ended A ugust 31, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each tax 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 withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding 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 is currently subject to a Taiwanese security transaction tax of 0.3% of the transaction amount on equities and 0.1% of the transaction amount on corporate bonds and mutual fund shares, which must be paid by the Fund upon the sale or transfer of any portfolio securities subject to such tax.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP.
14
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 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) | ||||||||||||
$ | 239,283,052 | $ | 46,702,719 | $ | (18,551,664 | ) | $ | 28,151,055 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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 calendar 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)
August 31, 2006 (Unaudited)
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 is 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 the 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 six months ended August 31, 2006 and the year ended February 28, 2006, the Fund received $13,757 and $139,679 in purchase premiums and $108,247 and $229,831 in redemption fees, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
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 six months ended August 31, 2006 was $1,585 and $828, respectively. No remuneration was paid by the Fund to any other officer of the Trust.
16
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
4. Purchases and sales of securities
Cost of purchase and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2006 aggregated $21,535,493 and $39,398,547, 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 August 31, 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 August 31, 2006, all 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 327,431 | $ | 9,157,243 | 3,548,047 | $ | 94,235,742 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 231,320 | 6,481,591 | 321,086 | 8,944,857 | |||||||||||||||
Shares repurchased | (849,239 | ) | (24,163,169 | ) | (1,970,363 | ) | (52,478,418 | ) | |||||||||||
Purchase premiums and redemption fees | — | 122,004 | — | 369,510 | |||||||||||||||
Net increase (decrease) | (290,488 | ) | $ | (8,402,331 | ) | 1,898,770 | $ | 51,071,691 |
17
GMO Taiwan Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Taiwan Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the
18
GMO Taiwan Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately r eflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
19
GMO Taiwan Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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.
20
GMO Taiwan Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 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 | 1.27 | % | $ | 1,000.00 | $ | 1,007.80 | $ | 6.43 | |||||||||||
2) Hypothetical | 1.27 | % | $ | 1,000.00 | $ | 1,018.80 | $ | 6.46 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
21
GMO Global Growth Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 98.1 | % | |||||
Preferred Stocks | 0.4 | ||||||
Rights and Warrants | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures | 0.0 | ||||||
Short-Term Investments | 0.9 | ||||||
Other | 0.6 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
United States | 39.5 | % | |||||
Japan | 16.6 | ||||||
United Kingdom | 8.4 | ||||||
France | 4.9 | ||||||
Canada | 4.7 | ||||||
Switzerland | 4.5 | ||||||
Germany | 2.8 | ||||||
Sweden | 2.5 | ||||||
Italy | 2.5 | ||||||
Australia | 2.3 | ||||||
Netherlands | 2.1 | ||||||
Finland | 1.8 | ||||||
Belgium | 1.6 | ||||||
Norway | 1.5 | ||||||
Spain | 1.2 | ||||||
Singapore | 1.0 | ||||||
Ireland | 0.8 | ||||||
Austria | 0.7 | ||||||
Hong Kong | 0.6 | ||||||
100.0 | % |
1
GMO Global Growth Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Industry Sector Summary | % of Equity Investments | ||||||
Financials | 20.7 | % | |||||
Health Care | 14.6 | ||||||
Energy | 14.5 | ||||||
Consumer Discretionary | 12.0 | ||||||
Information Technology | 10.6 | ||||||
Industrials | 9.7 | ||||||
Materials | 6.4 | ||||||
Consumer Staples | 5.2 | ||||||
Utilities | 4.4 | ||||||
Telecommunication Services | 1.9 | ||||||
100.0 | % |
2
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 98.1% | |||||||||||
Australia — 2.2% | |||||||||||
6,568 | Australia and New Zealand Banking Group Ltd | 136,363 | |||||||||
�� | 16,811 | BHP Billiton Ltd | 354,106 | ||||||||
1,467 | CSL Ltd | 56,815 | |||||||||
1,710 | Macquarie Bank Ltd | 84,357 | |||||||||
3,586 | QBE Insurance Group Ltd | 65,216 | |||||||||
7,247 | Rinker Group Ltd | 76,183 | |||||||||
3,078 | Rio Tinto Ltd | 170,820 | |||||||||
3,916 | Suncorp-Metway Ltd | 61,203 | |||||||||
42,739 | Telstra Corp Ltd | 117,508 | |||||||||
5,372 | Westpac Banking Corp | 95,746 | |||||||||
6,749 | Woodside Petroleum Ltd | 217,118 | |||||||||
1,435,435 | |||||||||||
Austria — 0.6% | |||||||||||
2,540 | Oesterreichische Elektrizitaetswirtschafts AG Class A | 127,922 | |||||||||
2,793 | OMV AG | 149,075 | |||||||||
5,524 | Telekom Austria AG | 135,502 | |||||||||
412,499 | |||||||||||
Belgium — 1.6% | |||||||||||
539 | Colruyt SA | 91,622 | |||||||||
9,602 | Fortis | 373,896 | |||||||||
1,977 | Inbev NV | 102,590 | |||||||||
1,627 | KBC Groep NV | 175,230 | |||||||||
4,487 | UCB SA | 263,020 | |||||||||
1,006,358 | |||||||||||
Canada — 4.7% | |||||||||||
1,600 | Alcan Inc | 71,959 | |||||||||
900 | Bank of Montreal | 54,490 | |||||||||
2,100 | Bank of Nova Scotia | 89,810 | |||||||||
2,500 | Barrick Gold Corp | 83,688 |
See accompanying notes to the financial statements.
3
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Canada — continued | |||||||||||
2,200 | Cameco Corp | 90,046 | |||||||||
5,200 | Canadian National Railway Co | 221,822 | |||||||||
8,200 | Canadian Natural Resources | 430,513 | |||||||||
4,200 | EnCana Corp | 220,393 | |||||||||
2,400 | Goldcorp Inc | 66,335 | |||||||||
2,400 | Husky Energy Inc | 166,065 | |||||||||
4,900 | Imperial Oil Ltd | 184,376 | |||||||||
2,900 | Nexen Inc | 168,941 | |||||||||
6,000 | Petro-Canada | 256,220 | |||||||||
1,800 | Rogers Communications Inc | 92,825 | |||||||||
5,800 | Royal Bank of Canada | 257,020 | |||||||||
2,300 | Shell Canada Ltd | 74,704 | |||||||||
1,500 | Suncor Energy Inc | 116,235 | |||||||||
7,500 | Talisman Energy Inc | 131,638 | |||||||||
1,900 | Teck Corp Class B | 126,518 | |||||||||
400 | Telus Corp | 19,633 | |||||||||
2,100 | Thomson Corp | 84,547 | |||||||||
3,007,778 | |||||||||||
Finland — 1.7% | |||||||||||
8,600 | Fortum Oyj | 231,097 | |||||||||
33,950 | Nokia Oyj | 709,596 | |||||||||
2,800 | Outokumpu Oyj | 71,243 | |||||||||
2,800 | Sampo Oyj Class A | 57,960 | |||||||||
3,500 | Stora Enso Oyj (R Shares) | 53,111 | |||||||||
1,123,007 | |||||||||||
France — 4.8% | |||||||||||
2,603 | BNP Paribas | 276,771 | |||||||||
2,241 | Carrefour SA | 138,350 | |||||||||
6,574 | Credit Agricole SA | 267,134 | |||||||||
2,873 | Electricite de France | 163,390 | |||||||||
2,692 | Peugeot SA | 151,890 | |||||||||
952 | Renault SA | 110,931 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
France — continued | |||||||||||
6,270 | Sanofi-Aventis | 563,119 | |||||||||
762 | Schneider Electric SA | 81,282 | |||||||||
1,774 | Societe Generale | 286,540 | |||||||||
3,336 | Suez SA | 142,838 | |||||||||
12,612 | Total SA | 851,663 | |||||||||
1,536 | Veolia Environnement | 86,157 | |||||||||
3,120,065 | |||||||||||
Germany — 2.4% | |||||||||||
508 | Allianz AG (Registered) | 86,344 | |||||||||
3,269 | Altana AG | 193,005 | |||||||||
2,041 | Bayerische Motoren Werke AG | 105,577 | |||||||||
1,274 | Continental AG | 136,453 | |||||||||
1,564 | Deutsche Bank AG (Registered) | 178,779 | |||||||||
617 | Deutsche Boerse AG | 93,587 | |||||||||
3,851 | Deutsche Lufthansa AG (Registered) | 76,263 | |||||||||
1,699 | RWE AG | 155,453 | |||||||||
833 | SAP AG | 159,035 | |||||||||
4,970 | ThyssenKrupp AG | 169,081 | |||||||||
2,044 | Volkswagen AG | 163,176 | |||||||||
1,516,753 | |||||||||||
Hong Kong — 0.6% | |||||||||||
29,000 | CLP Holdings Ltd | 183,381 | |||||||||
18,000 | Hong Kong & China Gas | 41,786 | |||||||||
34,500 | Hong Kong Electric Holdings Ltd | 164,957 | |||||||||
390,124 | |||||||||||
Ireland — 0.8% | |||||||||||
4,277 | Allied Irish Banks Plc | 111,690 | |||||||||
15,676 | Bank of Ireland | 297,578 | |||||||||
2,780 | CRH Plc | 96,228 | |||||||||
505,496 |
See accompanying notes to the financial statements.
5
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Italy — 2.5% | |||||||||||
28,999 | Enel SPA | 258,883 | |||||||||
39,168 | ENI SPA | 1,197,608 | |||||||||
16,801 | UniCredito Italiano SPA | 133,885 | |||||||||
1,590,376 | |||||||||||
Japan — 16.4% | |||||||||||
3,400 | Aeon Co Ltd | 85,303 | |||||||||
5,000 | Asahi Glass Co Ltd | 65,379 | |||||||||
2,100 | Astellas Pharma Inc | 84,961 | |||||||||
7,000 | Bank of Yokohama Ltd | 55,063 | |||||||||
7,500 | Canon Inc | 372,587 | |||||||||
8,800 | Chubu Electric Power Co Inc | 238,149 | |||||||||
1,900 | Daito Trust Construction Co Ltd | 98,394 | |||||||||
3,000 | Daiwa House Industry Co Ltd | 48,705 | |||||||||
8,000 | Daiwa Securities Group Inc | 94,693 | |||||||||
5,400 | Denso Corp | 187,278 | |||||||||
31 | East Japan Railway Co | 228,429 | |||||||||
4,200 | Eisai Co Ltd | 199,472 | |||||||||
17,000 | Fuji Heavy Industries Ltd | 98,018 | |||||||||
14,000 | Fujitsu Ltd | 111,747 | |||||||||
2,300 | Hitachi Chemical Co Ltd | 55,417 | |||||||||
17,000 | Hokuhoku Financial Group Inc | 66,639 | |||||||||
6,400 | Honda Motor Co Ltd | 216,575 | |||||||||
2,600 | Hoya Corp | 94,120 | |||||||||
22,000 | Itochu Corp | 183,723 | |||||||||
45 | Japan Tobacco Inc | 170,923 | |||||||||
1,900 | JFE Holdings Inc | 77,081 | |||||||||
4,700 | Kansai Electric Power Co Inc | 112,602 | |||||||||
2,000 | Kao Corp | 53,244 | |||||||||
6,000 | Kirin Brewery Co Ltd | 83,192 | |||||||||
19,000 | Kobe Steel Ltd | 60,461 | |||||||||
6,000 | Komatsu Ltd | 108,888 | |||||||||
800 | Kyocera Corp | 68,827 | |||||||||
39,000 | Marubeni Corp | 207,353 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
5,000 | Matsushita Electric Industrial Co Ltd | 106,484 | |||||||||
28,000 | Mazda Motor Corp | 178,565 | |||||||||
6 | Millea Holdings Inc | 109,955 | |||||||||
26,100 | Mitsubishi Corp | 528,337 | |||||||||
6,000 | Mitsubishi Estate Co Ltd | 128,612 | |||||||||
20,000 | Mitsubishi Heavy Industries | 83,441 | |||||||||
19,000 | Mitsui & Co | 274,150 | |||||||||
6,000 | Mitsui Fudosan Co Ltd | 133,808 | |||||||||
39,000 | Mizuho Trust & Banking Co Ltd (a) | 91,495 | |||||||||
1,200 | Murata Manufacturing Co Ltd | 82,137 | |||||||||
700 | Nidec Corp | 50,546 | |||||||||
7,000 | Nikko Cordial Corp | 88,283 | |||||||||
700 | Nintendo Co Ltd | 143,101 | |||||||||
24 | Nippon Telegraph & Telephone Corp | 120,901 | |||||||||
27,600 | Nissan Motor Co | 313,310 | |||||||||
2,300 | Nissin Food Products Co Ltd | 77,430 | |||||||||
900 | Nitto Denko Corp | 64,425 | |||||||||
11,400 | Nomura Holdings Inc | 218,725 | |||||||||
3,000 | Olympus Corp | 88,704 | |||||||||
1,000 | ORIX Corp | 264,016 | |||||||||
39,000 | Osaka Gas Co Ltd | 143,348 | |||||||||
2,000 | Seven & I Holdings Co Ltd | 70,333 | |||||||||
3,200 | Shin-Etsu Chemical Co Ltd | 181,666 | |||||||||
3,000 | Shiseido Co Ltd | 59,435 | |||||||||
6,400 | Softbank Corp | 110,685 | |||||||||
3,800 | Sony Corp | 164,833 | |||||||||
15,000 | Sumitomo Chemical Co Ltd | 117,725 | |||||||||
19,000 | Sumitomo Corp | 255,516 | |||||||||
35,000 | Sumitomo Metal Industries Ltd | 143,399 | |||||||||
22 | Sumitomo Mitsui Financial Group Inc | 246,734 | |||||||||
6,000 | Sumitomo Realty & Development Co Ltd | 175,884 | |||||||||
1,000 | T & D Holdings | 73,919 | |||||||||
10,200 | Takeda Pharmaceutical Co Ltd | 673,999 | |||||||||
10,000 | Teijin Ltd | 53,416 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
1,000 | Tokyo Electron Ltd | 65,493 | |||||||||
19,000 | Tokyo Gas Co Ltd | 100,787 | |||||||||
7,000 | Tokyu Land Corp | 60,756 | |||||||||
9,000 | TonenGeneral Sekiyu KK | 81,086 | |||||||||
9,000 | Toray Industries Inc | 71,416 | |||||||||
21,000 | Toshiba Corp | 148,951 | |||||||||
13,900 | Toyota Motor Corp | 751,183 | |||||||||
1,600 | Yakult Honsha Co Ltd | 43,527 | |||||||||
900 | Yamada Denki Co Ltd | 96,051 | |||||||||
10,563,790 | |||||||||||
Netherlands — 2.0% | |||||||||||
10,074 | ABN Amro Holdings NV | 287,372 | |||||||||
3,963 | Heineken NV | 183,760 | |||||||||
16,915 | ING Groep NV | 732,852 | |||||||||
4,800 | Unilever NV (New York Shares) | 114,432 | |||||||||
1,318,416 | |||||||||||
Norway — 1.5% | |||||||||||
359 | Aker Kvaerner Ogep ASA | 34,299 | |||||||||
8,900 | DnB NOR ASA | 115,177 | |||||||||
8,800 | Norsk Hydro ASA | 226,669 | |||||||||
940 | Orkla ASA | 46,049 | |||||||||
1,212 | Petroleum Geo Services ASA * | 63,146 | |||||||||
17,750 | Statoil ASA | 479,234 | |||||||||
964,574 | |||||||||||
Singapore — 1.0% | |||||||||||
39,000 | Capitaland Ltd | 117,755 | |||||||||
101,000 | Singapore Technologies Engineering Ltd | 187,316 | |||||||||
200,317 | Singapore Telecommunications | 316,536 | |||||||||
4,000 | United Overseas Bank Ltd | 39,626 | |||||||||
661,233 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Spain — 1.2% | |||||||||||
726 | Acciona SA | 110,910 | |||||||||
2,406 | ACS Actividades de Construccion y Servicios SA | 107,945 | |||||||||
8,238 | Iberdrola SA | 306,134 | |||||||||
2,133 | Inditex SA | 96,127 | |||||||||
4,278 | Repsol YPF SA | 123,084 | |||||||||
658 | Sacyr Vallehermoso SA | 25,376 | |||||||||
769,576 | |||||||||||
Sweden — 2.5% | |||||||||||
4,400 | Assa Abloy AB Class B | 77,232 | |||||||||
5,800 | Atlas Copco AB Class A | 149,623 | |||||||||
3,200 | Atlas Copco AB Class B * | 77,403 | |||||||||
8,150 | Hennes & Mauritz AB Class B | 316,415 | |||||||||
16,500 | Nordea AB | 207,158 | |||||||||
11,000 | Sandvik AB | 120,533 | |||||||||
2,800 | Securitas AB | 49,300 | |||||||||
5,000 | Skandinaviska Enskilda Banken AB Class A | 129,388 | |||||||||
1,100 | Svenska Cellulosa AB (SCA) | 47,127 | |||||||||
2,500 | Svenska Handelsbanken AB Class A | 65,221 | |||||||||
10,100 | Swedish Match AB | 170,795 | |||||||||
9,700 | Tele2 AB Class B | 96,040 | |||||||||
1,500 | Volvo AB Class B | 85,453 | |||||||||
1,591,688 | |||||||||||
Switzerland — 4.4% | |||||||||||
24,559 | ABB Ltd | 326,798 | |||||||||
2,000 | Alcon Inc | 235,580 | |||||||||
3,545 | Compagnie Financiere Richemont AG Class A | 168,485 | |||||||||
3,690 | Credit Suisse Group | 205,664 | |||||||||
2,457 | Novartis AG (Registered) | 140,167 | |||||||||
3,160 | Roche Holding AG (Non Voting) | 582,235 | |||||||||
247 | Serono SA | 172,514 | |||||||||
92 | Societe Generale de Surveillance Holding SA (Registered) | 84,115 | |||||||||
261 | Swatch Group AG | 50,868 |
See accompanying notes to the financial statements.
9
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Switzerland — continued | |||||||||||
269 | Swisscom AG (Registered) | 90,353 | �� | ||||||||
7,542 | UBS AG (Registered) | 426,344 | |||||||||
1,659 | Zurich Financial Services AG | 378,165 | |||||||||
2,861,288 | |||||||||||
United Kingdom — 8.3% | |||||||||||
10,516 | Anglo American Plc | 455,012 | |||||||||
3,197 | AstraZeneca Plc | 207,465 | |||||||||
13,356 | Barclays Plc | 167,335 | |||||||||
18,297 | BG Group Plc | 239,242 | |||||||||
9,879 | BHP Billiton Plc | 188,462 | |||||||||
5,648 | British American Tobacco Plc | 155,194 | |||||||||
14,187 | Cadbury Schweppes Plc | 151,315 | |||||||||
40,966 | Centrica Plc | 230,135 | |||||||||
19,909 | DSG International Plc | 77,749 | |||||||||
13,344 | GlaxoSmithKline Plc | 378,574 | |||||||||
8,232 | HBOS Plc | 157,207 | |||||||||
9,018 | HSBC Holdings Plc | 163,646 | |||||||||
8,548 | Imperial Tobacco Group Plc | 294,664 | |||||||||
10,868 | Marks & Spencer Group Plc | 122,572 | |||||||||
4,003 | Next Plc | 127,047 | |||||||||
9,400 | Rio Tinto Plc | 474,227 | |||||||||
24,005 | Royal Bank of Scotland Group | 814,247 | |||||||||
19,567 | Royal Dutch Shell Group Class A | 674,727 | |||||||||
6,111 | Scottish & Southern Energy Plc | 140,168 | |||||||||
3,130 | Xstrata Plc | 140,863 | |||||||||
5,359,851 | |||||||||||
United States — 38.9% | |||||||||||
1,500 | 3M Co | 107,550 | |||||||||
1,300 | Abercrombie & Fitch Co-Class A | 83,889 | |||||||||
2,200 | Adobe Systems, Inc * | 71,368 | |||||||||
1,100 | Aetna, Inc | 40,997 | |||||||||
1,900 | Akamai Technologies, Inc * | 74,480 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
500 | Allergan, Inc | 57,280 | |||||||||
3,700 | Allstate Corp (The) | 214,378 | |||||||||
1,300 | AMBAC Financial Group, Inc | 112,567 | |||||||||
2,000 | American International Group, Inc | 127,640 | |||||||||
2,000 | American Tower Corp-Class A * | 71,720 | |||||||||
5,100 | AmerisourceBergen Corp | 225,216 | |||||||||
1,300 | Amgen, Inc * | 88,309 | |||||||||
3,900 | Anheuser-Busch Cos, Inc | 192,582 | |||||||||
4,900 | Apple Computer, Inc * | 332,465 | |||||||||
5,700 | Applied Materials, Inc | 96,216 | |||||||||
6,800 | Archer-Daniels-Midland Co | 279,956 | |||||||||
1,700 | Autodesk, Inc * | 59,092 | |||||||||
2,200 | Baker Hughes, Inc | 156,596 | |||||||||
7,300 | Bank of America Corp | 375,731 | |||||||||
5,900 | BEA Systems, Inc * | 81,007 | |||||||||
600 | Bear Stearns Cos (The), Inc | 78,210 | |||||||||
5,100 | Bed Bath & Beyond, Inc * | 172,023 | |||||||||
2,100 | Best Buy Co., Inc | 98,700 | |||||||||
2,800 | Biomet, Inc | 91,588 | |||||||||
3,700 | Boeing Co | 277,130 | |||||||||
2,850 | Broadcom Corp-Class A * | 83,904 | |||||||||
3,800 | Burlington Northern Santa Fe Corp | 254,410 | |||||||||
3,700 | Capital One Financial Corp | 270,470 | |||||||||
1,000 | Cardinal Health, Inc | 67,420 | |||||||||
3,100 | Caremark Rx, Inc | 179,614 | |||||||||
3,600 | Caterpillar, Inc | 238,860 | |||||||||
2,000 | CDW Corp | 116,600 | |||||||||
3,000 | Celgene Corp * | 122,070 | |||||||||
1,900 | Centex Corp | 96,805 | |||||||||
7,000 | Charles Schwab Corp (The) | 114,170 | |||||||||
5,300 | Chevron Corp | 341,320 | |||||||||
1,000 | Clorox Co | 59,810 | |||||||||
2,300 | Coach, Inc * | 69,437 | |||||||||
3,900 | Coca-Cola Co (The) | 174,759 |
See accompanying notes to the financial statements.
11
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
1,200 | Cognizant Technologies Solutions Corp * | 83,892 | |||||||||
2,200 | Colgate-Palmolive Co | 131,692 | |||||||||
9,842 | ConocoPhillips | 624,278 | |||||||||
12,700 | Corning, Inc * | 282,448 | |||||||||
3,000 | D.R. Horton, Inc | 65,790 | |||||||||
22,800 | Dell, Inc * | 514,140 | |||||||||
4,400 | Direct TV Group (The) * | 82,676 | |||||||||
2,700 | E.I. du Pont de Nemours & Co | 107,919 | |||||||||
1,600 | EOG Resources, Inc | 103,712 | |||||||||
800 | Everest RE Group Ltd | 75,184 | |||||||||
1,500 | Expeditors International of Washington, Inc | 59,805 | |||||||||
1,400 | Express Scripts, Inc * | 117,712 | |||||||||
9,900 | Exxon Mobil Corp | 669,933 | |||||||||
8,700 | Fannie Mae | 458,055 | |||||||||
2,100 | FedEx Corp | 212,163 | |||||||||
3,900 | Fidelity National Financial, Inc | 156,897 | |||||||||
1,800 | Franklin Resources, Inc | 177,138 | |||||||||
6,300 | Freddie Mac | 400,680 | |||||||||
2,400 | Freeport-McMoRan Copper & Gold, Inc-Class B | 139,704 | |||||||||
8,700 | Gap (The), Inc | 146,247 | |||||||||
5,900 | Genentech, Inc * | 486,868 | |||||||||
1,600 | General Dynamics Corp | 108,080 | |||||||||
2,100 | Gilead Sciences, Inc * | 133,140 | |||||||||
2,300 | Goldman Sachs Group, Inc | 341,895 | |||||||||
1,300 | Google, Inc-Class A * | 492,089 | |||||||||
3,800 | Halliburton Co | 123,956 | |||||||||
1,600 | Hansen Natural Corp * | 44,032 | |||||||||
4,600 | Harley-Davidson, Inc | 269,146 | |||||||||
1,100 | Harrah's Entertainment, Inc | 68,596 | |||||||||
600 | Hartford Financial Services Group, Inc | 51,516 | |||||||||
17,600 | Hewlett-Packard Co | 643,456 | |||||||||
22,200 | Home Depot, Inc | 761,238 | |||||||||
2,200 | Illinois Tool Works, Inc | 96,580 | |||||||||
3,800 | International Business Machines Corp | 307,686 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
2,000 | International Game Technology | 77,360 | |||||||||
2,800 | Intuit, Inc * | 84,616 | |||||||||
3,000 | JC Penney Co, Inc | 189,120 | |||||||||
15,600 | Johnson & Johnson | 1,008,696 | |||||||||
1,300 | Johnson Controls, Inc | 93,509 | |||||||||
5,300 | King Pharmaceuticals, Inc * | 85,966 | |||||||||
1,700 | Kohls Corp * | 106,267 | |||||||||
900 | L-3 Communications Holdings, Inc | 67,851 | |||||||||
1,100 | Las Vegas Sands Corp * | 76,791 | |||||||||
4,100 | Lehman Brothers Holdings, Inc. | 261,621 | |||||||||
1,800 | Lennar Corp-Class A | 80,712 | |||||||||
2,200 | Lockheed Martin Corp | 181,720 | |||||||||
14,100 | Lowe's Cos, Inc | 381,546 | |||||||||
1,300 | Marathon Oil Corp | 108,550 | |||||||||
2,300 | Medtronic, Inc | 107,870 | |||||||||
2,500 | Merrill Lynch & Co, Inc | 183,825 | |||||||||
2,500 | Metlife, Inc | 137,575 | |||||||||
1,600 | MGIC Investment Corp | 92,592 | |||||||||
1,400 | Monsanto Co | 66,416 | |||||||||
1,800 | Moody's Corp | 110,124 | |||||||||
2,500 | Morgan Stanley | 164,475 | |||||||||
9,700 | Motorola, Inc | 226,786 | |||||||||
1,900 | Nabors Industries Ltd * | 62,472 | |||||||||
2,900 | Network Appliance, Inc * | 99,296 | |||||||||
1,200 | Newmont Mining Corp | 61,500 | |||||||||
7,300 | News Corp-Class A | 138,919 | |||||||||
1,200 | NII Holdings, Inc * | 64,020 | |||||||||
2,500 | Nordstrom, Inc | 93,375 | |||||||||
2,900 | Norfolk Southern Corp | 123,917 | |||||||||
4,300 | Nvidia Corp * | 125,173 | |||||||||
800 | Omnicom Group | 69,936 | |||||||||
24,200 | Oracle Corp * | 378,730 | |||||||||
1,400 | Peabody Energy Corp | 61,698 | |||||||||
1,700 | Pepsi Bottling Group, Inc | 59,517 |
See accompanying notes to the financial statements.
13
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
4,300 | PepsiCo, Inc | 280,704 | |||||||||
76,800 | Pfizer, Inc | 2,116,608 | |||||||||
1,500 | Phelps Dodge Corp | 134,250 | |||||||||
1,900 | Prudential Financial, Inc | 139,479 | |||||||||
2,700 | Pulte Homes, Inc | 80,109 | |||||||||
4,500 | Qualcomm, Inc | 169,515 | |||||||||
1,400 | Quest Diagnostics, Inc | 89,992 | |||||||||
1,700 | Radian Group, Inc | 101,796 | |||||||||
2,800 | Raytheon Co | 132,188 | |||||||||
800 | Rockwell Automation, Inc | 45,104 | |||||||||
1,000 | SanDisk Corp * | 58,920 | |||||||||
6,100 | Schering-Plough Corp | 127,795 | |||||||||
8,700 | Schlumberger Ltd | 533,310 | |||||||||
900 | Southern Copper Corp | 83,088 | |||||||||
1,600 | SPX Corp | 84,480 | |||||||||
5,000 | Starbucks Corp * | 155,050 | |||||||||
2,100 | Stryker Corp | 100,863 | |||||||||
10,800 | Texas Instruments, Inc | 351,972 | |||||||||
900 | Transocean, Inc * | 60,075 | |||||||||
1,300 | Union Pacific Corp | 104,455 | |||||||||
4,400 | United Technologies Corp | 275,924 | |||||||||
3,868 | Weatherford International Ltd * | 166,324 | |||||||||
2,200 | WellPoint, Inc * | 170,302 | |||||||||
25,089,526 | |||||||||||
TOTAL COMMON STOCKS (COST $55,461,130) | 63,287,833 | ||||||||||
PREFERRED STOCKS — 0.4% | |||||||||||
Germany — 0.4% | |||||||||||
389 | Henkel KGaA 1.34% | 49,664 | |||||||||
3,215 | Volkswagen AG 2.70% | 181,565 | |||||||||
231,229 | |||||||||||
TOTAL PREFERRED STOCKS (COST $136,987) | 231,229 |
See accompanying notes to the financial statements.
14
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares/ Par Value ($) | Description | Value ($) | |||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Switzerland — 0.0% | |||||||||||
269 | Swisscom AG Warrants, expires 09/13/06 * | 684 | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $636) | 684 | ||||||||||
SHORT-TERM INVESTMENTS — 0.9% | |||||||||||
500,000 | Bank Nationale de Paris Time Deposit, 5.27%, due 09/01/06 | 500,000 | |||||||||
87,150 | Boston Global Investment Trust - Enhanced Portfolio (b) | 87,150 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $587,150) | 587,150 | ||||||||||
TOTAL INVESTMENTS — 99.4% (Cost $56,185,903) | 64,106,896 | ||||||||||
Other Assets and Liabilities (net) — 0.6% | 381,055 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 64,487,951 |
See accompanying notes to the financial statements.
15
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
11/22/06 | CAD | 1,545,555 | $ | 1,401,826 | $ | 12,450 | |||||||||||||
11/22/06 | CHF | 1,518,080 | 1,243,387 | (1,183 | ) | ||||||||||||||
11/22/06 | JPY | 104,071,812 | 896,241 | (7,091 | ) | ||||||||||||||
11/22/06 | NOK | 6,684,848 | 1,062,453 | (8,595 | ) | ||||||||||||||
11/22/06 | NZD | 378,942 | 247,154 | 6,724 | |||||||||||||||
11/22/06 | SEK | 6,614,348 | 918,119 | (8,870 | ) | ||||||||||||||
11/22/06 | SGD | 2,608,560 | 1,663,983 | (599 | ) | ||||||||||||||
$ | (7,164 | ) | |||||||||||||||||
Sales | |||||||||||||||||||
11/22/06 | AUD | 1,247,658 | $ | 951,082 | $ | (841 | ) | ||||||||||||
11/22/06 | EUR | 3,062,683 | 3,941,915 | 2,249 | |||||||||||||||
11/22/06 | GBP | 835,301 | 1,592,148 | (11,733 | ) | ||||||||||||||
11/22/06 | HKD | 2,475,839 | 319,105 | 152 | |||||||||||||||
$ | (10,173 | ) |
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
7 | DAX | September 2006 | $ | 1,314,043 | $ | 81,635 | |||||||||||||
2 | SPI 200 | September 2006 | 194,845 | 7,055 | |||||||||||||||
$ | 88,690 | ||||||||||||||||||
Sales | |||||||||||||||||||
1 | Hang Seng | September 2006 | $ | 111,723 | $ | (2,745 | ) | ||||||||||||
6 | S&P/MIB | September 2006 | 1,461,395 | (76,351 | ) | ||||||||||||||
$ | (79,096 | ) |
As of August 31, 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.
16
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
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).
As of August 31, 2006, 54.4% of the Net Assets of the Fund were valued using fair value prices based on models used by a third party vendor (Note 2).
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - B ritish 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.
17
GMO Global Growth Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $82,111 (cost $56,185,903) (Note 2) | $ | 64,106,896 | |||||
Cash | 48,883 | ||||||
Foreign currency, at value (cost $122,942) (Note 2) | 123,275 | ||||||
Receivable for investments sold | 19,987 | ||||||
Dividends and interest receivable | 143,764 | ||||||
Foreign taxes receivable | 16,425 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 21,575 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 218,113 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 21,390 | ||||||
Total assets | 64,720,308 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 87,150 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 25,500 | ||||||
Shareholder service fee | 8,138 | ||||||
Trustees and Chief Compliance Officer fees | 61 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 38,912 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 2,107 | ||||||
Accrued expenses | 70,489 | ||||||
Total liabilities | 232,357 | ||||||
Net assets | $ | 64,487,951 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 54,060,330 | |||||
Accumulated undistributed net investment income | 395,244 | ||||||
Accumulated net realized gain | 2,118,344 | ||||||
Net unrealized appreciation | 7,914,033 | ||||||
$ | 64,487,951 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 64,487,951 | |||||
Shares outstanding: | |||||||
Class III | 2,723,658 | ||||||
Net asset value per share: | |||||||
Class III | $ | 23.68 |
See accompanying notes to the financial statements.
18
GMO Global Growth Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $59,745) | $ | 684,577 | |||||
Interest (including securities lending income of $30,435) | 65,712 | ||||||
Total investment income | 750,289 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 135,360 | ||||||
Shareholder service fee – Class III (Note 3) | 43,200 | ||||||
Custodian and fund accounting agent fees | 70,380 | ||||||
Transfer agent fees | 14,076 | ||||||
Audit and tax fees | 30,268 | ||||||
Legal fees | 646 | ||||||
Trustees fees and related expenses (Note 3) | 427 | ||||||
Registration fees | 1,840 | ||||||
Miscellaneous | 644 | ||||||
Total expenses | 296,841 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (117,668 | ) | |||||
Net expenses | 179,173 | ||||||
Net investment income (loss) | 571,116 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 2,025,018 | ||||||
Closed futures contracts | 81,020 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 18,185 | ||||||
Net realized gain (loss) | 2,124,223 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (439,118 | ) | |||||
Open futures contracts | 15,313 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (41,267 | ) | |||||
Net unrealized gain (loss) | (465,072 | ) | |||||
Net realized and unrealized gain (loss) | 1,659,151 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 2,230,267 |
See accompanying notes to the financial statements.
19
GMO Global Growth Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 571,116 | $ | 913,217 | |||||||
Net realized gain (loss) | 2,124,223 | 5,995,691 | |||||||||
Change in net unrealized appreciation (depreciation) | (465,072 | ) | 1,716,490 | ||||||||
Net increase (decrease) in net assets from operations | 2,230,267 | 8,625,398 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (69,629 | ) | (295,069 | ) | |||||||
Net realized gains | |||||||||||
Class III | (5,413,687 | ) | (1,412,162 | ) | |||||||
(5,483,316 | ) | (1,707,231 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 15,515,364 | (12,748,277 | ) | ||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 30,213 | 65,842 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase permiums and redemption fees | 15,545,577 | (12,682,435 | ) | ||||||||
Total increase (decrease) in net assets | 12,292,528 | (5,764,268 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 52,195,423 | 57,959,691 | |||||||||
End of period (including accumulated undistributed net investment income of $395,244 and distributions in excess of net investment income of $106,243, respectively) | $ | 64,487,951 | $ | 52,195,423 |
See accompanying notes to the financial statements.
20
GMO Global Growth Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28, | ||||||||||||||
(Unaudited) | 2006 | 2005(a) | |||||||||||||
Net asset value, beginning of period | $ | 25.13 | $ | 22.67 | $ | 20.00 | |||||||||
Income (loss) from investment operations: | |||||||||||||||
Net investment income (loss)† | 0.25 | 0.33 | 0.15 | ||||||||||||
Net realized and unrealized gain (loss) | 0.51 | 2.72 | 2.79 | ||||||||||||
Total from investment operations | 0.76 | 3.05 | 2.94 | ||||||||||||
Less distributions to shareholders: | |||||||||||||||
From net investment income | (0.03 | ) | (0.10 | ) | (0.27 | ) | |||||||||
From net realized gains | (2.18 | ) | (0.49 | ) | — | ||||||||||
Total distributions | (2.21 | ) | (0.59 | ) | (0.27 | ) | |||||||||
Net asset value, end of period | $ | 23.68 | $ | 25.13 | $ | 22.67 | |||||||||
Total Return(b) | 3.22 | %** | 13.61 | % | 14.72 | %** | |||||||||
Ratios/Supplemental Data: | |||||||||||||||
Net assets, end of period (000's) | $ | 64,488 | $ | 52,195 | $ | 57,960 | |||||||||
Net expenses to average daily net assets | 0.62 | %* | 0.62 | % | 0.62 | %* | |||||||||
Net investment income to average daily net assets | 1.98 | %* | 1.40 | % | 1.17 | %* | |||||||||
Portfolio turnover rate | 20 | %** | 53 | % | 40 | %** | |||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.41 | %* | 0.34 | % | 0.51 | %* | |||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 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.
21
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its objective by outperforming the S&P/Citigroup Primary Market Index ("PMI") World Growth Index. The Fund typically makes equity investments in companies from the world's developed countries, including the U.S.
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 generally 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 pursuant to procedures approved by the Trustees. 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 are generally valued by a third party vendor using fair value prices based on models 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
22
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 of 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 including 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 lo ss 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. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
23
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
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. Interest rate swap agreements involve the exchange by one party 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
24
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the party 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 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. There were no swap agreements outstanding at the end of the period.
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. There were no repurchase agreements o utstanding at the end of the period.
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
25
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, the Fund had loaned securities having a market value of $82,111, collateralized by cash in the amount of $87,150, which was invested in the Boston Global Investment Trust – Enhanced Portfolio.
Taxes and distributions
The Fund intends to qualify each tax 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 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 August 31, 2006, 83.6% 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.
26
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 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) | ||||||||||||
$ | 56,185,903 | $ | 9,578,555 | $ | (1,657,562 | ) | $ | 7,920,993 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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.
27
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 are 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 six months ended August 31, 2006 and the year ended February 28, 2006, the Fund received $30,213 and $280 in purchase premiums and $0 and $65,562 in redemption fees, respectively. The Manager will waive the purchase premium relating t o the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in U.S. 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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $243 and $184, respectively. No remuneration was paid by the Fund to any other officer of the Trust.
28
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2006 aggregated $21,632,438 and $10,945,580, 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 party
As of August 31, 2006, 83.6% 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 August 31, 2006, less than 0.1% of the Fund's shares were held by one related party comprised of a certain GMO employee account, and 83.6% 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 409,838 | $ | 10,040,777 | 332,529 | $ | 7,529,187 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 236,893 | 5,474,587 | 69,037 | 1,642,031 | |||||||||||||||
Shares repurchased | — | — | (881,718 | ) | (21,919,495 | ) | |||||||||||||
Purchase premiums and redemption fees | — | 30,213 | — | 65,842 | |||||||||||||||
Net increase (decrease) | 646,731 | $ | 15,545,577 | (480,152 | ) | $ | (12,682,435 | ) |
29
GMO Global Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Global Growth Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to
30
GMO Global Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manag er to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
31
GMO Global Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
32
GMO Global Growth Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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.
33
GMO Global Growth Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 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. 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 | $ | 1,032.20 | $ | 3.18 | |||||||||||
2) Hypothetical | 0.62 | % | $ | 1,000.00 | $ | 1,022.08 | $ | 3.16 |
* Expenses are calculated using the Class's annualized expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
34
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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. Intrinsic Value Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 97.5 | % | |||||
Short-Term Investments | 6.9 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | (4.4 | ) | |||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Financial | 35.4 | % | |||||
Health Care | 14.7 | ||||||
Utility | 11.1 | ||||||
Retail Stores | 9.5 | ||||||
Technology | 7.1 | ||||||
Consumer Goods | 4.9 | ||||||
Oil & Gas | 4.5 | ||||||
Construction | 2.6 | ||||||
Food & Beverage | 2.5 | ||||||
Automotive | 2.3 | ||||||
Services | 2.2 | ||||||
Manufacturing | 1.0 | ||||||
Transportation | 1.0 | ||||||
Primary Process Industry | 0.6 | ||||||
Machinery | 0.3 | ||||||
Metals & Mining | 0.3 | ||||||
100.0 | % |
1
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 97.5% | |||||||||||
Automotive — 2.2% | |||||||||||
2,800 | Eaton Corp. | 186,200 | |||||||||
93,154 | Ford Motor Co. (a) | 779,699 | |||||||||
900 | Goodyear Tire & Rubber Co. (The) * (a) | 12,240 | |||||||||
4,700 | Harley-Davidson, Inc. (a) | 274,997 | |||||||||
8,800 | Johnson Controls, Inc. | 632,984 | |||||||||
8,100 | Lear Corp. (a) | 164,754 | |||||||||
1,800 | TRW Automotive Holdings Corp. * | 44,388 | |||||||||
2,095,262 | |||||||||||
Construction — 2.5% | |||||||||||
8,800 | Annaly Capital Management, Inc. (a) | 110,088 | |||||||||
600 | AvalonBay Communities, Inc. REIT | 72,600 | |||||||||
700 | Beazer Homes USA, Inc. | 28,210 | |||||||||
1,000 | BRE Properties, Inc.-Class A | 59,090 | |||||||||
8,700 | Centex Corp. | 443,265 | |||||||||
1,200 | Crane Co. | 47,976 | |||||||||
3,333 | D.R. Horton, Inc. | 73,093 | |||||||||
500 | Essex Property Trust, Inc. REIT | 62,735 | |||||||||
400 | Federal Realty Investment Trust | 29,628 | |||||||||
500 | Hovnanian Enterprises, Inc.-Class A * (a) | 13,255 | |||||||||
700 | Jacobs Engineering Group, Inc. * | 60,963 | |||||||||
5,700 | KB Home | 243,732 | |||||||||
9,200 | Lennar Corp.-Class A | 412,528 | |||||||||
1,900 | Martin Marietta Materials, Inc. | 156,484 | |||||||||
1,800 | Masco Corp. | 49,338 | |||||||||
4,331 | MDC Holdings, Inc. (a) | 185,323 | |||||||||
1,700 | Pulte Homes, Inc. | 50,439 | |||||||||
4,800 | Ryland Group, Inc. (a) | 204,816 | |||||||||
1,000 | Standard-Pacific Corp. | 23,930 | |||||||||
500 | Thornburg Mortgage, Inc. REIT (a) | 11,485 | |||||||||
300 | Vulcan Materials Co. | 23,583 | |||||||||
2,362,561 |
See accompanying notes to the financial statements.
2
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Consumer Goods — 4.8% | |||||||||||
27,300 | Altria Group, Inc. | 2,280,369 | |||||||||
2,500 | Columbia Sportswear Co. * (a) | 122,050 | |||||||||
6,800 | Eastman Kodak Co. (a) | 144,636 | |||||||||
6,100 | Jones Apparel Group, Inc. | 190,930 | |||||||||
7,000 | Liz Claiborne, Inc. | 261,590 | |||||||||
6,500 | Mattel Co. | 122,460 | |||||||||
6,300 | Mohawk Industries, Inc. * (a) | 446,544 | |||||||||
6,200 | Newell Rubbermaid, Inc. | 167,338 | |||||||||
1,000 | Polo Ralph Lauren Corp. | 58,990 | |||||||||
600 | Reynolds American, Inc. | 39,042 | |||||||||
2,600 | Snap-On, Inc. | 113,620 | |||||||||
600 | Timberland Co.-Class A * | 17,046 | |||||||||
6,287 | Whirlpool Corp. | 508,681 | |||||||||
4,473,296 | |||||||||||
Financial — 34.5% | |||||||||||
24,500 | Aflac, Inc. | 1,104,215 | |||||||||
3,800 | Allstate Corp. (The) | 220,172 | |||||||||
8,100 | AMBAC Financial Group, Inc. | 701,379 | |||||||||
3,000 | American Financial Group, Inc. | 140,160 | |||||||||
39,900 | American International Group, Inc. | 2,546,418 | |||||||||
4,700 | AmerUs Group Co. | 318,660 | |||||||||
2,600 | AmSouth Bancorp | 74,490 | |||||||||
6,100 | AON Corp. | 210,877 | |||||||||
30,176 | Bank of America Corp. | 1,553,159 | |||||||||
8,400 | Bank of New York Co. (The), Inc. | 283,500 | |||||||||
1,200 | BB&T Corp. | 51,360 | |||||||||
1,680 | Bear Stearns Cos. (The), Inc. | 218,988 | |||||||||
3,500 | Capital One Financial Corp. | 255,850 | |||||||||
1,900 | CIT Group, Inc. | 85,614 | |||||||||
83,100 | Citigroup, Inc. | 4,100,985 | |||||||||
6,400 | Comerica, Inc. | 366,400 | |||||||||
1,800 | Commerce Group, Inc. | 53,622 | |||||||||
400 | Cullen/Frost Bankers, Inc. | 23,584 |
See accompanying notes to the financial statements.
3
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
400 | Downey Financial Corp. | 24,556 | |||||||||
7,900 | E*Trade Financial Corp. * | 186,361 | |||||||||
42,500 | Fannie Mae | 2,237,625 | |||||||||
14,137 | Fidelity National Financial, Inc. | 568,732 | |||||||||
9,300 | First American Corp. | 377,766 | |||||||||
7,000 | First Horizon National Corp. | 267,260 | |||||||||
19,300 | Freddie Mac | 1,227,480 | |||||||||
1,100 | Fremont General Corp. | 15,708 | |||||||||
5,500 | Goldman Sachs Group, Inc. | 817,575 | |||||||||
200 | HCC Insurance Holdings, Inc. | 6,498 | |||||||||
2,700 | Huntington Bancshares, Inc. | 64,584 | |||||||||
900 | Jefferies Group, Inc. | 22,428 | |||||||||
32,180 | JPMorgan Chase & Co. | 1,469,339 | |||||||||
5,200 | KeyCorp | 191,308 | |||||||||
11,600 | Lehman Brothers Holdings, Inc. | 740,196 | |||||||||
400 | Leucadia National Corp. | 10,292 | |||||||||
13,111 | Lincoln National Corp. | 795,838 | |||||||||
5,500 | Loews Corp. | 211,640 | |||||||||
11,700 | Marsh & McLennan Cos., Inc. | 306,072 | |||||||||
2,000 | MBIA, Inc. (a) | 123,260 | |||||||||
10,000 | Mellon Financial Corp. | 372,300 | |||||||||
12,900 | Merrill Lynch & Co., Inc. | 948,537 | |||||||||
6,700 | Metlife, Inc. | 368,701 | |||||||||
6,000 | MGIC Investment Corp. | 347,220 | |||||||||
23,200 | Morgan Stanley | 1,526,328 | |||||||||
37,972 | National City Corp. | 1,313,072 | |||||||||
4,200 | Nationwide Financial Services, Inc.-Class A | 203,322 | |||||||||
900 | Ohio Casualty Corp. | 23,355 | |||||||||
18,675 | Old Republic International Corp. | 390,307 | |||||||||
6,500 | PMI Group (The), Inc. | 281,060 | |||||||||
7,900 | PNC Financial Services Group, Inc. | 559,241 | |||||||||
2,000 | Principal Financial Group, Inc. | 106,480 | |||||||||
400 | Progressive Corp. (The) | 9,836 | |||||||||
3,200 | Protective Life Corp. | 147,296 |
See accompanying notes to the financial statements.
4
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
1,800 | Prudential Financial, Inc. | 132,138 | |||||||||
5,900 | Radian Group, Inc. | 353,292 | |||||||||
3,200 | Raymond James Financial, Inc. | 88,704 | |||||||||
2,800 | Realogy Corp. * (a) | 59,920 | |||||||||
700 | Reinsurance Group of America, Inc. | 36,176 | |||||||||
800 | Ryder Systems, Inc. | 39,536 | |||||||||
5,100 | St. Paul Travelers Cos. (The), Inc. | 223,890 | |||||||||
5,200 | State Street Corp. | 321,360 | |||||||||
400 | Student Loan Corp. | 73,520 | |||||||||
2,100 | TD Ameritrade Holding Corp. | 36,792 | |||||||||
2,300 | TD Banknorth, Inc. | 68,080 | |||||||||
9,600 | Torchmark Corp. | 597,216 | |||||||||
1,200 | Trustmark Corp. | 37,884 | |||||||||
32,100 | UnumProvident Corp. | 608,295 | |||||||||
1,200 | W.R. Berkley Corp. | 42,000 | |||||||||
25,584 | Washington Mutual, Inc. | 1,071,714 | |||||||||
500 | Wilmington Trust Corp. | 22,025 | |||||||||
32,383,548 | |||||||||||
Food & Beverage — 2.4% | |||||||||||
10,700 | Archer-Daniels-Midland Co. | 440,519 | |||||||||
400 | Brown-Forman Corp.-Class B | 30,792 | |||||||||
3,300 | Coca-Cola Co. (The) | 147,873 | |||||||||
5,200 | Dean Foods Co. * | 206,024 | |||||||||
800 | Flowers Foods, Inc. | 21,720 | |||||||||
8,100 | Kraft Foods, Inc. | 274,671 | |||||||||
3,100 | Pepsi Bottling Group, Inc. (a) | 108,531 | |||||||||
600 | PepsiAmericas, Inc. | 13,794 | |||||||||
24,000 | Sara Lee Corp. | 399,120 | |||||||||
1,100 | Smithfield Foods, Inc. * | 33,033 | |||||||||
39,024 | Tyson Foods, Inc.-Class A | 574,824 | |||||||||
2,250,901 |
See accompanying notes to the financial statements.
5
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Health Care — 14.3% | |||||||||||
3,700 | Aetna, Inc. | 137,899 | |||||||||
14,000 | AmerisourceBergen Corp. | 618,240 | |||||||||
700 | Biogen Idec, Inc. * | 30,898 | |||||||||
3,600 | Bristol-Myers Squibb Co. | 78,300 | |||||||||
14,200 | Cardinal Health, Inc. | 957,364 | |||||||||
6,200 | Express Scripts, Inc. * | 521,296 | |||||||||
3,500 | Forest Laboratories, Inc. * | 174,930 | |||||||||
300 | Invitrogen Corp. * | 18,255 | |||||||||
19,500 | McKesson Corp. | 990,600 | |||||||||
82,300 | Merck & Co., Inc. | 3,337,265 | |||||||||
500 | Omnicare, Inc. | 22,655 | |||||||||
174,500 | Pfizer, Inc. | 4,809,220 | |||||||||
2,000 | Quest Diagnostics, Inc. | 128,560 | |||||||||
4,700 | Stryker Corp. | 225,741 | |||||||||
26,500 | UnitedHealth Group, Inc. | 1,376,675 | |||||||||
13,427,898 | |||||||||||
Machinery — 0.3% | |||||||||||
200 | Cummins, Inc. | 22,964 | |||||||||
500 | Lincoln Electric Holdings, Inc. | 27,515 | |||||||||
300 | Oil States International, Inc. * | 9,588 | |||||||||
1,600 | Parker-Hannifin Corp. | 118,480 | |||||||||
2,000 | Terex Corp. * | 87,860 | |||||||||
266,407 | |||||||||||
Manufacturing — 1.0% | |||||||||||
16,300 | General Electric Co. | 555,178 | |||||||||
3,800 | Reliance Steel & Aluminum Co. | 124,526 | |||||||||
1,100 | SPX Corp. | 58,080 | |||||||||
2,100 | Temple-Inland, Inc. | 93,492 | |||||||||
600 | Timken Co. (The) | 19,224 | |||||||||
2,850 | Trinity Industries, Inc. | 95,076 | |||||||||
945,576 |
See accompanying notes to the financial statements.
6
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Metals & Mining — 0.3% | |||||||||||
9,300 | Alcoa, Inc. | 265,887 | |||||||||
Oil & Gas — 4.4% | |||||||||||
5,600 | Anadarko Petroleum Corp. | 262,696 | |||||||||
5,900 | Apache Corp. | 385,152 | |||||||||
2,100 | Chevron Corp. | 135,240 | |||||||||
12,829 | ConocoPhillips | 813,743 | |||||||||
25,700 | Exxon Mobil Corp. | 1,739,119 | |||||||||
300 | Hess Corp. | 13,734 | |||||||||
800 | Houston Exploration Co. (The) * | 51,320 | |||||||||
2,400 | Marathon Oil Corp. | 200,400 | |||||||||
1,300 | Murphy Oil Corp. | 63,583 | |||||||||
1,400 | Newfield Exploration Co. * | 60,536 | |||||||||
5,200 | Occidental Petroleum Corp. | 265,148 | |||||||||
200 | Pogo Producing Co. | 8,882 | |||||||||
900 | Tesoro Corp. | 58,149 | |||||||||
1,100 | Unit Corp. * | 57,981 | |||||||||
4,115,683 | |||||||||||
Primary Process Industry — 0.6% | |||||||||||
1,600 | Airgas, Inc. | 57,312 | |||||||||
5,300 | Nucor Corp. | 259,011 | |||||||||
3,000 | PPG Industries, Inc. | 190,080 | |||||||||
900 | Worthington Industries, Inc. | 17,199 | |||||||||
523,602 | |||||||||||
Retail Stores — 9.3% | |||||||||||
600 | AnnTaylor Stores Corp. * (a) | 23,880 | |||||||||
1,500 | AutoNation, Inc. * | 29,145 | |||||||||
300 | AutoZone, Inc. * | 27,090 | |||||||||
7,000 | Bed Bath & Beyond, Inc. * | 236,110 | |||||||||
5,500 | Costco Wholesale Corp. (a) | 257,345 | |||||||||
1,400 | Dillard's, Inc.-Class A | 43,652 | |||||||||
8,200 | Gap (The), Inc. | 137,842 |
See accompanying notes to the financial statements.
7
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Retail Stores — continued | |||||||||||
51,200 | Home Depot, Inc. | 1,755,648 | |||||||||
40,300 | Kroger Co. | 959,543 | |||||||||
49,400 | Lowe's Cos., Inc. | 1,336,764 | |||||||||
9,900 | Office Depot, Inc. * | 364,716 | |||||||||
2,900 | Rent-A-Center, Inc. * (a) | 78,590 | |||||||||
26,500 | Safeway, Inc. | 819,645 | |||||||||
12,975 | Supervalu, Inc. | 370,566 | |||||||||
4,100 | Tiffany & Co. | 129,560 | |||||||||
8,300 | TJX Cos., Inc. | 222,025 | |||||||||
42,900 | Wal-Mart Stores, Inc. | 1,918,488 | |||||||||
8,710,609 | |||||||||||
Services — 2.2% | |||||||||||
7,450 | Applebee's International, Inc. | 154,587 | |||||||||
1,500 | Aqua America, Inc. | 35,535 | |||||||||
2,400 | BearingPoint, Inc. * | 20,064 | |||||||||
2,700 | Brinker International, Inc. | 103,869 | |||||||||
900 | CBRL Group, Inc. | 34,056 | |||||||||
700 | CBS Corp.-Class B | 19,985 | |||||||||
11,200 | Cendant Corp. * | 21,616 | |||||||||
12,300 | Gannett Co., Inc. | 699,255 | |||||||||
1,300 | ITT Educational Services, Inc. * | 85,917 | |||||||||
2,500 | Manpower, Inc. | 147,775 | |||||||||
3,100 | New York Times Co.-Class A | 69,812 | |||||||||
7,100 | News Corp.-Class A | 135,113 | |||||||||
800 | Sabre Holdings Corp.-Class A | 17,536 | |||||||||
2,700 | Tribune Co | 84,267 | |||||||||
600 | Univision Communications, Inc.-Class A * | 20,736 | |||||||||
400 | Valassis Communications, Inc. * | 7,888 | |||||||||
3,900 | Walt Disney Co. (The) | 115,635 | |||||||||
4,100 | Waste Management, Inc. | 140,548 | |||||||||
1,000 | Wendy's International, Inc. | 63,900 | |||||||||
2,240 | Wyndham Worldwide Corp. * | 65,542 | |||||||||
2,043,636 |
See accompanying notes to the financial statements.
8
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Technology — 6.9% | |||||||||||
700 | Agilent Technologies, Inc. * | 22,512 | |||||||||
2,300 | Applera Corp.-Applied Biosystems Group | 70,495 | |||||||||
2,200 | Arrow Electronics, Inc. * | 61,380 | |||||||||
1,400 | AVX Corp. | 23,254 | |||||||||
800 | Computer Sciences Corp. * | 37,904 | |||||||||
1,300 | Convergys Corp. * | 27,131 | |||||||||
37,800 | Dell, Inc. * (a) | 852,390 | |||||||||
3,200 | Electronic Data Systems Corp. | 76,256 | |||||||||
1,200 | Emerson Electric Co. | 98,580 | |||||||||
13,300 | First Data Corp. | 571,501 | |||||||||
65,287 | Hewlett-Packard Co. | 2,386,893 | |||||||||
20,900 | Ingram Micro, Inc.-Class A * | 376,200 | |||||||||
3,300 | Intel Corp. | 64,482 | |||||||||
4,300 | International Business Machines Corp. | 348,171 | |||||||||
2,400 | Intersil Corp.-Class A | 60,840 | |||||||||
6,000 | Lexmark International, Inc. * (a) | 336,420 | |||||||||
11,300 | Motorola, Inc. | 264,194 | |||||||||
3,500 | Northrop Grumman Corp. | 233,835 | |||||||||
1,800 | Raytheon Co. | 84,978 | |||||||||
10,800 | Tech Data Corp. * | 376,812 | |||||||||
800 | W.W. Grainger, Inc. | 53,440 | |||||||||
6,427,668 | |||||||||||
Transportation — 1.0% | |||||||||||
3,200 | Burlington Northern Santa Fe Corp. | 214,240 | |||||||||
3,900 | FedEx Corp. | 394,017 | |||||||||
3,600 | Union Pacific Corp. | 289,260 | |||||||||
897,517 | |||||||||||
Utility — 10.8% | |||||||||||
9,100 | American Electric Power Co., Inc. | 331,968 | |||||||||
110,296 | AT&T, Inc. | 3,433,514 | |||||||||
25,800 | BellSouth Corp. | 1,050,576 | |||||||||
18,800 | Centerpoint Energy, Inc. | 271,660 |
See accompanying notes to the financial statements.
9
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
Utility — continued | |||||||||||
900 | CenturyTel, Inc. | 35,838 | |||||||||
1,400 | Consolidated Edison, Inc. (a) | 64,680 | |||||||||
700 | Duquesne Light Holdings, Inc. | 13,783 | |||||||||
2,000 | Edison International | 87,280 | |||||||||
4,700 | FirstEnergy Corp. | 268,182 | |||||||||
1,000 | Great Plains Energy, Inc. | 30,520 | |||||||||
600 | PG&E Corp. | 25,158 | |||||||||
6,900 | Progress Energy, Inc. (a) | 305,877 | |||||||||
18,900 | Qwest Communications International, Inc. * (a) | 166,509 | |||||||||
300 | Southern Co. (The) | 10,281 | |||||||||
114,852 | Verizon Communications, Inc. | 4,040,493 | |||||||||
10,136,319 | |||||||||||
TOTAL COMMON STOCKS (COST $86,160,009) | 91,326,370 | ||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Technology — 0.0% | |||||||||||
1,209 | Raytheon Co. Warrants, Expires 6/16/11 * | 16,866 | |||||||||
800 | Seagate Technology, Inc. Rights * (b) | 8 | |||||||||
16,874 | |||||||||||
TOTAL RIGHTS AND WARRANTS (COST $0) | 16,874 | ||||||||||
SHORT-TERM INVESTMENTS — 6.9% | |||||||||||
2,209,336 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $2,209,554 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/13 and a market value, including accrued interest, of $2,253,523. | 2,209,336 | |||||||||
802,586 | Credit Suisse First Boston Corp. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $802,705 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $846,159. (c) | 802,586 |
See accompanying notes to the financial statements.
10
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — continued | |||||||||||
1,252,034 | Goldman Sachs Group Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $1,252,220 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $1,291,061. (c) | 1,252,034 | |||||||||
160,517 | Lehman Brothers Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $160,541 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $188,200. (c) | 160,517 | |||||||||
1,252,034 | Merrill Lynch & Co. Tri Party Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $1,252,218 and an effective yield of 5.30%, collateralized by various U.S. government obligations with an aggregate market value of $1,289,051. (c) | 1,252,034 | |||||||||
776,779 | Morgan Stanley & Co. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $776,894 and an effective yield of 5.36%, collateralized by various corporate debt obligations with an aggregate market value of $827,246. (c) | 776,779 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $6,453,286) | 6,453,286 | ||||||||||
TOTAL INVESTMENTS — 104.4% (Cost $92,613,295) | 97,796,530 | ||||||||||
Other Assets and Liabilities (net) — (4.4%) | (4,085,339 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 93,711,191 |
See accompanying notes to the financial statements.
11
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
3 | S&P 500 | September 2006 | $ | 979,200 | $ | 17,102 |
At August 31, 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:
REIT - Real Estate Investment Trust
* 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) All or a portion of this security represents investment of security lending collateral (Note 2).
See accompanying notes to the financial statements.
12
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $4,069,474 (cost $92,613,295) (Note 2) | $ | 97,796,530 | |||||
Dividends and interest receivable | 175,400 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 47,250 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 375 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 10,106 | ||||||
Total assets | 98,029,661 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 4,243,950 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 24,475 | ||||||
Shareholder service fee | 11,843 | ||||||
Trustees and Chief Compliance Officer fees | 223 | ||||||
Accrued expenses | 37,979 | ||||||
Total liabilities | 4,318,470 | ||||||
Net assets | $ | 93,711,191 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 87,164,927 | |||||
Accumulated undistributed net investment income | 342,554 | ||||||
Accumulated net realized gain | 1,003,373 | ||||||
Net unrealized appreciation | 5,200,337 | ||||||
$ | 93,711,191 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 93,711,191 | |||||
Shares outstanding: | |||||||
Class III | 8,831,192 | ||||||
Net asset value per share: | |||||||
Class III | $ | 10.61 |
See accompanying notes to the financial statements.
13
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 1,116,710 | |||||
Interest (including securities lending income of $9,988) | 29,013 | ||||||
Total investment income | 1,145,723 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 145,116 | ||||||
Shareholder service fee – Class III (Note 3) | 70,217 | ||||||
Custodian, fund accounting agent and transfer agent fees | 24,104 | ||||||
Audit and tax fees | 24,063 | ||||||
Legal fees | 1,012 | ||||||
Trustees fees and related expenses (Note 3) | 850 | ||||||
Registration fees | 3,588 | ||||||
Miscellaneous | 828 | ||||||
Total expenses | 269,778 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (53,538 | ) | |||||
Net expenses | 216,240 | ||||||
Net investment income (loss) | 929,483 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 2,255,527 | ||||||
Closed futures contracts | (64,172 | ) | |||||
Net realized gain (loss) | 2,191,355 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (1,816,663 | ) | |||||
Open futures contracts | 17,102 | ||||||
Net unrealized gain (loss) | (1,799,561 | ) | |||||
Net realized and unrealized gain (loss) | 391,794 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 1,321,277 |
See accompanying notes to the financial statements.
14
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 929,483 | $ | 2,390,472 | |||||||
Net realized gain (loss) | 2,191,355 | 9,788,500 | |||||||||
Change in net unrealized appreciation (depreciation) | (1,799,561 | ) | (4,911,249 | ) | |||||||
Net increase (decrease) in net assets from operations | 1,321,277 | 7,267,723 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (818,908 | ) | (2,443,866 | ) | |||||||
Net realized gains | |||||||||||
Class III | (1,931,566 | ) | (12,699,878 | ) | |||||||
(2,750,474 | ) | (15,143,744 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (464,177 | ) | (8,930,574 | ) | |||||||
Total increase (decrease) in net assets | (1,893,374 | ) | (16,806,595 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 95,604,565 | 112,411,160 | |||||||||
End of period (including accumulated undistributed net investment income of $342,554 and $231,979, respectively) | $ | 93,711,191 | $ | 95,604,565 |
See accompanying notes to the financial statements.
15
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.78 | $ | 11.71 | $ | 11.36 | $ | 8.05 | $ | 10.73 | $ | 10.84 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.11 | 0.26 | 0.20 | 0.17 | 0.15 | 0.18 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.03 | 0.58 | 0.86 | 3.31 | (2.36 | ) | 0.05 | ||||||||||||||||||||
Total from investment operations | 0.14 | 0.84 | 1.06 | 3.48 | (2.21 | ) | 0.23 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.09 | ) | (0.28 | ) | (0.19 | ) | (0.17 | ) | (0.15 | ) | (0.20 | ) | |||||||||||||||
From net realized gains | (0.22 | ) | (1.49 | ) | (0.52 | ) | — | (0.32 | ) | (0.14 | ) | ||||||||||||||||
Total distributions | (0.31 | ) | (1.77 | ) | (0.71 | ) | (0.17 | ) | (0.47 | ) | (0.34 | ) | |||||||||||||||
Net asset value, end of period | $ | 10.61 | $ | 10.78 | $ | 11.71 | $ | 11.36 | $ | 8.05 | $ | 10.73 | |||||||||||||||
Total Return(a) | 1.45 | %** | 7.73 | % | 9.59 | % | 43.68 | % | (21.05 | )% | 2.16 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 93,711 | $ | 95,605 | $ | 112,411 | $ | 71,931 | $ | 61,923 | $ | 97,622 | |||||||||||||||
Net expenses to average daily net assets | 0.46 | %* | 0.48 | % | 0.48 | % | 0.48 | % | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 1.99 | %* | 2.31 | % | 1.79 | % | 1.77 | % | 1.56 | % | 1.67 | % | |||||||||||||||
Portfolio turnover rate | 29 | %** | 62 | % | 60 | % | 65 | % | 114 | % | 61 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.11 | %* | 0.12 | % | 0.10 | % | 0.14 | % | 0.15 | % | 0.09 | % |
(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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
16
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
1. Organization
GMO U.S. 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, 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 Funds into classes.
The Fund commenced operations following an in-kind purchase of shares by GMO Intrinsic Value Fund ("Predecessor Fund") effected as of the close of business on September 16, 2005. For tax purposes, this transaction met all requirements for a tax-free transaction under the Internal Revenue Code, and consequently the Fund retained the Predecessor Fund's basis and holding period in each asset contributed in-kind. For accounting purposes, the Fund recorded a cost for each in-kind asset contributed by the Predecessor Fund equal to such asset's historical cost. For tax and accounting purposes, the Fund is treated as a continuation of the Predecessor Fund's operations. Therefore, the Financial Statements reflect the performance and operational history of the Predecessor Fund prior to September 16, 2005.
The Fund seeks long-term capital growth. The Fund seeks to achieve its objective by outperforming the Russell 1000 Value Index. The Fund typically makes equity investments in U.S. companies that issue stocks included in the Russell 1000 Index, and companies with similar size characteristics.
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 generally 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
17
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
valued at fair value as determined in good faith by the Trustees or other persons acting at their direction pursuant to procedures approved by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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.
18
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 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. There were no swap agreements outstanding at the end of the period.
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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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 August 31, 2006, the Fund had loaned securities having a market value of $4,069,474 collateralized by cash in the amount of $4,243,950 which was invested in short-term instruments.
19
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Taxes and distributions
The Fund intends to qualify each tax 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.
As of August 31, 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) | ||||||||||||
$ | 93,692,400 | $ | 7,124,638 | $ | (3,020,508 | ) | $ | 4,104,130 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted
20
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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.
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 0.31% 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 Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 0.31% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $482 and $276, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $26,017,119 and $29,877,321, respectively.
21
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 90.3% 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 August 31, 2006, less than 0.1% of the Fund's shares were held by one related party comprised of a certain GMO employee account, and 34.0% 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 696 | $ | 7,508 | 294,033 | $ | 3,426,551 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 260,104 | 2,678,315 | 1,357,505 | 14,715,477 | |||||||||||||||
Shares repurchased | (294,458 | ) | (3,150,000 | ) | (1,904,079 | ) | (21,502,363 | ) | |||||||||||
Redemption in-kind | — | — | (479,432 | ) | (5,570,239 | ) | |||||||||||||
Net increase (decrease) | (33,658 | ) | $ | (464,177 | ) | (731,973 | ) | $ | (8,930,574 | ) |
22
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO U.S. Intrinsic Value Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
Noting that the Fund is the successor to GMO Intrinsic Value Fund (the "Predecessor Fund"), a former series of the Trust that had an investment objective and policies and restrictions substantially identical to those of the Fund, the Trustees considered investment performance and fee and expense information of the Predecessor Fund for periods ending on or before September 16, 2005. In particular, the Trustees noted that the Fund's advisory fee was 0.02% lower than the Predecessor Fund's advisory fee.
In addition, the Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The
23
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to th e Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to
24
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
25
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | 0.46 | % | $ | 1,000.00 | $ | 1,014.50 | $ | 2.34 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
26
GMO Foreign Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 94.4 | % | |||||
Preferred Stocks | 1.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Short-Term Investments | 3.9 | ||||||
Other | 0.6 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
Japan | 25.1 | % | |||||
United Kingdom | 24.2 | ||||||
Germany | 13.2 | ||||||
France | 5.9 | ||||||
Netherlands | 4.6 | ||||||
Italy | 4.4 | ||||||
Switzerland | 3.3 | ||||||
Spain | 3.0 | ||||||
Hong Kong | 2.0 | ||||||
Finland | 1.8 | ||||||
Norway | 1.5 | ||||||
Australia | 1.5 | ||||||
Ireland | 1.3 | ||||||
Belgium | 1.3 | ||||||
Sweden | 1.2 | ||||||
Taiwan | 1.1 | ||||||
Singapore | 1.0 | ||||||
Brazil | 0.7 | ||||||
South Korea | 0.6 | ||||||
Austria | 0.6 | ||||||
Thailand | 0.6 | ||||||
Canada | 0.2 | ||||||
Chile | 0.2 | ||||||
India | 0.2 | ||||||
New Zealand | 0.1 | ||||||
Malaysia | 0.1 | ||||||
Philippines | 0.1 | ||||||
Greece | 0.1 | ||||||
Mexico | 0.1 | ||||||
100.0 | % |
1
GMO Foreign Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Industry Sector Summary | % of Equity Investments | ||||||
Financials | 29.6 | % | |||||
Consumer Discretionary | 15.0 | ||||||
Industrials | 14.8 | ||||||
Consumer Staples | 7.1 | ||||||
Energy | 7.0 | ||||||
Telecommunication Services | 6.5 | ||||||
Utilities | 5.5 | ||||||
Information Technology | 5.2 | ||||||
Materials | 5.1 | ||||||
Health Care | 4.2 | ||||||
100.0 | % |
2
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 94.4% | |||||||||||
Australia — 1.4% | |||||||||||
1,675,000 | Amcor Ltd | 8,576,308 | |||||||||
1,267,078 | Coca Cola Amatil Ltd | 6,333,370 | |||||||||
186,500 | Commonwealth Bank of Australia | 6,499,389 | |||||||||
4,821,200 | Foster's Group Ltd | 21,886,040 | |||||||||
2,365,950 | Multiplex Group | 6,092,635 | |||||||||
615,100 | National Australia Bank Ltd | 17,014,184 | |||||||||
14,838,900 | SP AusNet | 14,613,922 | |||||||||
865,651 | TABCORP Holdings Ltd | 9,988,222 | |||||||||
4,105,686 | Telstra Corp Ltd (a) | 11,288,337 | |||||||||
526,927 | Westpac Banking Corp | 9,391,456 | |||||||||
142,492 | Woolworths Ltd | 2,249,212 | |||||||||
113,933,075 | |||||||||||
Austria — 0.6% | |||||||||||
183,900 | Erste Bank Der Oesterreichischen Sparkassen AG | 11,123,335 | |||||||||
29,330 | Flughafen Wien AG | 2,377,686 | |||||||||
314,500 | OMV AG | 16,786,281 | |||||||||
385,500 | Telekom Austria AG | 9,456,186 | |||||||||
131,530 | Wienerberger AG | 6,311,765 | |||||||||
46,055,253 | |||||||||||
Belgium — 1.2% | |||||||||||
224,570 | Belgacom SA | 7,926,006 | |||||||||
22,166 | CIE Francois d' Enterprises | 21,354,984 | |||||||||
573,495 | Fortis | 22,331,552 | |||||||||
67,475 | Groupe Bruxelles Lambert SA | 7,082,963 | |||||||||
214,565 | KBC Groep NV | 23,108,953 | |||||||||
87,962 | Solvay SA | 10,646,592 | |||||||||
127,369 | UCB SA | 7,466,148 | |||||||||
99,917,198 |
See accompanying notes to the financial statements.
3
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Brazil — 0.4% | |||||||||||
735,900 | Companhia de Concessoes Rodoviarias | 7,170,220 | |||||||||
49,400 | CSU Cardsystem ADR 144A * | 749,294 | |||||||||
1,114,500 | Datasul SA * | 7,901,306 | |||||||||
24,200 | MMX Mineracao e Metalicos SA * | 9,199,048 | |||||||||
135,800 | Unibanco-Uniao de Bancos Brasileiros SA GDR | 9,825,130 | |||||||||
34,844,998 | |||||||||||
Canada — 0.2% | |||||||||||
220,100 | KAP Resources Ltd * (b) | 1,991 | |||||||||
950,200 | RONA Inc * | 18,697,955 | |||||||||
18,699,946 | |||||||||||
Chile — 0.2% | |||||||||||
728,000 | Inversiones Aguas Metropolitanas SA ADR 144A | 16,147,841 | |||||||||
Finland — 1.8% | |||||||||||
2,031,300 | Nokia Oyj | 42,456,594 | |||||||||
2,111,200 | Nokian Renkaat Oyj (a) | 36,977,368 | |||||||||
1,149,900 | Poyry Oyj | 14,743,287 | |||||||||
293,300 | Ramirent Oyj | 12,098,311 | |||||||||
148,600 | Tietoenator Oyj | 4,279,851 | |||||||||
1,229,300 | Uponor Oyj | 33,505,901 | |||||||||
144,061,312 | |||||||||||
France — 5.6% | |||||||||||
58,760 | Accor SA | 3,762,942 | |||||||||
19,750 | Arkema * (a) | 769,962 | |||||||||
113,340 | Assurances Generales de France | 14,233,221 | |||||||||
627,440 | Axa (a) | 23,336,819 | |||||||||
126,105 | BIC SA | 7,847,797 | |||||||||
526,808 | BNP Paribas | 56,014,384 | |||||||||
35,210 | Casino Guichard-Perrachon SA | 3,022,440 | |||||||||
147,296 | Cie de Saint-Gobain | 10,927,719 | |||||||||
234,717 | Credit Agricole SA | 9,537,696 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
France — continued | |||||||||||
868,792 | France Telecom SA | 18,481,575 | |||||||||
125,876 | Groupe Danone | 17,321,472 | |||||||||
17,475 | Guyenne et Gascogne SA | 2,134,199 | |||||||||
110,492 | Imerys SA | 8,411,505 | |||||||||
76,278 | Lafarge SA | 9,833,941 | |||||||||
149,866 | Lagardere S.C.A. | 10,983,772 | |||||||||
139,000 | L'Oreal SA (a) | 14,554,787 | |||||||||
102,100 | M6-Metropole Television (a) | 3,188,016 | |||||||||
197,104 | Michelin SA Class B | 13,386,705 | |||||||||
35,183 | Pernod-Ricard (a) | 7,675,406 | |||||||||
310,172 | Peugeot SA | 17,500,795 | |||||||||
92,300 | Publicis Groupe | 3,645,995 | |||||||||
270,733 | Sanofi-Aventis | 24,314,988 | |||||||||
119,164 | Schneider Electric SA | 12,711,066 | |||||||||
31,831 | Sequana Capital (a) | 896,493 | |||||||||
79,400 | Societe Generale | 12,824,868 | |||||||||
137,852 | Suez Lyon des Eaux VVPR Strip * | 1,766 | |||||||||
1,545,572 | Suez SA | 66,176,846 | |||||||||
102,440 | Technip SA | 5,907,394 | |||||||||
126,414 | Thales SA | 5,493,038 | |||||||||
943,000 | Total SA | 63,678,911 | |||||||||
130,031 | Wendel Investissement | 15,038,175 | |||||||||
463,614,693 | |||||||||||
Germany — 11.8% | |||||||||||
1,164,680 | Adidas AG | 55,740,448 | |||||||||
658,091 | Allianz AG (Registered) | 111,855,165 | |||||||||
152,800 | Altana AG | 9,021,450 | |||||||||
585,499 | Bayer AG | 29,057,540 | |||||||||
489,200 | Bayerische Motoren Werke AG | 25,305,385 | |||||||||
1,057,810 | Commerzbank AG | 36,944,876 | |||||||||
113,120 | Continental AG | 12,115,852 | |||||||||
1,722,581 | DaimlerChrysler AG (Registered) | 90,830,296 | |||||||||
766,600 | Depfa Bank Plc | 14,308,351 |
See accompanying notes to the financial statements.
5
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Germany — continued | |||||||||||
120,400 | Deutsche Bank AG (Registered) | 13,762,766 | |||||||||
1,067,623 | Deutsche Lufthansa AG (Registered) | 21,142,540 | |||||||||
3,291,800 | Deutsche Post AG (Registered) | 83,371,176 | |||||||||
5,432,438 | Deutsche Telekom (Registered) | 79,474,286 | |||||||||
150,770 | Fraport AG (a) | 11,605,455 | |||||||||
313,318 | Heidelberger Druckmaschinen | 12,548,716 | |||||||||
372,576 | Hypo Real Estate Holding AG | 23,130,776 | |||||||||
860,900 | Infineon Technologies AG * | 10,146,515 | |||||||||
851,600 | Metro AG | 49,998,510 | |||||||||
202,200 | MTU Aero Engines Holding | 6,983,974 | |||||||||
694,774 | Muenchener Rueckversicherungs AG (Registered) | 104,457,134 | |||||||||
144,700 | SAP AG | 27,625,890 | |||||||||
283,500 | SGL Carbon AG * | 5,296,234 | |||||||||
1,273,137 | Siemens AG (Registered) | 108,164,872 | |||||||||
254,650 | Volkswagen AG (a) | 20,329,132 | |||||||||
76,629 | Wacker-Chemie AG * | 9,237,120 | |||||||||
972,454,459 | |||||||||||
Greece — 0.1% | |||||||||||
324,000 | Greek Postal Savings Bank * | 6,757,708 | |||||||||
Hong Kong — 1.9% | |||||||||||
3,532,887 | Bank of East Asia Ltd | 15,712,597 | |||||||||
9,782,000 | BOC Hong Kong Holdings Ltd | 21,451,160 | |||||||||
5,200,500 | China Netcom Group | 9,125,290 | |||||||||
7,750,000 | China Resources Power Holdings Co | 6,864,663 | |||||||||
2,130,500 | CLP Holdings Ltd | 13,472,151 | |||||||||
6,367,000 | Hang Lung Properties Ltd | 13,563,886 | |||||||||
2,238,000 | Henderson Land Development Co Ltd | 12,637,661 | |||||||||
2,702,500 | Jardine Strategic Holdings Ltd | 29,186,189 | |||||||||
2,385,507 | Kerry Properties Ltd | 8,952,372 | |||||||||
812,000 | Swire Pacific Ltd Class A | 8,876,335 | |||||||||
7,737,500 | Swire Pacific Ltd Class B | 14,918,559 | |||||||||
1,108,000 | Yue Yuen Industrial Holdings | 3,205,290 | |||||||||
157,966,153 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
India — 0.1% | |||||||||||
2,536,205 | Arvind Mills Ltd | 3,353,208 | |||||||||
1,428,000 | Jain Irrigation Systems Ltd | 7,703,418 | |||||||||
11,056,626 | |||||||||||
Ireland — 1.3% | |||||||||||
1,849,840 | Allied Irish Banks Plc | 48,306,842 | |||||||||
1,892,770 | Bank of Ireland | 35,930,558 | |||||||||
269,527 | CRH Plc | 9,329,472 | |||||||||
425,300 | Grafton Group Plc * | 5,823,113 | |||||||||
224,000 | Irish Life & Permanent Plc | 5,765,810 | |||||||||
105,155,795 | |||||||||||
Italy — 4.2% | |||||||||||
867,100 | Alleanza Assicurazioni SPA (a) | 10,505,863 | |||||||||
549,931 | Assicurazioni Generali SPA (a) | 20,715,781 | |||||||||
1,949,128 | Banca Intesa SPA | 13,046,481 | |||||||||
1,255,623 | Banca Intesa SPA-Di RISP | 7,992,696 | |||||||||
1,187,324 | Banca Monte dei Paschi di Siena SPA (a) | 7,222,221 | |||||||||
347,854 | Buzzi Unicem SPA | 7,810,606 | |||||||||
4,388,335 | Enel SPA | 39,176,024 | |||||||||
2,605,321 | ENI SPA | 79,660,769 | |||||||||
1,086,410 | Fiat SPA * (a) | 15,572,482 | |||||||||
597,820 | Finmeccanica SPA | 13,240,752 | |||||||||
266,246 | Grouppo Editoriale L'Espresso (a) | 1,416,149 | |||||||||
665,870 | Italcementi SPA-Di RISP | 10,514,203 | |||||||||
58,000 | Pagnossin SPA * (a) | 54,987 | |||||||||
1,086,400 | Snam Rete Gas SPA (a) | 5,087,598 | |||||||||
15,605,398 | Telecom Italia SPA | 43,208,560 | |||||||||
12,701,176 | Telecom Italia SPA Di RISP | 31,237,573 | |||||||||
4,408,682 | UniCredito Italiano SPA | 35,132,263 | |||||||||
341,595,008 | |||||||||||
Japan — 23.9% | |||||||||||
622,000 | Asahi Breweries | 9,115,892 | |||||||||
1,390,000 | Bridgestone Corp | 29,467,814 |
See accompanying notes to the financial statements.
7
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
1,518,200 | Canon Inc | 75,421,632 | |||||||||
1,529 | Central Japan Railway Co | 16,517,496 | |||||||||
1,346,600 | Chubu Electric Power Co Inc | 36,442,275 | |||||||||
155,900 | Credit Saison Co Ltd | 6,995,924 | |||||||||
361,500 | Daiichi Sankyo Co Ltd | 9,960,324 | |||||||||
879,000 | Daikin Industries Ltd | 26,832,537 | |||||||||
1,811,000 | Daimaru Inc (The) | 22,245,754 | |||||||||
1,151,000 | Daiwa House Industry Co Ltd | 18,686,294 | |||||||||
4,135,000 | Daiwa Securities Group Inc | 48,944,188 | |||||||||
1,733,600 | Denso Corp | 60,123,075 | |||||||||
6,134 | East Japan Railway Co | 45,199,466 | |||||||||
925,100 | Eisai Co Ltd | 43,936,154 | |||||||||
355,800 | Fanuc Ltd | 28,106,298 | |||||||||
395,000 | Fuji Electric Holdings Co Ltd | 1,996,130 | |||||||||
4,477,000 | Fujitsu Ltd | 35,734,934 | |||||||||
2,522,000 | Honda Motor Co Ltd | 85,344,194 | |||||||||
897,700 | Hoya Corp | 32,496,764 | |||||||||
3,037,000 | Isuzu Motors Ltd (a) | 9,808,647 | |||||||||
5,882,000 | Itochu Corp | 49,120,775 | |||||||||
2,741 | Japan Tobacco Inc | 10,411,079 | |||||||||
1,092,000 | JFE Holdings Inc | 44,301,025 | |||||||||
760,100 | JSR Corp | 17,988,995 | |||||||||
1,397,620 | JTEKT Corp | 27,738,109 | |||||||||
1,076,000 | Kao Corp | 28,645,334 | |||||||||
7,921 | KDDI Corp (a) | 52,068,724 | |||||||||
1,642,000 | Komatsu Ltd | 29,799,089 | |||||||||
4,286,000 | Kubota Corp | 35,036,037 | |||||||||
270,500 | Lawson Inc | 9,422,095 | |||||||||
4,398,000 | Matsushita Electric Industrial Co Ltd | 93,663,434 | |||||||||
2,297,000 | Mitsubishi Chemical Holdings | 15,035,376 | |||||||||
2,185,700 | Mitsubishi Corp | 44,244,716 | |||||||||
9,162,000 | Mitsubishi Electric Corp | 75,262,886 | |||||||||
1,202,000 | Mitsui Fudosan Co Ltd | 26,806,138 | |||||||||
1,915,000 | Mitsui Mining & Smelting Co Ltd | 10,699,468 | |||||||||
1,277,000 | Mitsui OSK Lines Ltd | 9,695,234 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
10,631 | Mizuho Financial Group Inc | 85,635,437 | |||||||||
94,400 | Mori Seiki Co (a) | 1,854,366 | |||||||||
3,230,500 | Nippon Mining Holdings Inc | 23,526,023 | |||||||||
995,000 | Nissan Motor Co | 11,295,043 | |||||||||
369 | Nomura Real Estate Office Fund (REIT) (a) | 2,875,058 | |||||||||
180,590 | ORIX Corp | 47,678,570 | |||||||||
833,000 | Ricoh Company Ltd | 16,297,802 | |||||||||
980 | Sapporo Hokuyo Holdings Inc | 10,757,118 | |||||||||
509,600 | Sega Sammy Holdings Inc | 17,353,084 | |||||||||
699,100 | Seven & I Holdings Co Ltd | 24,585,072 | |||||||||
829,000 | Sharp Corp | 14,776,593 | |||||||||
668,000 | Shionogi and Co Ltd | 11,988,239 | |||||||||
166,700 | Sony Corp | 7,213,561 | |||||||||
3,236,300 | Sumitomo Electric Industries Ltd | 41,624,345 | |||||||||
1,733,000 | Sumitomo Heavy Industries Ltd | 14,905,338 | |||||||||
12,818 | Sumitomo Mitsui Financial Group Inc | 143,756,418 | |||||||||
844,000 | Sumitomo Realty & Development Co Ltd | 24,740,964 | |||||||||
620,500 | Takeda Pharmaceutical Co Ltd | 41,001,621 | |||||||||
349,300 | TDK Corp | 26,918,909 | |||||||||
995 | The Tokyo Star Bank Ltd (a) | 3,236,837 | |||||||||
3,828,000 | Tokyo Gas Co Ltd | 20,305,979 | |||||||||
189,900 | Tokyo Seimitsu Co Ltd | 9,119,559 | |||||||||
1,331,000 | Tokyo Tatemono Co Ltd | 14,323,000 | |||||||||
1,278,000 | Tokyu Land Corp | 11,092,257 | |||||||||
2,158,200 | Toyota Motor Corp | 116,633,342 | |||||||||
1,966,808,841 | |||||||||||
Malaysia — 0.1% | |||||||||||
391,200 | IJM Corp Berhad | 633,296 | |||||||||
3,000,000 | MISC Berhad | 6,898,941 | |||||||||
7,532,237 | |||||||||||
Mexico — 0.1% | |||||||||||
1,007,000 | Corporacion GEO SA de CV Series B * | 4,060,130 | |||||||||
51,600 | Ternium SA ADR * | 1,300,836 | |||||||||
5,360,966 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Netherlands — 4.4% | |||||||||||
1,316,805 | ABN Amro Holdings NV | 37,563,293 | |||||||||
1,338,209 | Aegon NV | 23,911,899 | |||||||||
544,802 | Akzo Nobel NV | 31,376,054 | |||||||||
657,450 | Fortis NV (a) | 25,604,331 | |||||||||
134,832 | Fugro NV (a) | 5,945,608 | |||||||||
1,309,454 | Hagemeyer NV * (a) | 6,621,515 | |||||||||
139,274 | Hal Trust (Participating Units) | 9,807,168 | |||||||||
1,490,167 | ING Groep NV | 64,562,299 | |||||||||
378,213 | Koninklijke Ahold NV * (a) | 3,641,520 | |||||||||
1,260,500 | Koninklijke KPN NV | 15,564,629 | |||||||||
150,310 | Koninklijke Vopak NV | 5,577,568 | |||||||||
392,897 | Koninklijke Wessanen NV | 5,455,164 | |||||||||
256,771 | Mittal Steel Company NV | 8,569,464 | |||||||||
1,446,332 | Philips Electronics NV | 49,623,972 | |||||||||
92,391 | Philips Electronics NV ADR | 3,170,859 | |||||||||
550,300 | Reed Elsevier NV | 8,842,392 | |||||||||
524,607 | TNT NV | 19,733,468 | |||||||||
357,760 | Unilever NV | 8,531,299 | |||||||||
45,734 | Univar NV | 1,893,943 | |||||||||
80,987 | Wereldhave NV | 8,505,968 | |||||||||
634,308 | Wolters Kluwer NV | 16,044,187 | |||||||||
360,546,600 | |||||||||||
New Zealand — 0.1% | |||||||||||
394,477 | Air New Zealand | 296,765 | |||||||||
1,073,119 | Asian Growth Properties Ltd * | 684,496 | |||||||||
3,432,943 | Telecom Corp of New Zealand | 9,551,501 | |||||||||
10,532,762 | |||||||||||
Norway — 1.4% | |||||||||||
1,053,398 | Ekornes ASA | 21,133,443 | |||||||||
1,531,000 | Norske Skogindustrier AS Class A | 23,285,609 | |||||||||
574,400 | Orkla ASA | 28,138,867 | |||||||||
502,020 | Prosafe ASA | 33,458,577 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Norway — continued | |||||||||||
454,000 | Stolt-Nielsen SA (a) | 11,080,343 | |||||||||
117,096,839 | |||||||||||
Philippines — 0.1% | |||||||||||
7,797,100 | First Gen Corp | 7,139,319 | |||||||||
Singapore — 1.0% | |||||||||||
4,390,000 | ComfortDelgro Corp Ltd | 4,180,089 | |||||||||
2,318,880 | DBS Group Holdings Ltd | 26,473,616 | |||||||||
1,214,000 | Keppel Corp Ltd | 11,560,906 | |||||||||
16,004,000 | People's Food Holdings Ltd | 10,946,278 | |||||||||
937,000 | Singapore Airlines Ltd | 7,855,617 | |||||||||
7,043,509 | Singapore Telecommunications | 11,129,975 | |||||||||
4,973,250 | Unisteel Technology Ltd | 6,257,052 | |||||||||
78,403,533 | |||||||||||
South Korea — 0.6% | |||||||||||
19,865 | Hansol Paper Co | 257,337 | |||||||||
839,800 | KT Corp ADR | 18,559,580 | |||||||||
221,510 | Samsung SDI Co Ltd | 18,299,703 | |||||||||
30,620 | SK Telecom Co Ltd | 5,980,573 | |||||||||
154,700 | SK Telecom Co Ltd ADR | 3,387,930 | |||||||||
46,485,123 | |||||||||||
Spain — 2.9% | |||||||||||
379,040 | ACS Actividades de Construccion y Servicios SA | 17,005,572 | |||||||||
199,703 | Altadis SA | 9,458,858 | |||||||||
1,756,392 | Banco Bilbao Vizcaya Argentaria SA | 40,177,350 | |||||||||
684,315 | Banco Popular Espanol SA | 10,743,557 | |||||||||
1,758,932 | Banco Santander Central Hispano SA | 27,319,545 | |||||||||
696,527 | Endesa SA | 24,317,582 | |||||||||
156,600 | Gas Natural SDG SA | 5,244,458 | |||||||||
519,593 | Iberdrola SA | 19,308,681 | |||||||||
132,100 | Inditex SA | 5,953,285 |
See accompanying notes to the financial statements.
11
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Spain — continued | |||||||||||
124,750 | Red Electrica de Espana | 4,813,291 | |||||||||
896,929 | Repsol YPF SA | 25,805,812 | |||||||||
2,410,161 | Telefonica SA | 41,373,134 | |||||||||
138,668 | Union Fenosa SA | 6,064,130 | |||||||||
237,585,255 | |||||||||||
Sweden — 1.1% | |||||||||||
1,024,967 | Assa Abloy AB Class B | 17,990,881 | |||||||||
399,290 | Autoliv Inc SDR | 22,537,917 | |||||||||
580,850 | Lundin Mining Corp SDR * (a) | 16,899,747 | |||||||||
10,644,000 | Telefonaktiebolaget LM Ericsson | 35,484,406 | |||||||||
92,912,951 | |||||||||||
Switzerland — 3.1% | |||||||||||
66,900 | Adecco SA | 3,907,094 | |||||||||
43,170 | Baloise Holding Ltd | 3,592,662 | |||||||||
1,620 | Bank Sarasin & Cie AG Class B (Registered) | 4,552,032 | |||||||||
2,822 | Banque Cantonale Vaudoise | 1,068,615 | |||||||||
2,666 | Belimo Holding AG (Registered) | 2,140,204 | |||||||||
20,560 | Bobst Group AG (Registered) | 878,612 | |||||||||
90,460 | Converium Holding AG | 1,070,946 | |||||||||
441,250 | Credit Suisse Group | 24,593,275 | |||||||||
9,335 | Energiedienst Holding AG (Registered) * | 3,808,708 | |||||||||
6,697 | Forbo Holdings AG (Registered) * | 1,926,597 | |||||||||
8,262 | Geberit AG (Registered) | 9,613,007 | |||||||||
141,905 | Holcim Ltd | 11,492,893 | |||||||||
880 | Jelmoli Holding AG (Bearer) | 1,628,303 | |||||||||
4,836 | Jelmoli Holding AG (Registered) | 1,788,158 | |||||||||
108,420 | Nestle SA (Registered) (a) | 37,249,962 | |||||||||
408,284 | Novartis AG (Registered) | 23,291,775 | |||||||||
93,700 | Swatch Group AG | 18,261,874 | |||||||||
19,900 | Swiss Life Holding | 4,812,966 | |||||||||
504 | Swiss National Insurance Co (Registered) | 276,345 | |||||||||
576,027 | Swiss Reinsurance Co (Registered) | 43,934,829 | |||||||||
31,330 | Swisscom AG (Registered) | 10,523,281 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Switzerland — continued | |||||||||||
594,880 | UBS AG (Registered) | 33,628,155 | |||||||||
18,941 | Valora Holding AG | 4,254,715 | |||||||||
42,841 | Zurich Financial Services AG | 9,765,489 | |||||||||
258,060,497 | |||||||||||
Taiwan — 1.1% | |||||||||||
3,528,000 | Benq Corp * | 1,826,336 | |||||||||
17,456,320 | Chinatrust Financial Holding Co | 11,432,877 | |||||||||
708,900 | Chunghwa Telecom Co Ltd ADR | 12,271,059 | |||||||||
710,130 | Compal Electronics GDR 144A | 3,160,079 | |||||||||
4,347,566 | Compal Electronics Inc | 3,797,005 | |||||||||
5,298,900 | E.Sun Financial Holdings Co Ltd | 3,155,662 | |||||||||
6,322,000 | Fubon Financial Holding Co Ltd | 4,706,893 | |||||||||
169,600 | Fubon Financial Holding Co Ltd GDR (Registered) | 1,297,440 | |||||||||
25,980,000 | Sinopac Holdings Co | 11,373,817 | |||||||||
646,070 | Standard Foods Corp | 286,461 | |||||||||
1,182,216 | Taiwan Semiconductor Manufacturing Co Ltd ADR | 11,006,431 | |||||||||
41,803,348 | United Microelectronics Corp | 22,924,015 | |||||||||
87,238,075 | |||||||||||
Thailand — 0.6% | |||||||||||
5,123,200 | Advanced Info Service Pcl (Foreign Registered) (b) | 12,195,043 | |||||||||
5,430,500 | Charoen Pokphand Foods (b) | 719,115 | |||||||||
44,070,500 | Charoen Pokphand Foods Pcl (Foreign Registered) (b) | 5,840,104 | |||||||||
16,559,000 | Sino Thai Engineering & Construction Pcl (Foreign Registered) (b) | 1,974,258 | |||||||||
1,469,000 | Thai Airways International Pcl (Foreign Registered) (b) | 1,719,672 | |||||||||
122,530,000 | Thai Beverage Pcl * (b) | 23,357,585 | |||||||||
45,805,777 | |||||||||||
United Kingdom — 23.1% | |||||||||||
437,062 | Alliance Boots Plc | 6,416,418 | |||||||||
900,900 | Amvescap Plc | 9,299,302 | |||||||||
599,968 | Anglo American Plc | 25,959,766 | |||||||||
777,408 | Associated British Foods Plc | 12,268,834 | |||||||||
764,800 | AstraZeneca Plc | 49,630,657 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
3,120,675 | Aviva Plc | 43,855,538 | |||||||||
219,372 | AWG Plc | 5,434,299 | |||||||||
7,210,910 | BAE Systems Plc | 50,861,165 | |||||||||
6,175,088 | Barclays Plc | 77,366,686 | |||||||||
996,942 | BBA Group Plc | 5,065,040 | |||||||||
2,695,846 | BG Group Plc | 35,249,513 | |||||||||
629,847 | BHP Billiton Plc | 12,015,628 | |||||||||
253,500 | BOC Group | 7,795,228 | |||||||||
12,168,151 | BP Plc * | 138,076,589 | |||||||||
229,100 | Brambles Industries Plc | 2,007,998 | |||||||||
501,600 | British Energy Plc (Deferred Shares) * (b) (c) | — | |||||||||
804,676 | British Sky Broadcasting Plc | 8,613,863 | |||||||||
8,158,501 | BT Group Plc | 38,349,264 | |||||||||
431,635 | Bunzl Plc | 5,362,519 | |||||||||
229,783 | Burberry Group Plc | 2,093,963 | |||||||||
1,240,801 | Cable & Wireless Plc | 2,899,554 | |||||||||
778,800 | Cadbury Schweppes Plc | 8,306,468 | |||||||||
1,014,719 | Cattle's Plc | 6,340,493 | |||||||||
5,022,457 | Centrica Plc | 28,214,702 | |||||||||
3,297,000 | Cobham Plc | 10,782,497 | |||||||||
2,665,100 | Compass Group Plc | 12,956,679 | |||||||||
2,056,297 | Diageo Plc | 36,656,533 | |||||||||
1,981,282 | DSG International Plc | 7,737,315 | |||||||||
370,981 | Filtrona Plc | 1,910,015 | |||||||||
526,698 | FKI Plc | 971,370 | |||||||||
1,872,345 | Gallaher Group Plc | 32,377,323 | |||||||||
3,359,499 | GlaxoSmithKline Plc | 95,310,146 | |||||||||
548,914 | GUS Plc | 10,196,996 | |||||||||
741,658 | Hanson Plc | 9,343,516 | |||||||||
1,132,961 | Hays Plc | 2,939,205 | |||||||||
3,773,882 | HBOS Plc | 72,070,014 | |||||||||
5,583,385 | HSBC Holdings Plc | 101,319,167 | |||||||||
1,015,670 | ICAP Plc | 8,938,617 | |||||||||
945,120 | Imperial Chemical Industries Plc | 6,703,345 | |||||||||
1,114,418 | Imperial Tobacco Group Plc | 38,415,864 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
154,924 | Intercontinental Hotels Group Plc | 2,711,986 | |||||||||
1,647,300 | International Power Plc | 9,960,715 | |||||||||
4,018,000 | ITV Plc | 8,092,670 | |||||||||
1,498,269 | J Sainsbury Plc | 10,166,734 | |||||||||
348,370 | Johnson Matthey Plc | 8,763,239 | |||||||||
403,803 | Kesa Electricals Plc | 2,376,550 | |||||||||
1,748,018 | Kingfisher Plc | 7,852,823 | |||||||||
712,032 | Ladbrokes Plc | 5,188,841 | |||||||||
9,412,744 | Legal & General Group Plc | 23,573,248 | |||||||||
4,763,420 | Lloyds TSB Group Plc | 47,244,535 | |||||||||
49,738 | Lonmin Plc | 2,554,138 | |||||||||
1,255,000 | Matalan Plc | 4,159,308 | |||||||||
1,696,500 | Misys Plc | 7,983,814 | |||||||||
402,128 | Mitchells & Butlers Plc | 4,284,470 | |||||||||
2,075,067 | National Grid Plc | 25,219,828 | |||||||||
250,132 | Next Plc | 7,938,651 | |||||||||
640,700 | Northern Rock Plc | 13,607,286 | |||||||||
3,420,934 | Old Mutual Plc | 10,674,536 | |||||||||
1,255,500 | Pearson Plc | 17,865,423 | |||||||||
1,471,606 | Photo-Me International Plc | 2,991,427 | |||||||||
2,540,417 | Prudential Plc | 28,476,863 | |||||||||
1,046,590 | Reed Elsevier Plc | 11,227,607 | |||||||||
2,806,620 | Rentokil Initial Plc | 8,032,483 | |||||||||
878,886 | Resolution Plc | 9,956,651 | |||||||||
621,169 | Reuters Group Plc | 4,782,633 | |||||||||
625,836 | Rexam Plc | 6,467,177 | |||||||||
201,728 | Rio Tinto Plc | 10,177,119 | |||||||||
2,239,511 | Royal & Sun Alliance Insurance Group | 5,905,409 | |||||||||
3,650,643 | Royal Bank of Scotland Group | 123,829,406 | |||||||||
213,340 | Royal Dutch Shell Group Class A | 7,356,586 | |||||||||
970,000 | Royal Dutch Shell Plc A Shares | 33,555,366 | |||||||||
1,882,597 | Royal Dutch Shell Plc B Shares | 67,291,847 | |||||||||
1,298,000 | Sage Group Plc | 5,916,421 | |||||||||
1,534,421 | Scottish & Newcastle Plc | 16,081,442 | |||||||||
922,260 | Scottish & Southern Energy Plc | 21,153,830 | |||||||||
1,506,904 | Scottish Power Plc | 17,803,801 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
590,900 | Scottish Power Plc (Deferred Shares) * (b) | — | |||||||||
580,000 | Serco Group Plc | 3,887,971 | |||||||||
803,363 | Severn Trent Plc | 20,113,586 | |||||||||
835,100 | Shire Plc | 14,219,697 | |||||||||
635,595 | Slough Estates Plc | 7,950,682 | |||||||||
607,432 | Smith (David S.) Holdings Plc | 1,815,832 | |||||||||
1,097,400 | South African Breweries Plc | 21,618,849 | |||||||||
100,000 | SSL International Plc | 552,917 | |||||||||
287,875 | Standard Chartered Plc | 7,210,191 | |||||||||
2,967,000 | Standard Life Assurance Plc * | 14,857,702 | |||||||||
2,150,177 | Tesco Plc | 15,452,562 | |||||||||
226,228 | TI Automotive Ltd Class A * (b) | — | |||||||||
948,246 | Tomkins Plc | 5,141,183 | |||||||||
246,525 | Travis Perkins Plc | 7,912,560 | |||||||||
340,847 | Trinity Mirror Plc | 2,956,992 | |||||||||
628,349 | Unilever Plc | 15,021,619 | |||||||||
901,112 | United Utilities Plc | 11,787,630 | |||||||||
377,082 | Viridian Group Plc | 7,190,384 | |||||||||
28,893,583 | Vodafone Group Inc | 62,617,876 | |||||||||
263,056 | Whitbread Plc | 6,132,924 | |||||||||
1,251,036 | William Morrison Supermarkets Plc | 5,271,920 | |||||||||
652,021 | Wolseley Plc | 14,199,186 | |||||||||
2,291,250 | Wood Group (John) Plc | 9,983,499 | |||||||||
804,400 | WPP Group Plc | 9,802,354 | |||||||||
1,897,035,068 | |||||||||||
TOTAL COMMON STOCKS (COST $5,562,119,520) | 7,750,803,908 | ||||||||||
PREFERRED STOCKS — 1.1% | |||||||||||
Brazil — 0.2% | |||||||||||
1,518,000 | Randon Participacoes SA 4.75% | 4,828,713 | |||||||||
602,400 | Suzano Bahia Sul Papel e Celulose SA * | 3,666,660 | |||||||||
388,000 | Tam SA 0.30% | 12,032,705 | |||||||||
20,528,078 |
See accompanying notes to the financial statements.
16
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
France — 0.0% | |||||||||||
24,058 | Casino Guichard-Perrachon SA 3.86% | 1,672,483 | |||||||||
Germany — 0.8% | |||||||||||
257,290 | Henkel KGaA 1.34% | 32,848,624 | |||||||||
570,899 | Volkswagen AG 2.70% | 32,241,090 | |||||||||
65,089,714 | |||||||||||
Italy — 0.1% | |||||||||||
199,733 | Fiat SPA * | 2,382,982 | |||||||||
92,571 | IFI Istituto Finanziario Industries * | 2,216,952 | |||||||||
4,599,934 | |||||||||||
TOTAL PREFERRED STOCKS (COST $57,837,027) | 91,890,209 | ||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Switzerland — 0.0% | |||||||||||
31,330 | Swisscom AG Warrants, expires 09/13/06 * | 79,671 | |||||||||
Thailand — 0.0% | |||||||||||
2,759,833 | Sino Thai Engineering & Construction Pcl Warrants, Expires 04/18/08 * (b) | 18,115 | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $272,625) | 97,786 | ||||||||||
SHORT-TERM INVESTMENTS — 3.9% | |||||||||||
162,615,231 | Boston Global Investment Trust-Enhanced Portfolio (d) | 162,615,231 | |||||||||
158,700,000 | Rabobank Time Deposit, 5.28%, due 09/01/06 | 158,700,000 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $321,315,231) | 321,315,231 | ||||||||||
TOTAL INVESTMENTS — 99.4% (Cost $5,941,544,403) | 8,164,107,134 | ||||||||||
Other Assets and Liabilities (net) — 0.6% | 49,268,663 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 8,213,375,797 |
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)
August 31, 2006 (Unaudited)
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
* 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) All or a portion of this security represents investment of security lending collateral (Note 2).
As of August 31, 2006, 92.5% of the Net Assets of the Fund were valued using fair value prices based on models used 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 — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $153,335,233 (cost $5,941,544,403) (Note 2) | $ | 8,164,107,134 | |||||
Cash | 11,865 | ||||||
Foreign currency, at value (cost $195,052,971) (Note 2) | 196,257,052 | ||||||
Receivable for investments sold | 7,334,204 | ||||||
Receivable for Fund shares sold | 23,254,042 | ||||||
Dividends and interest receivable | 21,077,395 | ||||||
Foreign taxes receivable | 2,324,318 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 288,207 | ||||||
Total assets | 8,414,654,217 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 162,615,231 | ||||||
Payable for investments purchased | 12,968,159 | ||||||
Payable for Fund shares repurchased | 20,067,213 | ||||||
Accrued capital gain and repatriation taxes payable (Note 2) | 96,587 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 4,111,128 | ||||||
Shareholder service fee | 941,186 | ||||||
Administration fee – Class M | 1,149 | ||||||
Trustees and Chief Compliance Officer fees | 13,851 | ||||||
Payable for 12b-1 fee – Class M | 2,793 | ||||||
Accrued expenses | 461,123 | ||||||
Total liabilities | 201,278,420 | ||||||
Net assets | $ | 8,213,375,797 |
See accompanying notes to the financial statements.
19
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 5,672,884,597 | |||||
Accumulated undistributed net investment income | 80,218,306 | ||||||
Accumulated net realized gain | 236,524,534 | ||||||
Net unrealized appreciation | 2,223,748,360 | ||||||
$ | 8,213,375,797 | ||||||
Net assets attributable to: | |||||||
Class II shares | $ | 1,102,521,986 | |||||
Class III shares | $ | 4,108,847,413 | |||||
Class IV shares | $ | 2,994,929,062 | |||||
Class M shares | $ | 7,077,336 | |||||
Shares outstanding: | |||||||
Class II | 63,354,018 | ||||||
Class III | 235,141,629 | ||||||
Class IV | 171,317,941 | ||||||
Class M | 405,654 | ||||||
Net asset value per share: | |||||||
Class II | $ | 17.40 | |||||
Class III | $ | 17.47 | |||||
Class IV | $ | 17.48 | |||||
Class M | $ | 17.45 |
See accompanying notes to the financial statements.
20
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $13,706,080) | $ | 153,479,207 | |||||
Interest (including securities lending income of $4,197,281) | 7,783,416 | ||||||
Total investment income | 161,262,623 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 22,870,923 | ||||||
Shareholder service fee – Class II (Note 3) | 1,310,079 | ||||||
Shareholder service fee – Class III (Note 3) | 2,968,173 | ||||||
Shareholder service fee – Class IV (Note 3) | 1,110,926 | ||||||
12b-1 fee – Class M (Note 3) | 7,962 | ||||||
Administration fee – Class M (Note 3) | 6,370 | ||||||
Custodian and fund accounting agent fees | 1,448,724 | ||||||
Transfer agent fees | 38,548 | ||||||
Audit and tax fees | 41,400 | ||||||
Legal fees | 72,742 | ||||||
Trustees fees and related expenses (Note 3) | 58,928 | ||||||
Registration fees | 20,516 | ||||||
Miscellaneous | 71,208 | ||||||
Total expenses | 30,026,499 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (1,667,684 | ) | |||||
Net expenses | 28,358,815 | ||||||
Net investment income (loss) | 132,903,808 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of foreign capital gains tax and CPMF tax of $187,626 and $26,903, respectively) (Note 2) | 232,023,854 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 9,017,025 | ||||||
Net realized gain (loss) | 241,040,879 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments (net of foreign capital gains tax accrual of $267,184) (Note 2) | 171,438,493 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 2,155,705 | ||||||
Net unrealized gain (loss) | 173,594,198 | ||||||
Net realized and unrealized gain (loss) | 414,635,077 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 547,538,885 |
See accompanying notes to the financial statements.
21
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 132,903,808 | $ | 118,738,814 | |||||||
Net realized gain (loss) | 241,040,879 | 394,594,748 | |||||||||
Change in net unrealized appreciation (depreciation) | 173,594,198 | 625,048,659 | |||||||||
Net increase (decrease) in net assets from operations | 547,538,885 | 1,138,382,221 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class II | (3,002,150 | ) | (21,424,856 | ) | |||||||
Class III | (10,242,938 | ) | (83,505,010 | ) | |||||||
Class IV | (7,417,956 | ) | (28,114,634 | ) | |||||||
Class M | (15,251 | ) | (87,274 | ) | |||||||
Total distributions from net investment income | (20,678,295 | ) | (133,131,774 | ) | |||||||
Net realized gains | |||||||||||
Class II | (30,221,643 | ) | (54,410,141 | ) | |||||||
Class III | (98,724,488 | ) | (212,547,994 | ) | |||||||
Class IV | (67,206,681 | ) | (65,893,966 | ) | |||||||
Class M | (168,502 | ) | (237,365 | ) | |||||||
Total distributions from net realized gains | (196,321,314 | ) | (333,089,466 | ) | |||||||
(216,999,609 | ) | (466,221,240 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class II | (177,564,776 | ) | 293,352,728 | ||||||||
Class III | 109,037,069 | (282,786,170 | ) | ||||||||
Class IV | 923,729,130 | 697,266,022 | |||||||||
Class M | 1,151,379 | 1,658,096 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 856,352,802 | 709,490,676 | |||||||||
Total increase (decrease) in net assets | 1,186,892,078 | 1,381,651,657 | |||||||||
Net assets: | |||||||||||
Beginning of period | 7,026,483,719 | 5,644,832,062 | |||||||||
End of period (including accumulated undistributed net investment income of $80,218,306 and distributions in excess of net investment income of $32,007,207, respectively) | $ | 8,213,375,797 | $ | 7,026,483,719 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.70 | $ | 15.13 | $ | 13.29 | $ | 8.88 | $ | 9.94 | $ | 11.21 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a) | 0.30 | 0.28 | 0.26 | 0.17 | 0.15 | 0.16 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.90 | 2.46 | 2.28 | 4.46 | (1.03 | ) | (1.20 | ) | |||||||||||||||||||
Total from investment operations | 1.20 | 2.74 | 2.54 | 4.63 | (0.88 | ) | (1.04 | ) | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.05 | ) | (0.33 | ) | (0.34 | ) | (0.22 | ) | (0.18 | ) | (0.11 | ) | |||||||||||||||
From net realized gains | (0.45 | ) | (0.84 | ) | (0.36 | ) | — | — | (0.12 | ) | |||||||||||||||||
Total distributions | (0.50 | ) | (1.17 | ) | (0.70 | ) | (0.22 | ) | (0.18 | ) | (0.23 | ) | |||||||||||||||
Net asset value, end of period | $ | 17.40 | $ | 16.70 | $ | 15.13 | $ | 13.29 | $ | 8.88 | $ | 9.94 | |||||||||||||||
Total Return(b) | 7.28 | %** | 19.01 | % | 19.40 | % | 52.49 | % | (9.00 | )% | (9.37 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,102,522 | $ | 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 | % | 0.82 | % | |||||||||||||||
Net investment income to average daily net assets | 3.46 | %* | 1.82 | % | 1.92 | % | 1.47 | % | 1.54 | % | 1.56 | % | |||||||||||||||
Portfolio turnover rate | 11 | %** | 25 | % | 23 | % | 25 | % | 22 | % | 22 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* | 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
23
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.76 | $ | 15.18 | $ | 13.34 | $ | 8.90 | $ | 9.95 | $ | 11.22 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a) | 0.31 | 0.30 | 0.26 | 0.19 | 0.17 | 0.19 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.90 | 2.45 | 2.30 | 4.47 | (1.04 | ) | (1.23 | ) | |||||||||||||||||||
Total from investment operations | 1.21 | 2.75 | 2.56 | 4.66 | (0.87 | ) | (1.04 | ) | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.05 | ) | (0.33 | ) | (0.36 | ) | (0.22 | ) | (0.18 | ) | (0.11 | ) | |||||||||||||||
From net realized gains | (0.45 | ) | (0.84 | ) | (0.36 | ) | — | — | (0.12 | ) | |||||||||||||||||
Total distributions | (0.50 | ) | (1.17 | ) | (0.72 | ) | (0.22 | ) | (0.18 | ) | (0.23 | ) | |||||||||||||||
Net asset value, end of period | $ | 17.47 | $ | 16.76 | $ | 15.18 | $ | 13.34 | $ | 8.90 | $ | 9.95 | |||||||||||||||
Total Return(b) | 7.32 | %** | 19.07 | % | 19.41 | % | 52.76 | % | (8.89 | )% | (9.33 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 4,108,847 | $ | 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 | % | 0.75 | % | |||||||||||||||
Net investment income to average daily net assets | 3.52 | %* | 1.97 | % | 1.87 | % | 1.67 | % | 1.77 | % | 1.88 | % | |||||||||||||||
Portfolio turnover rate | 11 | %** | 25 | % | 23 | % | 25 | % | 22 | % | 22 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* | 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
24
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.77 | $ | 15.18 | $ | 13.34 | $ | 8.90 | $ | 9.96 | $ | 11.22 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a) | 0.30 | 0.31 | 0.28 | 0.19 | 0.18 | 0.20 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.91 | 2.47 | 2.28 | 4.48 | (1.05 | ) | (1.22 | ) | |||||||||||||||||||
Total from investment operations | 1.21 | 2.78 | 2.56 | 4.67 | (0.87 | ) | (1.02 | ) | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.05 | ) | (0.35 | ) | (0.36 | ) | (0.23 | ) | (0.19 | ) | (0.12 | ) | |||||||||||||||
From net realized gains | (0.45 | ) | (0.84 | ) | (0.36 | ) | — | — | (0.12 | ) | |||||||||||||||||
Total distributions | (0.50 | ) | (1.19 | ) | (0.72 | ) | (0.23 | ) | (0.19 | ) | (0.24 | ) | |||||||||||||||
Net asset value, end of period | $ | 17.48 | $ | 16.77 | $ | 15.18 | $ | 13.34 | $ | 8.90 | $ | 9.96 | |||||||||||||||
Total Return(b) | 7.34 | %** | 19.22 | % | 19.47 | % | 52.84 | % | (8.92 | )% | (9.19 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 2,994,929 | $ | 2,007,037 | $ | 1,169,805 | $ | 923,221 | $ | 207,858 | $ | 134,357 | |||||||||||||||
Net expenses to average daily net assets | 0.69 | %* | 0.69 | % | 0.69 | % | 0.70 | % | 0.69 | % | 0.69 | % | |||||||||||||||
Net investment income to average daily net assets | 3.44 | %* | 1.98 | % | 2.00 | % | 1.65 | % | 1.79 | % | 1.97 | % | |||||||||||||||
Portfolio turnover rate | 11 | %** | 25 | % | 23 | % | 25 | % | 22 | % | 22 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* | 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
25
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class M share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002† | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.75 | $ | 15.19 | $ | 13.25 | $ | 8.86 | $ | 9.93 | $ | 9.85 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a) | 0.27 | 0.24 | 0.30 | 0.14 | 0.05 | 0.00 | (b) | ||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.92 | 2.46 | 2.21 | 4.45 | (0.93 | ) | 0.08 | ||||||||||||||||||||
Total from investment operations | 1.19 | 2.70 | 2.51 | 4.59 | (0.88 | ) | 0.08 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.04 | ) | (0.30 | ) | (0.21 | ) | (0.20 | ) | (0.19 | ) | — | ||||||||||||||||
From net realized gains | (0.45 | ) | (0.84 | ) | (0.36 | ) | — | — | — | ||||||||||||||||||
Total distributions | (0.49 | ) | (1.14 | ) | (0.57 | ) | (0.20 | ) | (0.19 | ) | — | ||||||||||||||||
Net asset value, end of period | $ | 17.45 | $ | 16.75 | $ | 15.19 | $ | 13.25 | $ | 8.86 | $ | 9.93 | |||||||||||||||
Total Return(c) | 7.23 | %** | 18.66 | % | 19.18 | % | 52.10 | % | (9.09 | )% | 0.81 | %** | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 7,077 | $ | 5,673 | $ | 3,508 | $ | 12,878 | $ | 4,449 | $ | 1 | |||||||||||||||
Net expenses to average daily net assets | 1.05 | %* | 1.05 | % | 1.05 | % | 1.05 | % | 1.06 | % | 1.05 | %* | |||||||||||||||
Net investment income to average daily net assets | 3.16 | %* | 1.56 | % | 2.24 | % | 1.23 | % | 0.55 | % | 0.35 | %* | |||||||||||||||
Portfolio turnover rate | 11 | %** | 25 | % | 23 | % | 25 | % | 22 | % | 22 | %†† | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* | 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
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its investment objective by outperforming the MSCI EAFE Index (Europe, Australasia, and Far East). The Fund typically makes equity investments in non-U.S. companies, including the companies that issue stocks included in the MSCI international developed country universe (the universe of securities from which the MSCI EAFE Index is constructed) and companies in emerging countries. The Fund generally seeks to be fully invested and generally will not take temporary defensive positions, but may hold up to 10% of its total assets in cash and other high quality investments in order to manage cash inflows and outflows as a result of shareholder purchases and redemptions. The Fund may make investments in emerging countries, but these investments generally will represent 10% or less of the Fund's total assets.
Throughout the six months ended August 31, 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.
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 generally valued at the most recent quoted bid price. Short-term
27
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 pursuant to procedures approved by the Trustees. 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 are generally valued by a third party vendor using fair value prices based on models 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 including 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 lo ss 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. There were no forward currency contracts outstanding at the end of the period.
28
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. There were no futures contracts outstanding at the end of the period.
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
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
29
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no purchased option contracts outstanding at the end of the period.
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. 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 party 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 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
30
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
may be unfavorable changes in interest rates or the price of the index or security underlying these transactions. There were no swap agreements outstanding at the end of the period.
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 August 31, 2006, the Fund had loaned securities having a market value of $153,335,233, collateralized by cash in the amount of $162,615,231, which was invested in the Boston Global Investment Trust – Enhanced Portfolio.
Taxes and distributions
The Fund intends to qualify each tax 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 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. The Fund has recorded a deferred tax liability in respect of unrealized appreciation on foreign securities of $96,587 for potential capital gains and repatriation taxes as of August 31, 2006. The accrual for capital gains and repatriation taxes is included in net unrealized gain (loss) in the Statement of
31
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Operations. For the six months ended August 31, 2006, the Fund incurred $187,626 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. The CPMF tax has been included in the net realized gain (loss) on investments throughout the period. For the six months ended August 31, 2006, the Fund incurred $26,903 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.
As of August 31, 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) | ||||||||||||
$ | 5,945,352,923 | $ | 2,285,832,152 | $ | (67,077,941 | ) | $ | 2,218,754,211 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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
32
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 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 U.S. 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 up to 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 on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees
33
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
(Classes II, III, and IV only), 12b-1 and administration fees (Class M only), fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $39,240 and $21,252, respectively. No remuneration is paid by the Fund 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 six months ended August 31, 2006 aggregated $1,551,123,228 and $788,388,012, 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 August 31, 2006, less than 0.1% of the Fund's shares were held by fifteen related parties comprised of certain GMO employee accounts, and 0.5% of the Fund's shares were held by accounts for which the Manager has investment discretion.
34
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class II: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 10,772,338 | $ | 182,577,818 | 20,435,753 | $ | 315,944,888 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,838,330 | 30,920,713 | 4,621,131 | 70,186,396 | |||||||||||||||
Shares repurchased | (21,925,005 | ) | (391,063,307 | ) | (5,804,846 | ) | (92,778,556 | ) | |||||||||||
Net increase (decrease) | (9,314,337 | ) | $ | (177,564,776 | ) | 19,252,038 | $ | 293,352,728 | |||||||||||
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 44,547,391 | $ | 784,410,480 | 54,877,217 | $ | 816,011,668 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 6,070,818 | 102,536,116 | 16,054,197 | 244,024,637 | |||||||||||||||
Shares repurchased | (42,213,243 | ) | (777,909,527 | ) | (85,541,651 | ) | (1,342,822,475 | ) | |||||||||||
Net increase (decrease) | 8,404,966 | $ | 109,037,069 | (14,610,237 | ) | $ | (282,786,170 | ) | |||||||||||
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 49,266,133 | $ | 885,332,178 | 49,623,322 | $ | 800,078,517 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 4,150,039 | 70,094,172 | 5,715,726 | 87,337,578 | |||||||||||||||
Shares repurchased | (1,802,278 | ) | (31,697,220 | ) | (12,672,320 | ) | (190,150,073 | ) | |||||||||||
Net increase (decrease) | 51,613,894 | $ | 923,729,130 | 42,666,728 | $ | 697,266,022 |
35
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 69,124 | $ | 1,191,346 | 129,243 | $ | 1,984,452 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 10,892 | 183,753 | 21,242 | 324,639 | |||||||||||||||
Shares repurchased | (12,941 | ) | (223,720 | ) | (42,894 | ) | (650,995 | ) | |||||||||||
Net increase (decrease) | 67,075 | $ | 1,151,379 | 107,591 | $ | 1,658,096 |
36
GMO Foreign Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Foreign Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to
37
GMO Foreign Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manag er to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
38
GMO Foreign Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
39
GMO Foreign Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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.
40
GMO Foreign Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 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 | $ | 1,072.80 | $ | 4.28 | |||||||||||
2) Hypothetical | 0.82 | % | $ | 1,000.00 | $ | 1,021.07 | $ | 4.18 | |||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.75 | % | $ | 1,000.00 | $ | 1,073.20 | $ | 3.92 | |||||||||||
2) Hypothetical | 0.75 | % | $ | 1,000.00 | $ | 1,021.42 | $ | 3.82 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.69 | % | $ | 1,000.00 | $ | 1,073.40 | $ | 3.61 | |||||||||||
2) Hypothetical | 0.69 | % | $ | 1,000.00 | $ | 1,021.73 | $ | 3.52 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 1.05 | % | $ | 1,000.00 | $ | 1,072.30 | $ | 5.48 | |||||||||||
2) Hypothetical | 1.05 | % | $ | 1,000.00 | $ | 1,019.91 | $ | 5.35 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
41
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 97.9 | % | |||||
Short-Term Investments | 2.0 | ||||||
Futures | 0.7 | ||||||
Forward Currency Contracts | 0.4 | ||||||
Loan Assignments | 0.2 | ||||||
Loan Participations | 0.2 | ||||||
Call Options Purchased | 0.1 | ||||||
Promissory Notes | 0.0 | ||||||
Put Options Purchased | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | 0.0 | ||||||
Swaps | (0.3 | ) | |||||
Reverse Repurchase Agreements | (1.0 | ) | |||||
Other | (0.2 | ) | |||||
100.0 | % | ||||||
Country Summary** | % of Investments | ||||||
Euro Region*** | 87.3 | % | |||||
Sweden | 22.9 | ||||||
Australia | 20.7 | ||||||
United Kingdom | 13.1 | ||||||
Canada | (3.7 | ) | |||||
Japan | (13.7 | ) | |||||
United States | (26.6 | ) | |||||
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. The table excludes short-term investments and any investment in the underlying fund(s) that are less than 3% of invested assets. The table includes exposure through the use 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)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 4.3% | |||||||||||
United States — 4.3% | |||||||||||
U.S. Government | |||||||||||
18,556,800 | U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (a) (b) | 19,171,494 | |||||||||
5,000,000 | U.S. Treasury Note, 3.75%, due 03/31/07 (b) | 4,960,156 | |||||||||
Total United States | 24,131,650 | ||||||||||
TOTAL DEBT OBLIGATIONS (COST $24,590,043) | 24,131,650 | ||||||||||
MUTUAL FUNDS — 95.3% | |||||||||||
Affiliated Issuers — 95.3% | |||||||||||
1,534,176 | GMO Emerging Country Debt Fund, Class III | 17,090,718 | |||||||||
15,658,667 | GMO Short-Duration Collateral Fund | 407,751,678 | |||||||||
5,496 | GMO Special Purpose Holding Fund (c) | 26,709 | |||||||||
4,425,067 | GMO World Opportunity Overlay Fund | 112,573,704 | |||||||||
TOTAL MUTUAL FUNDS (COST $530,082,589) | 537,442,809 | ||||||||||
SHORT-TERM INVESTMENTS — 0.3% | |||||||||||
Money Market Funds — 0.3% | |||||||||||
1,683,739 | Merrimac Cash Series-Premium Class | 1,683,739 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $1,683,739) | 1,683,739 | ||||||||||
TOTAL INVESTMENTS — 99.9% (Cost $556,356,371) | 563,258,198 | ||||||||||
Other Assets and Liabilities (net) — 0.1% | 825,494 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 564,083,692 |
See accompanying notes to the financial statements.
2
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
10/24/06 | AUD | 87,000,000 | $ | 66,360,555 | $ | 236,335 | |||||||||||||
9/19/06 | CHF | 52,600,000 | 42,796,843 | 15,289 | |||||||||||||||
9/26/06 | EUR | 7,300,000 | 9,364,556 | 31,211 | |||||||||||||||
9/12/06 | GBP | 39,600,000 | 75,407,774 | 1,277,918 | |||||||||||||||
10/10/06 | JPY | 2,260,000,000 | 19,344,212 | (457,415 | ) | ||||||||||||||
10/03/06 | NZD | 43,000,000 | 28,131,063 | 1,196,255 | |||||||||||||||
$ | 2,299,593 | ||||||||||||||||||
Sales | |||||||||||||||||||
10/24/06 | AUD | 14,200,000 | $ | 10,831,263 | $ | (49,193 | ) | ||||||||||||
10/31/06 | CAD | 11,200,000 | 10,151,147 | (52,775 | ) | ||||||||||||||
9/19/06 | CHF | 118,200,000 | 96,170,853 | (44,512 | ) | ||||||||||||||
9/26/06 | EUR | 36,300,000 | 46,566,218 | (81,736 | ) | ||||||||||||||
9/12/06 | GBP | 1,800,000 | 3,427,626 | (106,230 | ) | ||||||||||||||
10/10/06 | JPY | 12,450,000,000 | 106,564,353 | 1,140,412 | |||||||||||||||
10/03/06 | NZD | 3,600,000 | 2,355,159 | (139,719 | ) | ||||||||||||||
9/05/06 | SEK | 1,819 | 251 | 1 | |||||||||||||||
$ | 666,248 |
Forward Cross Currency Contracts
Settlement Date | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | ||||||||||||
9/05/06 | EUR | 22,600,000 | SEK | 208,595,550 | $ | (169,485 | ) | ||||||||
9/05/06 | SEK | 208,593,731 | EUR | 22,600,000 | 169,736 | ||||||||||
10/17/06 | EUR | 28,700,000 | NOK | 226,429,081 | (952,720 | ) | |||||||||
10/17/06 | NOK | 120,181,070 | EUR | 15,100,000 | 334,833 | ||||||||||
11/07/06 | EUR | 10,800,000 | SEK | 99,832,500 | (45,695 | ) | |||||||||
$ | (663,331 | ) |
See accompanying notes to the financial statements.
3
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
509 | Australian Government Bond 10 Yr. | September 2006 | $ | 39,830,849 | $ | 371,353 | |||||||||||||
892 | Australian Government Bond 3 Yr. | September 2006 | 68,492,931 | 116,395 | |||||||||||||||
998 | Euro BOBL | September 2006 | 141,220,011 | 912,797 | |||||||||||||||
1,946 | Euro Bund | September 2006 | 294,861,043 | 4,614,032 | |||||||||||||||
2 | Japanese Government Bond 10 Yr. (LIF) | September 2006 | 2,301,802 | (554 | ) | ||||||||||||||
412 | UK Gilt Long Bond | December 2006 | 86,424,906 | 251,988 | |||||||||||||||
$ | 6,266,011 | ||||||||||||||||||
Sales | |||||||||||||||||||
189 | Canadian Government Bond 10 Yr. | December 2006 | $ | 19,517,289 | $ | (138,566 | ) | ||||||||||||
380 | Federal Fund 30 day | September 2006 | 150,017,000 | (1,330 | ) | ||||||||||||||
57 | Japanese Government Bond 10 Yr. (TSE) | September 2006 | 65,538,226 | (1,405,506 | ) | ||||||||||||||
333 | U.S. Long Bond | December 2006 | 36,983,813 | (193,682 | ) | ||||||||||||||
380 | U.S. Treasury Note 10 Yr. | December 2006 | 40,802,500 | (129,518 | ) | ||||||||||||||
650 | U.S. Treasury Note 2 Yr. | December 2006 | 132,823,438 | (217,920 | ) | ||||||||||||||
208 | U.S. Treasury Note 5 Yr. | December 2006 | 21,862,750 | (53,703 | ) | ||||||||||||||
$ | (2,140,225 | ) |
As of August 31, 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.
4
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Swap Agreements
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
51,000,000 | SEK | 9/20/2008 | Deutsche Bank AG | Receive | 3.20 | % | 3 month SEK STIBOR | $ | (58,200 | ) | |||||||||||||||||||||
191,000,000 | SEK | 9/20/2008 | JP Morgan Chase Bank | Receive | 3.20 | % | 3 month SEK STIBOR | (217,966 | ) | ||||||||||||||||||||||
25,000,000 | SEK | 9/20/2011 | Citigroup | Receive | 3.60 | % | 3 month SEK STIBOR | (49,584 | ) | ||||||||||||||||||||||
7,000,000 | SEK | 9/20/2011 | Deutsche Bank AG | Receive | 3.60 | % | 3 month SEK STIBOR | (13,884 | ) | ||||||||||||||||||||||
231,000,000 | SEK | 9/20/2011 | JP Morgan Chase Bank | Receive | 3.60 | % | 3 month SEK STIBOR | (458,161 | ) | ||||||||||||||||||||||
158,000,000 | SEK | 9/20/2013 | JP Morgan Chase Bank | Receive | 3.70 | % | 3 month SEK STIBOR | (428,147 | ) | ||||||||||||||||||||||
136,000,000 | SEK | 9/20/2016 | Deutsche Bank AG | Receive | 3.75 | % | 3 month SEK STIBOR | (559,405 | ) | ||||||||||||||||||||||
80,000,000 | SEK | 9/20/2016 | JP Morgan Chase Bank | Receive | 3.75 | % | 3 month SEK STIBOR | (329,062 | ) | ||||||||||||||||||||||
$ | (2,114,409 | ) |
Notes to Schedule of Investments:
STIBOR - Stockholm Interbank Offered Rate
(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 collateral on open swap contracts (Note 2).
(c) Security valued at fair value using methods determined in good faith by or at the discretion of the Trustees of GMO Trust (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 | ||||||
See accompanying notes to the financial statements.
5
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value, (cost $26,273,782) (Note 2) | $ | 25,815,389 | |||||
Investments in affiliated issuers, at value (cost $530,082,589) (Notes 2 and 8) | 537,442,809 | ||||||
Interest receivable | 179,670 | ||||||
Unrealized appreciation on open forward currency and cross currency contracts (Note 2) | 4,401,990 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 820,854 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 44,121 | ||||||
Total assets | 568,704,833 | ||||||
Liabilities: | |||||||
Foreign currency due to custodian | 75,552 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 119,629 | ||||||
Shareholder service fee | 71,778 | ||||||
Trustees and Chief Compliance Officer fees | 1,588 | ||||||
Unrealized depreciation on open forward currency and cross currency contracts (Note 2) | 2,099,480 | ||||||
Payable for open swap contracts (Note 2) | 2,114,409 | ||||||
Accrued expenses | 138,705 | ||||||
Total liabilities | 4,621,141 | ||||||
Net assets | $ | 564,083,692 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 576,867,631 | |||||
Distributions in excess of net investment income | (17,158,582 | ) | |||||
Accumulated net realized loss | (6,968,623 | ) | |||||
Net unrealized appreciation | 11,343,266 | ||||||
$ | 564,083,692 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 564,083,692 | |||||
Shares outstanding: | |||||||
Class III | 61,679,035 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.15 |
See accompanying notes to the financial statements.
6
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 4,803,935 | |||||
Interest | 883,252 | ||||||
Total investment income | 5,687,187 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 940,497 | ||||||
Shareholder service fee – Class III (Note 3) | 564,298 | ||||||
Custodian, fund accounting agent and transfer agent fees | 173,420 | ||||||
Audit and tax fees | 35,236 | ||||||
Legal fees | 9,568 | ||||||
Trustees fees and related expenses (Note 3) | 7,242 | ||||||
Registration fees | 1,288 | ||||||
Miscellaneous | 6,623 | ||||||
Total expenses | 1,738,172 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (223,008 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (47,282 | ) | |||||
Shareholder service fee waived – (Note 3) | (17,127 | ) | |||||
Net expenses | 1,450,755 | ||||||
Net investment income (loss) | 4,236,432 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 7,449,633 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 739,498 | ||||||
Closed futures contracts | (20,684,878 | ) | |||||
Closed swap contracts | (444,107 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 1,335,263 | ||||||
Net realized gain (loss) | (11,604,591 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 1,756,496 | ||||||
Open futures contracts | 8,850,678 | ||||||
Open swap contracts | (2,665,103 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 165,403 | ||||||
Net unrealized gain (loss) | 8,107,474 | ||||||
Net realized and unrealized gain (loss) | (3,497,117 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | 739,315 |
See accompanying notes to the financial statements.
7
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 4,236,432 | $ | 20,505,017 | |||||||
Net realized gain (loss) | (11,604,591 | ) | 46,367,143 | ||||||||
Change in net unrealized appreciation (depreciation) | 8,107,474 | (3,585,183 | ) | ||||||||
Net increase (decrease) in net assets from operations | 739,315 | 63,286,977 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (105,683,069 | ) | ||||||||
Net realized gains | |||||||||||
Class III | — | (12,456,548 | ) | ||||||||
— | (118,139,617 | ) | |||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (390,550,068 | ) | (6,261,661 | ) | |||||||
Total increase (decrease) in net assets | (389,810,753 | ) | (61,114,301 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 953,894,445 | 1,015,008,746 | |||||||||
End of period (including distributions in excess of net investment income of $17,158,582 and $21,395,014, respectively) | $ | 564,083,692 | $ | 953,894,445 |
See accompanying notes to the financial statements.
8
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 9.04 | $ | 9.59 | $ | 9.16 | $ | 8.85 | $ | 9.04 | $ | 9.72 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.05 | 0.18 | 0.14 | 0.06 | 0.09 | 0.50 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.06 | 0.39 | 0.44 | 0.76 | 0.32 | (0.13 | ) | ||||||||||||||||||||
Total from investment operations | 0.11 | 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 | $ | 9.15 | $ | 9.04 | $ | 9.59 | $ | 9.16 | $ | 8.85 | $ | 9.04 | |||||||||||||||
Total Return(b) | 1.22 | %** | 6.01 | % | 6.35 | % | 9.53 | % | 4.81 | % | 4.21 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 564,084 | $ | 953,894 | $ | 1,015,009 | $ | 222,872 | $ | 20,219 | $ | 17,932 | |||||||||||||||
Net expenses to average daily net assets(c) | 0.39 | %* | 0.39 | % | 0.39 | % | 0.38 | % | 0.40 | % | 0.38 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 1.13 | %* | 1.91 | % | 1.51 | % | 0.68 | % | 0.97 | % | 5.45 | % | |||||||||||||||
Portfolio turnover rate | 11 | %** | 49 | % | 44 | % | 36 | % | 66 | % | 44 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.08 | %* | 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 the 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
9
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks total return in excess of the JPMorgan Non-U.S. Government Bond Index (Hedged) (ex-Japan). The Fund typically invests in fixed income securities included in the JPMorgan Non-U.S. Government Bond Index (Hedged) (ex-Japan) and in securities with similar characteristics. The Fund seeks additional returns by investing in global interest rate, currency, and emerging country debt markets. The Fund may invest in or use investment-grade bonds denominated in various currencies; shares of GMO Short-Duration Collateral Fund; shares of GMO World Opportunity Overlay Fund; futures contracts, currency forwards, swap contracts, and other types of derivatives; and sovereign debt of emerging countries, primarily through investment in shares of GMO Emerging Country Debt Fund (limited to 5% of the Fund's total assets). GMO generally attempts to hedge at least 75% of the Fund's net foreign currency exposure back to the U.S. dollar.
The financial statements of the series 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, 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 generally 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
10
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 pursuant to procedures approved by the Trustees.
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 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. As of August 31, 2006, the total value of these securities represented 38.2% 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 April of 2006, SPHF entered into a settlement agreement with a defendant and the Fund received $190,807 indirectly in conjunction with that settlement. The outcome of the remaining lawsuits against the 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 including 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
11
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may write call and put options. 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 t he 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
12
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
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. There were no loan agreements outstanding at the end of the period.
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. Indexed securities held by the Fund at the end of the period are listed in the Fund's Schedule of Investments.
13
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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. Credit default swaps may be used to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where a party 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. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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
14
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no repurchase agreements outstanding at the end of the period.
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. There were no reverse repurchase agreements outstanding at the end of the period.
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 six months ended A ugust 31, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each tax 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.
15
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP.
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 August 31, 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) | ||||||||||||
$ | 556,418,130 | $ | 7,298,461 | $ | (458,393 | ) | $ | 6,840,068 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
16
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 the 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 U.S. 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 Manager will waive the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by the Fund exceeds 0.15%; provided, however, that the amount of this waiver will not exceed 0.15%.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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, "Excluded Fund Fees and Expenses")) exceed 0.25% of the Fund's average daily net assets. In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2007 to the extent that the sum of (a) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses) and (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in ECDF (excluding ECDF's fees and expenses of the independent trustees of the Trust, fees expenses for legal services not procured or provided
17
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
by the Manager for the Trust, compensation and expenses of the Trust's CCO (excluding any employee benefits), and investment-related expenses such as brokerage commissions, hedging transaction fees, securities lending fees and expenses, interest expense and transfer taxes), exceeds 0.25% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.25% 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 six months ended August 31, 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 | ||||||||||||
0.015 | % | 0.004 | % | 0.019 | % | 0.038 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $4,666 and $2,576, respectively. No remuneration is paid by the Fund 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 six months ended August 31, 2006 were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | — | $ | — | |||||||
Investments (non-U.S. Government securities) | 83,320,576 | 480,408,566 |
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.
18
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
6. Principal shareholders and related party
As of August 31, 2006, 74.3% 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 August 31, 2006, less than 0.1% of the Fund's shares were held by one related party comprised of a certain GMO employee account, and 95.8% 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,278,439 | $ | 11,411,390 | 28,576,178 | $ | 279,566,401 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 11,745,209 | 108,299,908 | |||||||||||||||
Shares repurchased | (45,160,820 | ) | (401,961,458 | ) | (40,553,773 | ) | (394,127,970 | ) | |||||||||||
Net increase (decrease) | (43,882,381 | ) | $ | (390,550,068 | ) | (232,386 | ) | $ | (6,261,661 | ) |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of affiliated issuers during the six months ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class III | $ | 29,019,205 | $ | 721,216 | $ | 12,100,000 | $ | 204,575 | $ | 516,640 | $ | 17,090,718 | |||||||||||||||
GMO Short-Duration Collateral Fund | 701,705,018 | 78,399,360 | 382,450,000 | 4,599,360 | — | 407,751,678 | |||||||||||||||||||||
GMO Special Purpose Holding Fund | 45,229 | — | — | — | 222,858 | 26,709 | |||||||||||||||||||||
GMO World Opportunity Overlay Fund | 191,497,233 | 4,200,000 | 84,925,000 | — | — | 112,573,704 | |||||||||||||||||||||
Totals | $ | 922,266,685 | $ | 83,320,576 | $ | 479,475,000 | $ | 4,803,935 | $ | 739,498 | $ | 537,442,809 |
19
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Currency Hedged International Bond Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee
20
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests, noting in particular that, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for certain of the fees and expenses (including advisory fees) that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, and concluded that the fee payable under the agreemen t appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax
21
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
22
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | $ | 1,012.20 | $ | 2.18 | |||||||||||
2) Hypothetical | 0.43 | % | $ | 1,000.00 | $ | 1,023.04 | $ | 2.19 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
23
GMO Emerging Countries Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 83.3 | % | |||||
Preferred Stocks | 12.8 | ||||||
Rights and Warrants | 0.0 | ||||||
Short-Term Investments | 3.2 | ||||||
Other | 0.7 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
South Korea | 21.2 | % | |||||
Taiwan | 15.8 | ||||||
Russia | 12.6 | ||||||
Brazil | 11.6 | ||||||
China | 9.3 | ||||||
South Africa | 7.9 | ||||||
Mexico | 5.8 | ||||||
India | 3.2 | ||||||
Malaysia | 2.5 | ||||||
Israel | 2.3 | ||||||
Thailand | 1.6 | ||||||
Poland | 1.4 | ||||||
Turkey | 1.2 | ||||||
Chile | 1.1 | ||||||
Indonesia | 1.0 | ||||||
Philippines | 0.6 | ||||||
Argentina | 0.4 | ||||||
Hungary | 0.4 | ||||||
Czech Republic | 0.1 | ||||||
100.0 | % |
1
GMO Emerging Countries Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Industry Sector Summary | % of Equity Investments | ||||||
Energy | 22.7 | % | |||||
Financials | 21.4 | ||||||
Information Technology | 16.9 | ||||||
Materials | 12.2 | ||||||
Telecommunication Services | 11.5 | ||||||
Industrials | 4.2 | ||||||
Consumer Discretionary | 4.0 | ||||||
Utilities | 3.4 | ||||||
Consumer Staples | 2.6 | ||||||
Health Care | 1.1 | ||||||
100.0 | % |
2
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 83.3% | |||||||||||
Argentina — 0.3% | |||||||||||
30,465 | Tenaris SA ADR | 1,118,370 | |||||||||
15,147 | Transportadora de Gas del Sur ADR * (a) | 75,735 | |||||||||
1,194,105 | |||||||||||
Brazil — 3.7% | |||||||||||
7,996,895 | Aes Tiete SA | 208,800 | |||||||||
29,300 | Arcelor Brasil SA | 508,377 | |||||||||
158,580 | Banco do Brasil SA | 3,550,299 | |||||||||
10,235,928 | Companhia Saneamento Basico SAO PA | 1,122,037 | |||||||||
46,838 | Companhia Siderurgica Nacional SA | 1,367,565 | |||||||||
951,600 | Compania de Bebidas das Americas | 375,052 | |||||||||
55,100 | Compania Vale do Rio Doce | 1,182,183 | |||||||||
26,878,800 | Electrobras (Centro) | 586,720 | |||||||||
9,400 | Gol-Linhas Aereas Intel | 324,484 | |||||||||
11,800 | Petroleo Brasileiro SA (Petrobras) ADR | 1,057,988 | |||||||||
51,323 | Souza Cruz SA (Registered) | 839,026 | |||||||||
29,500 | Unibanco-Uniao de Bancos Brasileiros SA GDR | 2,134,325 | |||||||||
13,256,856 | |||||||||||
Chile — 1.1% | |||||||||||
21,377 | Banco De Chile ADR | 848,239 | |||||||||
10,900 | Banco Santander Chile SA ADR | 474,804 | |||||||||
14,600 | Compania Cervecerias Unidas ADR | 362,956 | |||||||||
42,500 | Compania de Telecommunicaciones de Chile ADR | 311,950 | |||||||||
11,400 | Empresa Nacional de Electricidad SA ADR | 326,382 | |||||||||
65,000 | Enersis SA ADR | 803,400 | |||||||||
16,900 | Lan Airlines SA | 589,134 | |||||||||
10,096 | Quinenco SA ADR | 114,792 | |||||||||
3,831,657 |
See accompanying notes to the financial statements.
3
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
China — 8.9% | |||||||||||
1,422,000 | Aluminum Corp of China Ltd | 995,697 | |||||||||
2,104,000 | Bank of Communications Co Ltd | 1,323,933 | |||||||||
5,114,000 | China Construction Bank Class H | 2,214,001 | |||||||||
8,500 | China Finance Online Co ADR * | 45,900 | |||||||||
185,064 | China International Marine Containers Co Ltd Class B | 238,058 | |||||||||
622,000 | China Life Insurance Co Ltd Class H | 1,104,384 | |||||||||
1,391,364 | China Mobile Ltd * | 9,356,564 | |||||||||
12,872 | China Mobile Ltd ADR | 428,766 | |||||||||
140,000 | China Overseas Land and Investment Ltd | 96,240 | |||||||||
4,887,883 | China Petroleum & Chemical Corp Class H | 2,893,607 | |||||||||
338,000 | China Resources Enterprise Ltd | 768,474 | |||||||||
140,000 | China Shenhua Energy Co Ltd Class H | 247,429 | |||||||||
61,500 | China Telecom Corp Ltd ADR | 2,075,625 | |||||||||
1,743,400 | China Telecom Corp Ltd Class H | 587,205 | |||||||||
846,000 | CNOOC Ltd | 737,705 | |||||||||
380,000 | CNPC Hong Kong Ltd | 217,883 | |||||||||
792,890 | Denway Motors Ltd | 252,622 | |||||||||
363,000 | Foxconn International Holdings * | 958,435 | |||||||||
1,188,100 | Guangdong Investments Ltd | 460,849 | |||||||||
5,647,553 | PetroChina Co Ltd Class H | 6,339,187 | |||||||||
44,000 | Ping An Insurance Co | 143,879 | |||||||||
236,000 | Shanghai Industrial Holdings Ltd | 460,451 | |||||||||
31,946,894 | |||||||||||
Czech Republic — 0.1% | |||||||||||
3,000 | CEZ AS | 111,864 | |||||||||
800 | Komercni Banka AS | 119,846 | |||||||||
231,710 | |||||||||||
Hungary — 0.3% | |||||||||||
1,100 | Gedeon Richter Right | 234,862 | |||||||||
5,600 | MOL Magyar Olaj es Gazipari Rt (New Shares) | 568,455 | |||||||||
14,800 | OTP Bank | 428,493 | |||||||||
1,231,810 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
India — 3.1% | |||||||||||
3,900 | Bharat Electronics Ltd | 97,151 | |||||||||
41,400 | Bharti Televentures * | 365,658 | |||||||||
84,100 | HCL Technologies Ltd | 1,050,616 | |||||||||
19,600 | HDFC Bank | 358,878 | |||||||||
21,250 | Hindalco Industries Ltd | 41,714 | |||||||||
93,000 | Hindalco Industries Ltd GDR 144A | 343,780 | |||||||||
12,000 | Hindalco Industries Ltd GDR 144A (Registered Shares) (London International Exchange) | 43,800 | |||||||||
73,000 | Hindalco Industries Ltd GDR 144A (Registered Shares) (Luxembourg Exchange) * | 266,450 | |||||||||
40,700 | ICICI Bank Ltd | 519,926 | |||||||||
2,100 | ICICI Bank Ltd ADR | 56,049 | |||||||||
147,921 | Mahanagar Telephone Nigam | 498,692 | |||||||||
71,106 | Mahindra & Mahindra Ltd | 987,211 | |||||||||
58,500 | Oil & Natural Gas Corp Ltd | 1,531,301 | |||||||||
32,100 | Reliance Communication Venture * | 205,467 | |||||||||
8,677 | Reliance Energy Ltd | 81,810 | |||||||||
66,498 | Reliance Industries Ltd | 1,597,027 | |||||||||
31 | Satyam Computer Services Ltd | 539 | |||||||||
11,500 | Satyam Computer Services Ltd ADR | 438,955 | |||||||||
9,300 | Siemens India Ltd | 209,228 | |||||||||
23,400 | State Bank of India | 468,276 | |||||||||
23,494 | State Bank of India Ltd GDR | 1,151,763 | |||||||||
19,400 | Tata Consultancy Services Ltd | 415,794 | |||||||||
15,125 | Tata Motors Ltd | 274,928 | |||||||||
11,005,013 | |||||||||||
Indonesia — 1.0% | |||||||||||
236,000 | Astra International Tbk PT | 287,890 | |||||||||
2,274,000 | Bank Mandiri Persero Tbk PT | 524,980 | |||||||||
834,000 | Bank Rakyat Indonesia | 398,888 | |||||||||
103,000 | Gudang Garam Tbk PT | 114,250 | |||||||||
446,000 | Indosat Tbk PT | 216,227 | |||||||||
7,562,120 | Matahari Putra Prima Tbk PT | 631,415 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Indonesia — continued | |||||||||||
100,000 | Perusahan Gas Negara PT | 138,939 | |||||||||
908,000 | Ramayana Lestari Sentosa Tbk PT | 77,862 | |||||||||
1,178,224 | Telekomunikasi Indonesia Tbk PT | 1,026,309 | |||||||||
3,416,760 | |||||||||||
Israel — 2.2% | |||||||||||
1,400 | Africa Israel Investment Ltd | 75,269 | |||||||||
362,100 | Bank Hapoalim B.M. | 1,592,319 | |||||||||
373,900 | Bank Leumi Le | 1,332,732 | |||||||||
43,800 | Check Point Software Technologies Ltd * | 814,242 | |||||||||
0 | IDB Development Corp Ltd | 3 | |||||||||
400 | Teva Pharmaceutical Industries | 13,939 | |||||||||
102,500 | Teva Pharmaceutical Industries ADR | 3,562,900 | |||||||||
1,025 | The Israel Corp Ltd | 408,633 | |||||||||
7,800,037 | |||||||||||
Malaysia — 2.4% | |||||||||||
1,066,000 | Bumiputra-Commerce Holdings Berhad | 1,852,627 | |||||||||
32,000 | Digi.Com Berhad | 102,665 | |||||||||
162,000 | Genting Berhad | 1,082,575 | |||||||||
303,000 | Hong Leong Bank Berhad | 440,029 | |||||||||
224,000 | IOI Corp Berhad | 1,030,224 | |||||||||
101,000 | Kuala Lumpur Kepong Berhad | 313,846 | |||||||||
435,090 | Malakoff Berhad | 1,147,285 | |||||||||
169,000 | Malayan Banking Berhad | 514,034 | |||||||||
181,378 | Maxis Communications Berhad | 433,952 | |||||||||
259,000 | Proton Holdings Berhad | 348,049 | |||||||||
365,585 | Public Bank Berhad | 664,866 | |||||||||
211,090 | Sime Darby Berhad | 341,747 | |||||||||
144,000 | Tenaga Nasional Berhad | 357,813 | |||||||||
8,629,712 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Mexico — 5.6% | |||||||||||
155,800 | Alfa SA de CV Class A | 756,661 | |||||||||
81,700 | America Movil SA de CV Class L ADR | 3,048,227 | |||||||||
928,536 | Cemex SA de CV CPO * | 2,676,796 | |||||||||
27,000 | Fomento Economico Mexicano SA de CV | 254,340 | |||||||||
721,600 | Grupo Financiero Banorte SA de CV | 2,111,977 | |||||||||
821,340 | Grupo Mexico SA Class B | 2,619,901 | |||||||||
25,000 | Grupo Televisa SA (Participating Certificates) | 94,956 | |||||||||
135,700 | Organizacion Soriana SA de CV Class B | 646,484 | |||||||||
292,800 | Telefonos de Mexico SA de CV Class L ADR | 7,068,192 | |||||||||
187,698 | Wal-Mart de Mexico SA de CV Class V | 639,824 | |||||||||
19,917,358 | |||||||||||
Philippines — 0.6% | |||||||||||
4,454,754 | Ayala Land Inc | 1,179,826 | |||||||||
134,400 | Equitable PCI Bank * | 208,608 | |||||||||
15,436 | Philippine Long Distance Telephone | 580,268 | |||||||||
4,200 | Philippine Long Distance Telephone ADR | 157,248 | |||||||||
2,125,950 | |||||||||||
Poland — 1.4% | |||||||||||
13,600 | Bank Pekao SA | 866,022 | |||||||||
73,400 | Big Bank Gdanski SA | 138,189 | |||||||||
42,100 | KGHM Polska Miedz SA | 1,464,874 | |||||||||
67,400 | Polski Koncern Naftowy Orlen SA | 1,125,301 | |||||||||
29,400 | Powszechna Kasa Oszczednosci Bank Polski SA | 354,375 | |||||||||
137,700 | Telekomunikacja Polska SA | 903,509 | |||||||||
4,852,270 | |||||||||||
Russia — 12.1% | |||||||||||
4,500 | Gazprom Neft ADR | 93,825 | |||||||||
21,100 | JSC Mining & Smelting Co ADR | 2,869,600 | |||||||||
171,100 | Lukoil ADR | 14,286,850 | |||||||||
4,100 | Lukoil ADR 144A | 342,350 | |||||||||
57,000 | Mobile Telesystems ADR | 2,086,200 |
See accompanying notes to the financial statements.
7
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Russia — continued | |||||||||||
436,344 | OAO Gazprom ADR | 20,551,802 | |||||||||
16,300 | Polyus Gold ADR * | 692,750 | |||||||||
440 | Sberbank RF | 954,800 | |||||||||
12,600 | Unified Energy Systems ADR | 929,250 | |||||||||
4,900 | Unified Energy Systems GDR | 362,600 | |||||||||
3,600 | Vimpel-Communications ADR * | 195,552 | |||||||||
43,365,579 | |||||||||||
South Africa — 7.6% | |||||||||||
56,952 | �� | ABSA Group Ltd | 814,259 | ||||||||
19,200 | AECI Ltd | 148,953 | |||||||||
118,300 | African Bank Investments Ltd | 416,891 | |||||||||
13,700 | Anglo American Platinum Corp | 1,537,066 | |||||||||
8,000 | AngloGold Ashanti Ltd | 366,324 | |||||||||
44,500 | Barloworld Ltd | 837,114 | |||||||||
126,800 | Edgars Consolidated Stores Ltd | 497,994 | |||||||||
367,400 | FirstRand Ltd | 908,346 | |||||||||
162,300 | Foschini Ltd | 1,012,025 | |||||||||
47,000 | Gold Fields Ltd | 923,676 | |||||||||
16,000 | Harmony Gold Mining Co Ltd * | 218,776 | |||||||||
18,100 | Impala Platinum Holdings Ltd | 3,352,695 | |||||||||
49,100 | Imperial Holdings Ltd * | 970,658 | |||||||||
10,600 | Investec Ltd | 516,883 | |||||||||
79,767 | Mittal Steel South Africa Ltd | 843,106 | |||||||||
26,800 | MTN Group Ltd | 212,405 | |||||||||
64,279 | Nedbank Group Ltd | 983,409 | |||||||||
7,600 | Pretoria Portland Cement Co Ltd | 409,880 | |||||||||
196,707 | Remgro Ltd | 3,904,019 | |||||||||
52,700 | Reunert Ltd | 527,267 | |||||||||
80,400 | Sasol Ltd | 2,792,668 | |||||||||
184,400 | Standard Bank Group Ltd | 1,989,005 | |||||||||
103,800 | Telkom SA Ltd | 1,960,330 | |||||||||
24,324 | Tiger Brands Ltd | 513,896 | |||||||||
333,950 | Woolworths Holdings | 612,140 | |||||||||
27,269,785 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
South Korea — 15.1% | |||||||||||
6,670 | Cheil Industries Inc | 255,248 | |||||||||
1,100 | CJ Corp | 115,207 | |||||||||
2,600 | Daewoo International Corp | 101,173 | |||||||||
39,320 | Doosan Infracore Co Ltd | 676,905 | |||||||||
43,281 | Hana Financial Group Inc | 1,860,024 | |||||||||
56,700 | Hanjin Heavy Industry & Construction | 1,538,650 | |||||||||
14,500 | Hanjin Shipping | 331,011 | |||||||||
19,070 | Hyundai Development Co | 778,409 | |||||||||
3,000 | Hyundai Heavy Industries | 379,655 | |||||||||
6,300 | Hyundai Merchant Marine | 118,804 | |||||||||
13,900 | Hyundai Mobis | 1,273,035 | |||||||||
38,140 | Hyundai Motor Co | 3,208,006 | |||||||||
9,600 | Hyundai Steel Co | 340,566 | |||||||||
41,600 | Industrial Bank of Korea | 741,551 | |||||||||
1,000 | KCC Corporation | 253,386 | |||||||||
68,500 | KIA Motors Corp | 1,086,404 | |||||||||
109,120 | Kookmin Bank | 8,799,497 | |||||||||
2,200 | Kookmin Bank ADR | 177,276 | |||||||||
74,000 | Korea Electric Power Corp | 2,840,227 | |||||||||
30,100 | Korean Air Lines Co Ltd | 944,999 | |||||||||
14,800 | KT Corp ADR | 327,080 | |||||||||
10,600 | KT Freetel Co Ltd | 306,412 | |||||||||
53,700 | KT&G Corp | 3,146,224 | |||||||||
14,500 | KT&G Corp GDR 144A (a) | 427,025 | |||||||||
2,700 | LG Chemicals Ltd | 109,777 | |||||||||
23,100 | LG Corp | 686,373 | |||||||||
5,300 | LG Electronics Inc | 353,735 | |||||||||
92,451 | LG Telecom Ltd * | 1,049,278 | |||||||||
600 | Lotte Shopping Co Ltd | 204,056 | |||||||||
18,490 | NHN Corp * | 1,739,438 | |||||||||
27,900 | POSCO | 6,986,394 | |||||||||
28,700 | Samsung Corp | 809,239 | |||||||||
1,300 | Samsung Fire & Marine Insurance | 182,075 | |||||||||
28,100 | Samsung Heavy Industries Co Ltd | 669,619 |
See accompanying notes to the financial statements.
9
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
South Korea — continued | |||||||||||
15,300 | Samsung SDI Co Ltd | 1,263,986 | |||||||||
10,230 | Samsung Securities | 594,585 | |||||||||
51,863 | Shinhan Financial Group Co Ltd | 2,331,878 | |||||||||
81,846 | SK Corp | 5,257,320 | |||||||||
12,100 | SK Telecom Co Ltd ADR | 264,990 | |||||||||
6,400 | Woongjin Coway Co Ltd | 146,083 | |||||||||
63,800 | Woori Finance Holdings Co Ltd | 1,251,531 | |||||||||
53,927,131 | |||||||||||
Taiwan — 15.2% | |||||||||||
138,636 | Acer Inc | 213,894 | |||||||||
678,000 | Advanced Semiconductor Engineering Inc * | 693,375 | |||||||||
744,137 | Asustek Computer Inc | 1,665,780 | |||||||||
276,040 | AU Optronics Corp | 404,182 | |||||||||
25,146 | Catcher Technology Co | 196,580 | |||||||||
313,865 | Cathay Financial Holding Co Ltd | 599,038 | |||||||||
336,000 | Chang Hwa Commercial Bank * | 198,795 | |||||||||
379,648 | Chi Mei Optoelectronics Corp | 448,868 | |||||||||
5,439,533 | China Development Financial Holding Corp | 2,098,114 | |||||||||
3,664,100 | China Steel Corp | 2,970,086 | |||||||||
812,604 | Chinatrust Financial Holding Co | 532,208 | |||||||||
1,356,600 | Chunghwa Telecom Co Ltd | 2,238,616 | |||||||||
31,671 | Chunghwa Telecom Co Ltd ADR | 548,225 | |||||||||
562,771 | Compal Electronics Inc | 491,504 | |||||||||
155,000 | Delta Electronics Inc | 430,511 | |||||||||
266,858 | Evergreen Marine Corp | 147,689 | |||||||||
1,049,601 | Far Eastern Textile Co Ltd | 736,340 | |||||||||
228,575 | First Financial Holding Co Ltd | 146,552 | |||||||||
455,039 | Formosa Chemicals & Fibre Co | 655,943 | |||||||||
586,178 | Formosa Plastics Corp | 797,827 | |||||||||
105,800 | Foxconn Technology Co Ltd | 797,937 | |||||||||
250,000 | Fubon Financial Holding Co Ltd | 186,131 | |||||||||
109,200 | High Tech Computer Corp | 2,745,927 | |||||||||
1,708,298 | Hon Hai Precision Industry Co Ltd | 9,613,309 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Taiwan — continued | |||||||||||
113,000 | Hua Nan Financial Holdings Co Ltd | 71,072 | |||||||||
867,208 | Inventec Co Ltd | 526,889 | |||||||||
1,072,300 | Lite-On Technology Corp * | 1,328,395 | |||||||||
333,080 | MediaTek Inc | 3,030,525 | |||||||||
3,384,000 | Mega Financial Holdings Co Ltd | 2,248,192 | |||||||||
637,417 | Nan Ya Plastics Corp | 861,550 | |||||||||
11,845 | Novatek Microelectronics | 58,281 | |||||||||
266,168 | Powerchip Semiconductor Corp | 175,600 | |||||||||
126,465 | Quanta Computer Inc | 181,144 | |||||||||
684,477 | Shin Kong Financial Holdings | 591,653 | |||||||||
296,757 | Siliconware Precision Industries Co | 350,576 | |||||||||
1,482,960 | Sinopac Holdings Co | 649,227 | |||||||||
2,006,000 | Taishin Financial Holdings Co Ltd * | 955,250 | |||||||||
2,152,000 | Taiwan Cellular Corp | 2,002,319 | |||||||||
2,076,005 | Taiwan Cement Corp | 1,383,177 | |||||||||
4,664,853 | Taiwan Semiconductor Manufacturing Co Ltd | 8,258,845 | |||||||||
63,343 | Taiwan Semiconductor Manufacturing Co Ltd ADR | 589,723 | |||||||||
234,000 | Uni-President Enterprises Corp | 178,167 | |||||||||
388,498 | United Microelectronics Corp | 213,044 | |||||||||
1,714,687 | Walsin Lihwa Corp * | 697,451 | |||||||||
301,716 | Wan Hai Lines Ltd | 162,838 | |||||||||
336,000 | Yang Ming Marine Transport | 168,865 | |||||||||
54,240,214 | |||||||||||
Thailand — 1.5% | |||||||||||
160,900 | Advanced Info Service Pcl (Foreign Registered) (b) | 382,999 | |||||||||
182,300 | Bangkok Dusit Medical Service Pcl (Foreign Registered) (b) | 139,344 | |||||||||
30,600 | Kasikornbank Pcl (Foreign Registered) (b) | 52,865 | |||||||||
656,000 | Kasikornbank Pcl NVDR (b) | 1,089,725 | |||||||||
238,200 | PTT Exploration & Production Pcl (Foreign Registered) (b) | 678,217 | |||||||||
332,902 | PTT Pcl (Foreign Registered) (b) | 2,089,799 | |||||||||
136,999 | Siam Cement Pcl (Foreign Registered) NVDR (b) | 794,110 | |||||||||
113,000 | Siam Commercial Bank Pcl (Foreign Registered) (b) | 174,401 | |||||||||
90,400 | Thai Airways International Pcl (Foreign Registered) (b) | 105,826 | |||||||||
5,507,286 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Turkey — 1.1% | |||||||||||
283,699 | Akbank TAS | 1,541,606 | |||||||||
25,874 | Tupras-Turkiye Petrol Rafineriler AS | 471,484 | |||||||||
75,357 | Turkcell Iletisim Hizmet AS | 354,868 | |||||||||
54,134 | Turkiye IS Bankasi Class C | 310,833 | |||||||||
693,429 | Yapi Ve Kredi Bankasi AS * | 1,348,464 | |||||||||
4,027,255 | |||||||||||
TOTAL COMMON STOCKS (COST $222,299,329) | 297,777,382 | ||||||||||
PREFERRED STOCKS — 12.8% | |||||||||||
Brazil — 7.5% | |||||||||||
41,900 | Banco Bradesco SA 6.08% | 1,373,085 | |||||||||
71,500 | Banco Itau Holding Financeira SA 3.02% | 2,151,336 | |||||||||
49,723,200 | Companhia Energetica de Minas Gerais 0.53% | 2,052,473 | |||||||||
57,278 | Companhia Vale do Rio Doce Class A 0.61% | 1,076,100 | |||||||||
13,578,900 | Geracao Tiete 5.75% | 353,406 | |||||||||
6,700 | Gerdau Metalurgica SA 5.76% | 118,750 | |||||||||
179,304 | Gerdau SA 4.58% | 2,588,367 | |||||||||
821,377 | Investimentos Itau SA 3.18% | 3,467,100 | |||||||||
666,012 | Petroleo Brasileiro SA (Petrobras) 0.93% | 13,456,921 | |||||||||
4,700 | Telemar Norte Leste SA 4.88% | 94,263 | |||||||||
26,731,801 | |||||||||||
South Korea — 5.3% | |||||||||||
7,800 | Hyundai Motor Co 2.73% | 377,052 | |||||||||
35,260 | Samsung Electronics Co Ltd (Non Voting) 1.13% | 18,293,006 | |||||||||
3,000 | Samsung SDI Co Ltd 3.22% | 151,760 | |||||||||
18,821,818 | |||||||||||
TOTAL PREFERRED STOCKS (COST $16,738,098) | 45,553,619 |
See accompanying notes to the financial statements.
12
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares/ Par Value ($) | Description | Value ($) | |||||||||
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 INVESTMENTS — 3.2% | |||||||||||
462,600 | Boston Global Investment Trust - Enhanced Portfolio (c) | 462,600 | |||||||||
11,000,000 | Branch Bank & Trust Time Deposit, 5.26% due 09/01/06 | 11,000,000 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $11,462,600) | 11,462,600 | ||||||||||
TOTAL INVESTMENTS — 99.3% (Cost $250,500,027) | 354,793,601 | ||||||||||
Other Assets and Liabilities (net) — 0.7% | 2,584,668 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 357,378,269 |
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
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) All or a portion of this security represents investment of security lending collateral (Note 2).
As of August 31, 2006, 59.5% of the Net Assets of the Fund were valued using fair value prices based on models used by a third party vendor (Note 2).
See accompanying notes to the financial statements.
13
GMO Emerging Countries Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $447,278 (cost $250,500,027) (Note 2) | $ | 354,793,601 | |||||
Cash | 66,344 | ||||||
Foreign currency, at value (cost $1,847,132) (Note 2) | 1,839,426 | ||||||
Receivable for investments sold | 267,048 | ||||||
Receivable for Fund shares sold | 10,486 | ||||||
Dividends and interest receivable | 1,297,134 | ||||||
Foreign taxes receivable | 234,037 | ||||||
Total assets | 358,508,076 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 462,600 | ||||||
Payable for investments purchased | 134,953 | ||||||
Payable for Fund shares repurchased | 50,161 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 196,716 | ||||||
Shareholder service fee | 41,487 | ||||||
Administration fee – Class M | 5,214 | ||||||
Trustees and Chief Compliance Officer fees | 950 | ||||||
Payable for 12b-1 fee – Class M | 13,032 | ||||||
Accrued expenses | 224,694 | ||||||
Total liabilities | 1,129,807 | ||||||
Net assets | $ | 357,378,269 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 192,558,641 | |||||
Accumulated undistributed net investment income | 2,546,556 | ||||||
Accumulated net realized gain | 57,990,811 | ||||||
Net unrealized appreciation | 104,282,261 | ||||||
$ | 357,378,269 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 326,693,161 | |||||
Class M shares | $ | 30,685,108 | |||||
Shares outstanding: | |||||||
Class III | 18,557,891 | ||||||
Class M | 1,758,981 | ||||||
Net asset value per share: | |||||||
Class III | $ | 17.60 | |||||
Class M | $ | 17.44 |
See accompanying notes to the financial statements.
14
GMO Emerging Countries Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $748,234) | $ | 7,072,547 | |||||
Interest (including securities lending income of $11,238) | 429,155 | ||||||
Total investment income | 7,501,702 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 1,253,689 | ||||||
Shareholder service fee – Class III (Note 3) | 255,421 | ||||||
12b-1 fee – Class M (Note 3) | 56,485 | ||||||
Administration fee – Class M (Note 3) | 45,188 | ||||||
Custodian and fund accounting agent fees | 412,896 | ||||||
Transfer agent fees | 24,472 | ||||||
Audit and tax fees | 38,180 | ||||||
Legal fees | 4,692 | ||||||
Trustees fees and related expenses (Note 3) | 3,363 | ||||||
Registration fees | 13,708 | ||||||
Miscellaneous | 4,141 | ||||||
Total expenses | 2,112,235 | ||||||
Net investment income (loss) | 5,389,467 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of foreign capital gains tax and CPMF tax of $16,760 and $5,482, respectively) (Note 2) | 55,655,557 | ||||||
Closed swap contracts | 2,909,955 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (421,972 | ) | |||||
Net realized gain (loss) | 58,143,540 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments (net of foreign capital gains tax accrual of ($63,587)) (Note 2) | (59,625,686 | ) | |||||
Open swap contracts | (291,054 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (72,700 | ) | |||||
Net unrealized gain (loss) | (59,989,440 | ) | |||||
Net realized and unrealized gain (loss) | (1,845,900 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | 3,543,567 |
See accompanying notes to the financial statements.
15
GMO Emerging Countries Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 5,389,467 | $ | 5,753,569 | |||||||
Net realized gain (loss) | 58,143,540 | 56,908,752 | |||||||||
Change in net unrealized appreciation (depreciation) | (59,989,440 | ) | 53,398,988 | ||||||||
Net increase (decrease) in net assets from operations | 3,543,567 | 116,061,309 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (1,298,214 | ) | (6,104,851 | ) | |||||||
Class M | (97,768 | ) | (951,842 | ) | |||||||
Total distributions from net investment income | (1,395,982 | ) | (7,056,693 | ) | |||||||
Net realized gains | |||||||||||
Class III | (29,517,293 | ) | (31,132,069 | ) | |||||||
Class M | (2,963,924 | ) | (6,343,672 | ) | |||||||
Total distributions from net realized gains | (32,481,217 | ) | (37,475,741 | ) | |||||||
(33,877,199 | ) | (44,532,434 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 7,764,435 | 37,400,362 | |||||||||
Class M | (23,206,222 | ) | (23,889,400 | ) | |||||||
Increase (decrease) in net assets resulting from net share transactions | (15,441,787 | ) | 13,510,962 | ||||||||
Total increase (decrease) in net assets | (45,775,419 | ) | 85,039,837 | ||||||||
Net assets: | |||||||||||
Beginning of period | 403,153,688 | 318,113,851 | |||||||||
End of period (including accumulated undistributed net investment income of $2,546,556 and distributions in excess of net investment income of $1,446,929, respectively) | $ | 357,378,269 | $ | 403,153,688 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.20 | $ | 15.99 | $ | 14.99 | $ | 8.54 | $ | 9.65 | $ | 8.81 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss) | 0.27 | † | 0.28 | † | 0.30 | † | 0.18 | 0.08 | 0.14 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (0.06 | ) | 5.09 | 3.43 | 6.71 | (1.04 | ) | 0.77 | |||||||||||||||||||
Total from investment operations | 0.21 | 5.37 | 3.73 | 6.89 | (0.96 | ) | 0.91 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.08 | ) | (0.35 | ) | (0.31 | ) | (0.22 | ) | (0.15 | ) | (0.07 | ) | |||||||||||||||
From net realized gains | (1.73 | ) | (1.81 | ) | (2.42 | ) | (0.22 | ) | — | — | |||||||||||||||||
Total distributions | (1.81 | ) | (2.16 | ) | (2.73 | ) | (0.44 | ) | (0.15 | ) | (0.07 | ) | |||||||||||||||
Net asset value, end of period | $ | 17.60 | $ | 19.20 | $ | 15.99 | $ | 14.99 | $ | 8.54 | $ | 9.65 | |||||||||||||||
Total Return | 1.31 | %** | 36.38 | %(a) | 28.76 | %(a) | 81.45 | %(a) | (10.15 | )%(a)(b) | 10.49 | %(a)(b) | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 326,693 | $ | 346,018 | $ | 249,005 | $ | 249,844 | $ | 89,042 | $ | 72,405 | |||||||||||||||
Net expenses to average daily net assets | 1.06 | %* | 1.10 | % | 1.10 | % | 1.16 | % | 1.27 | % | 1.40 | % | |||||||||||||||
Net investment income to average daily net assets | 1.43 | %(c)** | 1.68 | % | 2.12 | % | 1.82 | % | 0.78 | % | 2.12 | % | |||||||||||||||
Portfolio turnover rate | 22 | %** | 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 | (d) | $ | 0.04 |
(a) The total return would have been lower had certain expenses not been reimbursed during the period shown.
(b) Calculations exclude purchase premiums and redemption fees which are borne by the shareholder.
(c) The ratio for the six months ended August 31, 2006, 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.
(d) 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
17
GMO Emerging Countries Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class M share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 19.05 | $ | 15.87 | $ | 14.91 | $ | 8.51 | $ | 9.85 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss) | 0.24 | † | 0.27 | † | 0.26 | † | 0.11 | 0.01 | |||||||||||||||
Net realized and unrealized gain (loss) | (0.06 | ) | 5.00 | 3.39 | 6.71 | (1.35 | ) | ||||||||||||||||
Total from investment operations | 0.18 | 5.27 | 3.65 | 6.82 | (1.34 | ) | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.06 | ) | (0.28 | ) | (0.27 | ) | (0.20 | ) | — | ||||||||||||||
From net realized gains | (1.73 | ) | (1.81 | ) | (2.42 | ) | (0.22 | ) | — | ||||||||||||||
Total distributions | (1.79 | ) | (2.09 | ) | (2.69 | ) | (0.42 | ) | — | ||||||||||||||
Net asset value, end of period | $ | 17.44 | $ | 19.05 | $ | 15.87 | $ | 14.91 | $ | 8.51 | |||||||||||||
Total Return | 1.17 | %** | 35.99 | %(b) | 28.30 | %(b) | 80.98 | %(b) | (13.60 | )%(b)** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 30,685 | $ | 57,136 | $ | 69,109 | $ | 58,346 | $ | 579 | |||||||||||||
Net expenses to average daily net assets | 1.27 | %(c)** | 1.39 | % | 1.40 | % | 1.45 | % | 1.57 | %* | |||||||||||||
Net investment income to average daily net assets | 2.52 | %* | 1.65 | % | 1.82 | % | 1.27 | % | 0.20 | %* | |||||||||||||
Portfolio turnover rate | 22 | %** | 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 return would have been lower had certain expenses not been reimbursed during the period shown.
(c) The ratio for the six months ended August 31, 2006, 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 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
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its investment objective by outperforming the S&P/IFCI (Investable) Composite Index. The Fund typically makes equity investments in companies whose stocks are traded in the securities markets of the world's non-developed markets, which excludes countries that are included in the MSCI EAFE Index.
Throughout the six months ended August 31, 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 principal 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 generally 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 pursuant to procedures approved by the Trustees. Because many foreign equity securities markets and
19
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 are generally valued by a third party vendor using fair value prices based on models 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 including 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 lo ss 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. There were no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. 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
20
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 est ablished each day by the board of trade or exchange on which they are traded. There were no futures contracts outstanding at the end of the period.
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
21
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no indexed securities held by the Fund at the end of the period.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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
22
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
may be unfavorable changes in interest rates or the price of the index or security underlying these transactions. There were no swap agreements outstanding at the end of the period.
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 August 31, 2006, the Fund had loaned securities having a market value of $447,278 collateralized by cash in the amount of $462,600 which was invested in the Boston Global Investment Trust – Enhanced Portfolio.
Taxes and distributions
The Fund intends to qualify each tax 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 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.
The Fund is currently subject to a Taiwanese security transaction tax of 0.3% of the transaction amount on equities and 0.1% of the transaction amount on corporate bonds and mutual fund shares, which must be paid by the Fund upon the sale or transfer of any portfolio securities subject to such tax.
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.
23
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The accrual for capital gains and repatriation taxes is included in net unrealized gain (loss) in the Statement of Operations. For the six months ended August 31, 2006, the Fund incurred $16,760 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. During the six months ended August 31, 2006, the Fund incurred $5,482 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.
As of August 31, 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) | ||||||||||||
$ | 250,587,343 | $ | 111,108,207 | $ | (6,901,949 | ) | $ | 104,206,258 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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
24
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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.
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 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
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 up to 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
25
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees (Class III only), 12b-1 and administration fees (Class M only), fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $2,259 and $1,288, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $82,468,210 and $130,175,786, 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 August 31, 2006, 18.2% 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 August 31, 2006, 0.1% of the Fund's shares were held by ten related parties comprised of certain GMO employee accounts and, 14.5% 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)
August 31, 2006 (Unaudited)
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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,128,374 | $ | 22,242,696 | 4,414,349 | $ | 76,364,209 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,703,868 | 29,204,307 | 2,108,709 | 34,716,984 | |||||||||||||||
Shares repurchased | (2,296,785 | ) | (43,682,568 | ) | (4,068,752 | ) | (73,680,831 | ) | |||||||||||
Net increase (decrease) | 535,457 | $ | 7,764,435 | 2,454,306 | $ | 37,400,362 | |||||||||||||
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 665,989 | $ | 12,627,171 | 1,020,576 | $ | 16,564,539 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 180,206 | 3,061,692 | 456,256 | 7,295,513 | |||||||||||||||
Shares repurchased | (2,086,705 | ) | (38,895,085 | ) | (2,830,875 | ) | (47,749,452 | ) | |||||||||||
Net increase (decrease) | (1,240,510 | ) | $ | (23,206,222 | ) | (1,354,043 | ) | $ | (23,889,400 | ) |
27
GMO Emerging Countries Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Emerging Countries Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to
28
GMO Emerging Countries Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
29
GMO Emerging Countries Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
30
GMO Emerging Countries Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, distribution and/or service (12b-1), 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, March 1, 2006 through August 31, 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.
31
GMO Emerging Countries Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 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 Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 1.06 | % | $ | 1,000.00 | $ | 1,013.10 | $ | 5.38 | |||||||||||
2) Hypothetical | 1.06 | % | $ | 1,000.00 | $ | 1,019.86 | $ | 5.40 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 1.36 | % | $ | 1,000.00 | $ | 1,011.70 | $ | 6.90 | |||||||||||
2) Hypothetical | 1.36 | % | $ | 1,000.00 | $ | 1,018.35 | $ | 6.92 |
* Expenses are calculated using each Class's annualized expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
32
GMO Developed World Stock Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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 Developed World Stock Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 94.6 | % | |||||
Preferred Stocks | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures | 0.2 | ||||||
Short-Term Investments | 6.3 | ||||||
Other | (1.2 | ) | |||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
United States | 43.2 | % | |||||
Japan | 16.8 | ||||||
United Kingdom | 11.9 | ||||||
France | 5.8 | ||||||
Germany | 4.6 | ||||||
Netherlands | 4.1 | ||||||
Switzerland | 2.4 | ||||||
Italy | 2.0 | ||||||
Canada | 1.8 | ||||||
Finland | 1.7 | ||||||
Singapore | 1.4 | ||||||
Belgium | 1.1 | ||||||
Sweden | 0.8 | ||||||
Norway | 0.7 | ||||||
Australia | 0.5 | ||||||
Hong Kong | 0.4 | ||||||
Spain | 0.3 | ||||||
Austria | 0.3 | ||||||
Ireland | 0.2 | ||||||
100.0 | % |
1
GMO Developed World Stock Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Industry Sector Summary | % of Equity Investments | ||||||
Financials | 26.8 | % | |||||
Consumer Discretionary | 13.6 | ||||||
Energy | 11.0 | ||||||
Health Care | 10.1 | ||||||
Industrials | 9.3 | ||||||
Information Technology | 6.7 | ||||||
Materials | 6.2 | ||||||
Consumer Staples | 6.1 | ||||||
Utilities | 5.9 | ||||||
Telecommunication Services | 4.3 | ||||||
100.0 | % |
2
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 94.6% | |||||||||||
Australia — 0.5% | |||||||||||
38,403 | BHP Billiton Ltd | 808,920 | |||||||||
141,670 | Qantas Airways Ltd | 371,482 | |||||||||
12,038 | Woodside Petroleum Ltd | 387,267 | |||||||||
1,567,669 | |||||||||||
Austria — 0.3% | |||||||||||
7,384 | Boehler Uddeholm (Bearer) | 397,304 | |||||||||
18,150 | Voestalpine AG | 687,676 | |||||||||
1,084,980 | |||||||||||
Belgium — 1.1% | |||||||||||
24,416 | Dexia | 627,247 | |||||||||
41,931 | Fortis | 1,632,768 | |||||||||
3,211 | KBC Groep NV | 345,829 | |||||||||
15,068 | UCB SA | 883,260 | |||||||||
3,489,104 | |||||||||||
�� | Canada — 1.7% | ||||||||||
8,000 | Alcan Inc | 359,794 | |||||||||
24,064 | BCE Inc | 600,239 | |||||||||
10,800 | Canadian National Railway Co | 460,707 | |||||||||
22,900 | Canadian Natural Resources | 1,202,286 | |||||||||
10,000 | EnCana Corp | 524,744 | |||||||||
11,500 | Imperial Oil Ltd | 432,720 | |||||||||
25,500 | Petro-Canada | 1,088,935 | |||||||||
20,800 | Royal Bank of Canada | 921,726 | |||||||||
5,591,151 | |||||||||||
Finland — 1.6% | |||||||||||
63,200 | Fortum Oyj | 1,698,294 | |||||||||
10,600 | Metso Oyj | 394,852 | |||||||||
52,750 | Nokia Oyj | 1,102,538 |
See accompanying notes to the financial statements.
3
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Finland — continued | |||||||||||
20,750 | Rautaruukki Oyj | 606,532 | |||||||||
30,000 | Sampo Oyj Class A | 620,998 | |||||||||
44,400 | UPM-Kymmene Oyj | 1,050,744 | |||||||||
5,473,958 | |||||||||||
France — 5.6% | |||||||||||
15,558 | Air France | 424,696 | |||||||||
3,783 | Assurances Generales de France | 475,069 | |||||||||
9,888 | Axa | 367,771 | |||||||||
33,297 | BNP Paribas | 3,540,400 | |||||||||
9,877 | Carrefour SA | 609,763 | |||||||||
8,138 | Casino Guichard-Perrachon SA | 698,569 | |||||||||
14,668 | Cie de Saint-Gobain | 1,088,202 | |||||||||
25,688 | Credit Agricole SA | 1,043,829 | |||||||||
6,199 | Lafarge SA | 799,190 | |||||||||
7,488 | Michelin SA Class B | 508,562 | |||||||||
15,807 | Peugeot SA | 891,876 | |||||||||
9,928 | Renault SA | 1,156,853 | |||||||||
17,566 | Sanofi-Aventis | 1,577,632 | |||||||||
4,081 | Schneider Electric SA | 435,315 | |||||||||
6,539 | Societe Generale | 1,056,194 | |||||||||
49,857 | Total SA | 3,366,744 | |||||||||
2,075 | Vallourec | 464,763 | |||||||||
18,505,428 | |||||||||||
Germany — 4.2% | |||||||||||
15,347 | Altana AG | 906,101 | |||||||||
29,919 | Bayerische Motoren Werke AG | 1,547,653 | |||||||||
21,631 | Commerzbank AG | 755,480 | |||||||||
8,771 | DaimlerChrysler AG (Registered) | 462,488 | |||||||||
7,826 | Deutsche Bank AG (Registered) | 894,580 | |||||||||
3,099 | Deutsche Boerse AG | 470,061 | |||||||||
33,993 | Deutsche Post AG (Registered) | 860,938 | |||||||||
5,874 | Deutsche Postbank AG | 460,292 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Germany — continued | |||||||||||
5,840 | E. On AG | 741,331 | |||||||||
7,779 | Hannover Rueckversicherungs AG (Registered) * | 299,990 | |||||||||
21,589 | KarstadtQuelle AG * (a) | 480,034 | |||||||||
2,651 | Linde AG | 234,255 | |||||||||
5,368 | MAN AG | 410,731 | |||||||||
6,499 | Muenchener Rueckversicherungs AG (Registered) | 977,105 | |||||||||
731 | Puma AG Rudolf Dassler Sport | 254,529 | |||||||||
9,752 | RWE AG | 892,278 | |||||||||
41,019 | ThyssenKrupp AG | 1,395,479 | |||||||||
23,815 | Volkswagen AG (a) | 1,901,191 | |||||||||
13,944,516 | |||||||||||
Hong Kong — 0.4% | |||||||||||
84,000 | CLP Holdings Ltd | 531,171 | |||||||||
88,000 | Hong Kong & China Gas | 204,288 | |||||||||
110,000 | Hong Kong Electric Holdings Ltd | 525,951 | |||||||||
1,261,410 | |||||||||||
Ireland — 0.2% | |||||||||||
37,738 | Bank of Ireland | 716,383 | |||||||||
Italy — 1.9% | |||||||||||
51,834 | Banca Monte dei Paschi di Siena SPA | 315,294 | |||||||||
64,305 | Capitalia SPA | 560,914 | |||||||||
133,428 | Enel SPA | 1,191,153 | |||||||||
121,045 | ENI SPA | 3,701,094 | |||||||||
45,328 | Fiat SPA * (a) | 649,727 | |||||||||
6,418,182 | |||||||||||
Japan — 15.9% | |||||||||||
15,000 | Aeon Co Ltd | 376,338 | |||||||||
47,000 | Bank of Yokohama Ltd | 369,708 | |||||||||
16,550 | Canon Inc | 822,176 | |||||||||
50,600 | Chubu Electric Power Co Inc | 1,369,359 |
See accompanying notes to the financial statements.
5
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
60,000 | Cosmo Oil Co Ltd | 263,039 | |||||||||
82,000 | Dainippon Ink and Chemicals Inc | 303,823 | |||||||||
37,000 | Daiwa Securities Group Inc | 437,953 | |||||||||
10,500 | Denso Corp | 364,151 | |||||||||
70 | East Japan Railway Co | 515,807 | |||||||||
16,700 | Eisai Co Ltd | 793,140 | |||||||||
13,080 | Electric Power Development Co | 486,990 | |||||||||
98,000 | Fuji Heavy Industries Ltd | 565,045 | |||||||||
95,000 | Hitachi Ltd | 601,286 | |||||||||
67,000 | Hokuhoku Financial Group Inc | 262,634 | |||||||||
45,600 | Honda Motor Co Ltd | 1,543,099 | |||||||||
12,000 | Hoya Corp | 434,400 | |||||||||
172,000 | Isuzu Motors Ltd (a) | 555,511 | |||||||||
125,000 | Itochu Corp | 1,043,879 | |||||||||
209 | Japan Tobacco Inc | 793,840 | |||||||||
49,000 | Kajima Corp | 226,299 | |||||||||
39,700 | Kansai Electric Power Co Inc | 951,126 | |||||||||
18,000 | Kao Corp | 479,197 | |||||||||
44,000 | Kawasaki Kisen Kaisha Ltd (a) | 285,190 | |||||||||
89,000 | Kobe Steel Ltd | 283,213 | |||||||||
24,000 | Komatsu Ltd | 435,553 | |||||||||
45,000 | Kubota Corp | 367,854 | |||||||||
29,000 | Kyushu Electric Power Co Inc | 690,777 | |||||||||
163,000 | Marubeni Corp | 866,629 | |||||||||
33,000 | Matsushita Electric Industrial Co Ltd | 702,795 | |||||||||
119,000 | Mazda Motor Corp | 758,899 | |||||||||
101,800 | Mitsubishi Corp | 2,060,718 | |||||||||
24,000 | Mitsubishi Estate Co Ltd | 514,449 | |||||||||
76,000 | Mitsubishi Heavy Industries | 317,075 | |||||||||
94 | Mitsubishi Tokyo UFJ Financial Group Inc | 1,275,190 | |||||||||
104,000 | Mitsui & Co | 1,500,610 | |||||||||
35,000 | Mitsui Chemicals Inc | 245,076 | |||||||||
18,000 | Mitsui Fudosan Co Ltd | 401,423 | |||||||||
211 | Mizuho Financial Group Inc | 1,699,659 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
6,400 | Murata Manufacturing Co Ltd | 438,062 | |||||||||
24,000 | Nikko Cordial Corp | 302,686 | |||||||||
13,000 | Nikon Corp | 234,146 | |||||||||
153,800 | Nissan Motor Co | 1,745,907 | |||||||||
3,400 | Nitto Denko Corp | 243,385 | |||||||||
36,400 | Nomura Holdings Inc | 698,387 | |||||||||
22,000 | Olympus Optical Co Ltd | 650,496 | |||||||||
2,930 | ORIX Corp | 773,566 | |||||||||
167,000 | Osaka Gas Co Ltd | 613,823 | |||||||||
25,800 | Pioneer Corp (a) | 491,887 | |||||||||
242 | Resona Holdings Inc | 758,906 | |||||||||
15,000 | Ricoh Company Ltd | 293,478 | |||||||||
17,900 | Seven & I Holdings Co Ltd | 629,485 | |||||||||
47,000 | Shimizu Corp (a) | 277,767 | |||||||||
12,900 | Shin-Etsu Chemical Co Ltd | 732,340 | |||||||||
13,000 | Sony Corp | 563,901 | |||||||||
53,000 | Sumitomo Chemical Co Ltd | 415,963 | |||||||||
102,000 | Sumitomo Corp | 1,371,716 | |||||||||
25,400 | Sumitomo Electric Industries Ltd | 326,687 | |||||||||
181,000 | Sumitomo Metal Industries Ltd | 741,579 | |||||||||
25,000 | Sumitomo Metal Mining Co Ltd | 350,144 | |||||||||
69 | Sumitomo Mitsui Financial Group Inc | 773,849 | |||||||||
18,000 | Sumitomo Realty & Development Co Ltd | 527,651 | |||||||||
41,000 | Sumitomo Trust & Banking Co Ltd | 434,156 | |||||||||
79,000 | Taisei Corp | 283,140 | |||||||||
25,000 | Taisho Pharmaceutical Co Ltd | 488,025 | |||||||||
43,700 | Takeda Pharmaceutical Co Ltd | 2,887,624 | |||||||||
31,000 | Teijin Ltd | 165,589 | |||||||||
37,100 | Tohoku Electric Power Co Inc | 839,605 | |||||||||
42,900 | Tokyo Electric Power Co Inc | 1,221,853 | |||||||||
153,000 | Tokyo Gas Co Ltd | 811,603 | |||||||||
57,000 | TonenGeneral Sekiyu KK (a) | 513,546 | |||||||||
32,000 | Toppan Printing Co Ltd | 361,388 | |||||||||
39,000 | Toray Industries Inc | 309,468 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
75,000 | Toshiba Corp | 531,968 | |||||||||
15,500 | Toyo Seikan Kaisha Ltd | 314,617 | |||||||||
62,500 | Toyota Motor Corp | 3,377,622 | |||||||||
69 | West Japan Railway Co | 294,091 | |||||||||
9,800 | Yamaha Motor Co Ltd | 259,981 | |||||||||
53,013,997 | |||||||||||
Netherlands — 3.9% | |||||||||||
92,013 | ABN Amro Holdings NV | 2,624,771 | |||||||||
75,145 | Aegon NV | 1,342,735 | |||||||||
14,213 | Akzo Nobel NV | 818,550 | |||||||||
5,197 | Corio NV | 349,905 | |||||||||
27,201 | Heineken NV | 1,261,281 | |||||||||
121,895 | ING Groep NV | 5,281,167 | |||||||||
7,778 | Koninklijke DSM | 307,715 | |||||||||
4,168 | Rodamco Europe NV | 450,228 | |||||||||
15,429 | TNT NV | 580,373 | |||||||||
13,016,725 | |||||||||||
Norway — 0.6% | |||||||||||
11,168 | Norsk Hydro ASA | 287,663 | |||||||||
66,100 | Statoil ASA | 1,784,641 | |||||||||
2,072,304 | |||||||||||
Singapore — 1.3% | |||||||||||
206,000 | Capitaland Ltd | 621,986 | |||||||||
150,000 | Fraser & Neave Ltd | 378,748 | |||||||||
109,000 | Keppel Land Ltd | 306,855 | |||||||||
234,000 | Sembcorp Industrie | 517,038 | |||||||||
39,000 | Singapore Airlines Ltd | 326,968 | |||||||||
297,000 | Singapore Technologies Engineering Ltd | 550,821 | |||||||||
957,600 | Singapore Telecommunications | 1,513,175 | |||||||||
23,000 | United Overseas Bank Ltd | 227,847 | |||||||||
4,443,438 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Spain — 0.3% | |||||||||||
29,225 | Iberdrola SA | 1,086,035 | |||||||||
Sweden — 0.7% | |||||||||||
14,600 | Electrolux AB | 225,767 | |||||||||
30,600 | Hennes & Mauritz AB Class B | 1,188,012 | |||||||||
43,500 | Nordea AB | 546,144 | |||||||||
10,100 | Svenska Cellulosa Series B | 432,709 | |||||||||
2,392,632 | |||||||||||
Switzerland — 2.2% | |||||||||||
67,501 | ABB Ltd | 898,213 | |||||||||
10,607 | Compagnie Financiere Richemont AG Class A | 504,126 | |||||||||
12,334 | Credit Suisse Group | 687,441 | |||||||||
4,778 | Roche Holding AG (Non Voting) | 880,355 | |||||||||
985 | Serono SA | 687,963 | |||||||||
1,289 | Swisscom AG (Registered) | 432,956 | |||||||||
26,296 | UBS AG | 1,486,495 | |||||||||
8,185 | Zurich Financial Services AG | 1,865,748 | |||||||||
7,443,297 | |||||||||||
United Kingdom — 11.2% | |||||||||||
53,543 | Alliance Boots Plc | 786,054 | |||||||||
45,654 | Anglo American Plc | 1,975,384 | |||||||||
6,789 | AstraZeneca Plc | 440,563 | |||||||||
77,144 | Aviva Plc | 1,084,122 | |||||||||
69,679 | Barclays Plc | 872,997 | |||||||||
22,131 | Barratt Developments Plc | 418,663 | |||||||||
65,638 | BG Group Plc | 858,249 | |||||||||
41,695 | BHP Billiton Plc | 795,418 | |||||||||
69,530 | BP Plc | 788,983 | |||||||||
39,697 | British Airways Plc * | 310,458 | |||||||||
23,254 | British American Tobacco Plc | 638,967 | |||||||||
209,450 | BT Group Plc | 984,526 | |||||||||
47,673 | Cadbury Schweppes Plc | 508,467 |
See accompanying notes to the financial statements.
9
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
224,942 | Centrica Plc | 1,263,659 | |||||||||
156,659 | DSG International Plc | 611,786 | |||||||||
38,649 | Gallaher Group Plc | 668,334 | |||||||||
42,793 | GKN Plc | 248,473 | |||||||||
34,921 | GlaxoSmithKline Plc | 990,721 | |||||||||
72,379 | HBOS Plc | 1,382,225 | |||||||||
30,832 | Imperial Tobacco Group Plc | 1,062,831 | |||||||||
91,077 | J Sainsbury Plc | 618,017 | |||||||||
90,794 | Lloyds TSB Group Plc | 900,513 | |||||||||
19,150 | Next Plc | 607,780 | |||||||||
14,657 | Persimmon Plc | 347,473 | |||||||||
27,595 | Rio Tinto Plc | 1,392,160 | |||||||||
180,327 | Royal Bank of Scotland Group | 6,116,672 | |||||||||
75,395 | Royal Dutch Shell Group Class A | 2,599,840 | |||||||||
72,191 | Royal Dutch Shell Plc A Shares | 2,497,315 | |||||||||
32,262 | Scottish & Newcastle Plc | 338,121 | |||||||||
28,890 | Scottish & Southern Energy Plc | 662,648 | |||||||||
15,518 | Severn Trent Plc | 388,520 | |||||||||
36,404 | Taylor Woodrow Plc | 237,757 | |||||||||
127,016 | Tesco Plc | 912,819 | |||||||||
63,290 | Tomkins Plc | 343,145 | |||||||||
37,303 | United Utilities Plc | 487,968 | |||||||||
506,809 | Vodafone Group Inc | 1,098,351 | |||||||||
37,756 | Wimpey (George) Plc | 360,302 | |||||||||
19,058 | Wolseley Plc | 415,030 | |||||||||
11,511 | Xstrata Plc | 518,042 | |||||||||
37,533,353 | |||||||||||
United States — 41.0% | |||||||||||
9,300 | Abercrombie & Fitch Co.-Class A | 600,129 | |||||||||
12,200 | Agilent Technologies, Inc. * | 392,352 | |||||||||
11,600 | Alcoa, Inc. | 331,644 | |||||||||
30,100 | Allied Waste Industries, Inc. * | 311,234 | |||||||||
21,300 | Allstate Corp. (The) | 1,234,122 | |||||||||
8,400 | Alltel Corp. | 455,364 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
54,400 | Altria Group, Inc. | 4,544,032 | |||||||||
8,400 | AMBAC Financial Group, Inc. | 727,356 | |||||||||
16,800 | American Electric Power Co., Inc. | 612,864 | |||||||||
6,600 | American Financial Group, Inc. | 308,352 | |||||||||
15,800 | AmerisourceBergen Corp. | 697,728 | |||||||||
14,000 | Apple Computer, Inc. * | 949,900 | |||||||||
18,300 | Archer-Daniels-Midland Co. | 753,411 | |||||||||
69,257 | AT&T, Inc. | 2,155,970 | |||||||||
18,500 | AutoNation, Inc. * | 359,455 | |||||||||
5,400 | Baker Hughes, Inc. | 384,372 | |||||||||
13,483 | Bank of America Corp. | 693,970 | |||||||||
2,800 | Bear Stearns Cos. (The), Inc. | 364,980 | |||||||||
27,300 | Bed Bath & Beyond, Inc. * | 920,829 | |||||||||
66,900 | BellSouth Corp. | 2,724,168 | |||||||||
15,400 | Biomet, Inc. | 503,734 | |||||||||
8,300 | BJ Services Co. | 284,773 | |||||||||
11,300 | Boeing Co. | 846,370 | |||||||||
14,800 | Burlington Northern Santa Fe Corp. | 990,860 | |||||||||
20,200 | Capital One Financial Corp. | 1,476,620 | |||||||||
12,500 | Caterpillar, Inc. | 829,375 | |||||||||
10,100 | CDW Corp. | 588,830 | |||||||||
32,700 | Cendant Corp. * | 63,111 | |||||||||
15,100 | Centex Corp. | 769,345 | |||||||||
7,600 | CH Robinson Worldwide, Inc. | 348,232 | |||||||||
58,905 | Chevron Corp. | 3,793,482 | |||||||||
500 | Chicago Mercantile Exchange | 220,000 | |||||||||
5,800 | Cigna Corp. | 655,806 | |||||||||
14,400 | CNA Financial Corp. * | 499,248 | |||||||||
17,800 | Computer Sciences Corp. * | 843,364 | |||||||||
27,700 | Compuware Corp. * | 210,520 | |||||||||
55,953 | ConocoPhillips | 3,549,099 | |||||||||
13,000 | Conseco, Inc. * | 269,100 | |||||||||
17,100 | Convergys Corp. * | 356,877 | |||||||||
41,100 | Corning, Inc. * | 914,064 | |||||||||
9,200 | CSX Corp. | 278,024 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
31,800 | D.R. Horton, Inc. | 697,374 | |||||||||
125,600 | Dell, Inc. * | 2,832,280 | |||||||||
4,000 | Diamond Offshore Drilling, Inc. | 289,920 | |||||||||
11,000 | Dow Chemical Co. | 419,430 | |||||||||
20,900 | Eastman Kodak Co. | 444,543 | |||||||||
6,400 | Embarq Corp. | 301,760 | |||||||||
5,600 | Emerson Electric Co. | 460,040 | |||||||||
4,900 | Everest RE Group Ltd | 460,502 | |||||||||
6,400 | Expeditors International of Washington, Inc. | 255,168 | |||||||||
22,900 | Exxon Mobil Corp. | 1,549,643 | |||||||||
53,200 | Fannie Mae | 2,800,980 | |||||||||
13,432 | Federated Department Stores, Inc. | 510,147 | |||||||||
4,800 | FedEx Corp. | 484,944 | |||||||||
13,900 | Fidelity National Financial, Inc. | 559,197 | |||||||||
11,800 | First American Corp. | 479,316 | |||||||||
5,700 | First Horizon National Corp. | 217,626 | |||||||||
8,300 | FirstEnergy Corp. | 473,598 | |||||||||
152,000 | Ford Motor Co. | 1,272,240 | |||||||||
12,200 | FPL Group, Inc. | 542,290 | |||||||||
36,100 | Freddie Mac | 2,295,960 | |||||||||
6,300 | Freeport-McMoRan Copper & Gold, Inc.- Class B | 366,723 | |||||||||
42,900 | Gap (The), Inc. | 721,149 | |||||||||
7,600 | Genentech, Inc. * | 627,152 | |||||||||
35,300 | General Motors Corp. (a) | 1,030,054 | |||||||||
22,200 | Genworth Financial, Inc.-Class A | 764,346 | |||||||||
11,500 | Gilead Sciences, Inc. * | 729,100 | |||||||||
4,500 | Global Santa Fe Corp. | 221,490 | |||||||||
9,000 | Goldman Sachs Group, Inc. | 1,337,850 | |||||||||
5,000 | Google, Inc.-Class A * | 1,892,650 | |||||||||
25,600 | Halliburton Co. | 835,072 | |||||||||
18,800 | Harley-Davidson, Inc. | 1,099,988 | |||||||||
5,700 | Hartford Financial Services Group, Inc. | 489,402 | |||||||||
10,100 | Health Net, Inc. * | 422,281 | |||||||||
53,600 | Hewlett-Packard Co. | 1,959,616 | |||||||||
103,800 | Home Depot, Inc. | 3,559,302 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
6,800 | IndyMac Bancorp, Inc. | 265,880 | |||||||||
20,700 | Janus Capital Group, Inc. | 368,046 | |||||||||
76,500 | Johnson & Johnson | 4,946,490 | |||||||||
6,200 | Johnson Controls, Inc. | 445,966 | |||||||||
9,100 | Jones Apparel Group, Inc. | 284,830 | |||||||||
11,600 | KB Home | 496,016 | |||||||||
23,600 | Kraft Foods, Inc. | 800,276 | |||||||||
28,500 | Kroger Co. | 678,585 | |||||||||
6,200 | Las Vegas Sands Corp. * | 432,822 | |||||||||
16,200 | Lehman Brothers Holdings, Inc. | 1,033,722 | |||||||||
13,600 | Lennar Corp.-Class A | 609,824 | |||||||||
9,700 | Lexmark International, Inc. * | 543,879 | |||||||||
8,600 | Lincare Holdings, Inc. * | 318,458 | |||||||||
4,200 | Lockheed Martin Corp. | 346,920 | |||||||||
15,000 | Loews Corp. | 577,200 | |||||||||
36,100 | Lowe's Cos., Inc. | 976,866 | |||||||||
5,700 | Marathon Oil Corp. | 475,950 | |||||||||
6,000 | Mastercard, Inc. * | 335,400 | |||||||||
7,100 | MBIA, Inc. | 437,573 | |||||||||
4,500 | MDC Holdings, Inc. | 192,555 | |||||||||
9,800 | MEMC Electronic Materials, Inc. * | 379,064 | |||||||||
22,700 | Merck & Co., Inc. | 920,485 | |||||||||
12,800 | Merrill Lynch & Co., Inc. | 941,184 | |||||||||
5,800 | Metlife, Inc. | 319,174 | |||||||||
9,200 | MGIC Investment Corp. | 532,404 | |||||||||
8,300 | Monster Worldwide, Inc. * | 338,142 | |||||||||
6,100 | Moody's Corp. | 373,198 | |||||||||
7,300 | Morgan Stanley | 480,267 | |||||||||
33,200 | Motorola, Inc. | 776,216 | |||||||||
34,600 | National City Corp. | 1,196,468 | |||||||||
8,800 | New Century Financial Corp. (a) | 340,648 | |||||||||
22,100 | News Corp.-Class A | 420,563 | |||||||||
6,900 | NII Holdings, Inc. * | 368,115 | |||||||||
10,200 | Nordstrom, Inc. | 380,970 | |||||||||
13,700 | Norfolk Southern Corp. | 585,401 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
3,300 | Northrop Grumman Corp. | 220,473 | |||||||||
12,600 | Nucor Corp. | 615,762 | |||||||||
14,100 | Nvidia Corp. * | 410,451 | |||||||||
600 | NVR, Inc. * | 308,190 | |||||||||
16,625 | Old Republic International Corp. | 347,463 | |||||||||
85,000 | Oracle Corp. * | 1,330,250 | |||||||||
8,800 | Peabody Energy Corp. | 387,816 | |||||||||
374,400 | Pfizer, Inc. | 10,318,464 | |||||||||
7,600 | Phelps Dodge Corp. | 680,200 | |||||||||
9,900 | PMI Group (The), Inc. | 428,076 | |||||||||
5,700 | PNC Financial Services Group, Inc. | 403,503 | |||||||||
7,600 | Precision Castparts Corp. | 444,144 | |||||||||
10,700 | Progress Energy, Inc. | 474,331 | |||||||||
8,800 | Prudential Financial, Inc. | 646,008 | |||||||||
23,600 | Pulte Homes, Inc. | 700,212 | |||||||||
13,300 | Qualcomm, Inc. | 501,011 | |||||||||
56,500 | Qwest Communications International, Inc. * | 497,765 | |||||||||
7,000 | Radian Group, Inc. | 419,160 | |||||||||
8,175 | Realogy Corp. * | 174,945 | |||||||||
6,200 | Reynolds American, Inc. | 403,434 | |||||||||
5,500 | Rockwell Automation, Inc. | 310,090 | |||||||||
6,100 | Ryder Systems, Inc. | 301,462 | |||||||||
7,200 | Ryland Group, Inc. | 307,224 | |||||||||
11,600 | Sabre Holdings Corp.-Class A | 254,272 | |||||||||
32,700 | Safeway, Inc. | 1,011,411 | |||||||||
28,700 | Sara Lee Corp. | 477,281 | |||||||||
27,600 | Schlumberger Ltd | 1,691,880 | |||||||||
6,500 | SEI Investment Co. | 331,760 | |||||||||
4,700 | Simon Property Group, Inc. REIT | 398,513 | |||||||||
5,900 | Southern Copper Corp. | 544,688 | |||||||||
10,000 | SPX Corp. | 528,000 | |||||||||
20,900 | St. Paul Travelers Cos. (The), Inc. | 917,510 | |||||||||
10,200 | Starbucks Corp. * | 316,302 | |||||||||
11,700 | Stryker Corp. | 561,951 | |||||||||
11,142 | Supervalu, Inc. | 318,216 | |||||||||
49,900 | Tellabs, Inc. * | 508,481 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
30,300 | Texas Instruments, Inc. | 987,477 | |||||||||
10,200 | Toll Brothers, Inc. * | 269,484 | |||||||||
4,800 | Torchmark Corp. | 298,608 | |||||||||
7,500 | Union Pacific Corp. | 602,625 | |||||||||
6,600 | United Technologies Corp. | 413,886 | |||||||||
36,000 | UnumProvident Corp. | 682,200 | |||||||||
5,900 | USG Corp. * | 300,900 | |||||||||
14,100 | Valero Energy Corp. | 809,340 | |||||||||
69,500 | Verizon Communications, Inc. | 2,445,010 | |||||||||
2,800 | Vornado Realty Trust | 296,548 | |||||||||
38,600 | Wachovia Corp. | 2,108,718 | |||||||||
35,049 | Washington Mutual, Inc. | 1,468,203 | |||||||||
11,300 | Waste Management, Inc. | 387,364 | |||||||||
6,900 | Weatherford International Ltd * | 296,700 | |||||||||
62,200 | Wells Fargo & Co. | 2,161,450 | |||||||||
4,700 | Whirlpool Corp. | 380,277 | |||||||||
8,684 | Windstream Corp. | 114,629 | |||||||||
6,540 | Wyndham Worldwide Corp. * | 191,360 | |||||||||
136,841,234 | |||||||||||
TOTAL COMMON STOCKS (COST $288,722,745) | 315,895,796 | ||||||||||
PREFERRED STOCKS — 0.1% | |||||||||||
Germany — 0.1% | |||||||||||
8,638 | Volkswagen AG 2.70% | 487,824 | |||||||||
TOTAL PREFERRED STOCKS (COST $357,352) | 487,824 | ||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Switzerland — 0.0% | |||||||||||
1,289 | Swisscom AG Warrants, expires 09/13/06 * | 3,278 | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $2,745) | 3,278 |
See accompanying notes to the financial statements.
15
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 6.3% | |||||||||||
5,990,091 | Boston Global Investment Trust - Enhanced Portfolio (b) | 5,990,091 | |||||||||
14,900,000 | Branch Bank & Trust Time Deposit, 5.26% due 09/01/06 | 14,900,000 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $20,890,091) | 20,890,091 | ||||||||||
TOTAL INVESTMENTS — 101.0% (Cost $309,972,933) | 337,276,989 | ||||||||||
Other Assets and Liabilities (net) — (1.0%) | (3,325,012 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 333,951,977 |
See accompanying notes to the financial statements.
16
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||
Buys | |||||||||||||||||||||||
11/22/06 | CAD | 15,085,845 | $ | 13,682,938 | $ | 125,282 | |||||||||||||||||
11/22/06 | CHF | 261,396 | 214,097 | (130 | ) | ||||||||||||||||||
11/22/06 | EUR | 594,000 | 764,525 | 551 | |||||||||||||||||||
11/22/06 | GBP | 53,000 | 101,022 | 457 | |||||||||||||||||||
11/22/06 | HKD | 3,073,000 | 396,072 | (15 | ) | ||||||||||||||||||
11/22/06 | JPY | 407,680,140 | 3,510,839 | (28,538 | ) | ||||||||||||||||||
11/22/06 | NOK | 7,421,423 | 1,179,520 | (10,051 | ) | ||||||||||||||||||
11/22/06 | NZD | 1,891,754 | 1,233,844 | 32,246 | |||||||||||||||||||
11/22/06 | SEK | 74,896,478 | 10,396,166 | (100,727 | ) | ||||||||||||||||||
11/22/06 | SGD | 4,321,682 | 2,756,772 | (975 | ) | ||||||||||||||||||
$ | 18,100 | ||||||||||||||||||||||
Sales | |||||||||||||||||||||||
11/22/06 | AUD | 616,156 | $ | 469,692 | $ | (977 | ) | ||||||||||||||||
11/22/06 | EUR | 690,936 | 889,289 | (19 | ) | ||||||||||||||||||
11/22/06 | GBP | 10,082,428 | 19,217,884 | (149,109 | ) | ||||||||||||||||||
11/22/06 | HKD | 9,168,167 | 1,181,663 | 555 | |||||||||||||||||||
$ | (149,550 | ) |
See accompanying notes to the financial statements.
17
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
2 | CAC 40 | September 2006 | $ | 132,394 | $ | 97 | |||||||||||||
81 | DAX | September 2006 | 15,205,362 | 1,021,427 | |||||||||||||||
1 | EURONEXT | September 2006 | 120,274 | 161 | |||||||||||||||
5 | MSCI Singapore | September 2006 | 188,594 | 2,951 | |||||||||||||||
2 | OMXS 30 | September 2006 | 27,391 | 289 | |||||||||||||||
4 | S&P 500 | September 2006 | 1,305,600 | 1,059 | |||||||||||||||
2 | TOPIX | September 2006 | 278,462 | 3,748 | |||||||||||||||
2 | TOPIX | December 2006 | 277,439 | 2,811 | |||||||||||||||
$ | 1,032,543 | ||||||||||||||||||
Sales | |||||||||||||||||||
17 | FTSE 100 | September 2006 | $ | 1,910,895 | $ | (110,504 | ) | ||||||||||||
1 | Hang Seng | September 2006 | 111,723 | (2,791 | ) | ||||||||||||||
3 | IBEX 35 | September 2006 | 467,325 | (10,842 | ) | ||||||||||||||
12 | S&P/MIB | September 2006 | 2,922,790 | (96,050 | ) | ||||||||||||||
13 | SPI 200 | September 2006 | 1,266,494 | (46,945 | ) | ||||||||||||||
$ | (267,132 | ) |
As of August 31, 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.
18
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
* 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).
As of August 31, 2006, 52.1% of the Net Assets of the Fund were valued using fair value prices based on models used by a third party vendor (Note 2).
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - B ritish 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.
19
GMO Developed World Stock Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $5,672,679 (cost $309,972,933) (Note 2) | $ | 337,276,989 | |||||
Cash | 52,508 | ||||||
Foreign currency, at value (cost $481,354) (Note 2) | 484,104 | ||||||
Receivable for investments sold | 372,772 | ||||||
Dividends and interest receivable | 775,645 | ||||||
Foreign taxes receivable | 66,023 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 159,091 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 1,575,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 41,664 | ||||||
Total assets | 340,803,796 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 5,990,091 | ||||||
Payable for investments purchased | 279,055 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 130,174 | ||||||
Shareholder service fee | 35,542 | ||||||
Trustees and Chief Compliance Officer fees | 660 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 290,541 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 39,429 | ||||||
Accrued expenses | 86,327 | ||||||
Total liabilities | 6,851,819 | ||||||
Net assets | $ | 333,951,977 |
See accompanying notes to the financial statements.
20
GMO Developed World Stock Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 298,134,919 | |||||
Accumulated undistributed net investment income | 4,114,145 | ||||||
Accumulated net realized gain | 3,760,075 | ||||||
Net unrealized appreciation | 27,942,838 | ||||||
$ | 333,951,977 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 190,965,031 | |||||
Class IV shares | $ | 142,986,946 | |||||
Shares outstanding: | |||||||
Class III | 8,342,312 | ||||||
Class IV | 6,242,245 | ||||||
Net asset value per share: | |||||||
Class III | $ | 22.89 | |||||
Class IV | $ | 22.91 |
See accompanying notes to the financial statements.
21
GMO Developed World Stock Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $355,644) | $ | 4,856,143 | |||||
Interest (including securities lending income of $149,806) | 485,114 | ||||||
Total investment income | 5,341,257 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 761,867 | ||||||
Shareholder service fee – Class III (Note 3) | 137,589 | ||||||
Shareholder service fee – Class IV (Note 3) | 70,373 | ||||||
Custodian and fund accounting agent fees | 148,120 | ||||||
Transfer agent fees | 21,160 | ||||||
Audit and tax fees | 30,084 | ||||||
Legal fees | 3,130 | ||||||
Trustees fees and related expenses (Note 3) | 2,452 | ||||||
Registration fees | 3,864 | ||||||
Miscellaneous | 3,128 | ||||||
Total expenses | 1,181,767 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (208,564 | ) | |||||
Net expenses | 973,203 | ||||||
Net investment income (loss) | 4,368,054 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 3,959,410 | ||||||
Closed futures contracts | (516,499 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 349,833 | ||||||
Net realized gain (loss) | 3,792,744 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 4,577,228 | ||||||
Open futures contracts | 272,240 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (211,914 | ) | |||||
Net unrealized gain (loss) | 4,637,554 | ||||||
Net realized and unrealized gain (loss) | 8,430,298 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 12,798,352 |
See accompanying notes to the financial statements.
22
GMO Developed World Stock Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Period from August 1, 2005 (commencement of operations) through February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 4,368,054 | $ | 1,630,759 | |||||||
Net realized gain (loss) | 3,792,744 | 2,301,807 | |||||||||
Change in net unrealized appreciation (depreciation) | 4,637,554 | 23,305,284 | |||||||||
Net increase (decrease) in net assets from operations | 12,798,352 | 27,237,850 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (345,666 | ) | (395,896 | ) | |||||||
Class IV | (277,844 | ) | (357,127 | ) | |||||||
Total distributions from net investment income | (623,510 | ) | (753,023 | ) | |||||||
Net realized gains | |||||||||||
Class III | (1,607,747 | ) | — | ||||||||
Class IV | (1,234,864 | ) | — | ||||||||
Total distributions from net realized gains | (2,842,611 | ) | — | ||||||||
(3,466,121 | ) | — | |||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 6,212,380 | 164,617,846 | |||||||||
Class IV | 1,512,708 | 124,982,127 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 7,725,088 | 289,599,973 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 19,568 | 415,290 | |||||||||
Class IV | — | 375,000 | |||||||||
Increase in net assets resulting from net purchase premiums and redemption fees | 19,568 | 790,290 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 7,744,656 | 290,390,263 | |||||||||
Total increase (decrease) in net assets | 17,076,887 | 316,875,090 | |||||||||
Net assets: | |||||||||||
Beginning of period | 316,875,090 | — | |||||||||
End of period (including accumulated undistributed net investment income of $4,114,145 and $369,601, respectively) | $ | 333,951,977 | $ | 316,875,090 |
See accompanying notes to the financial statements.
23
GMO Developed World Stock Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 (Unaudited) | Period from August 1, 2005 (commencement of operations) through February 28, 2006 | ||||||||||
Net asset value, beginning of period | $ | 22.24 | $ | 20.00 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)† | 0.30 | 0.15 | |||||||||
Net realized and unrealized gain (loss) | 0.59 | 2.15 | |||||||||
Total from investment operations | 0.89 | 2.30 | |||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | (0.04 | ) | (0.06 | ) | |||||||
From net realized gains | (0.20 | ) | — | ||||||||
Total distributions | (0.24 | ) | (0.06 | ) | |||||||
Net asset value, end of period | $ | 22.89 | $ | 22.24 | |||||||
Total Return(a) | 4.05 | %** | 11.51 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 190,965 | $ | 179,466 | |||||||
Net expenses to average daily net assets | 0.62 | %* | 0.62 | %* | |||||||
Net investment income to average daily net assets | 2.67 | %* | 1.27 | %* | |||||||
Portfolio turnover rate | 18 | %** | 15 | %** | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.13 | %* | 0.20 | %* | |||||||
Purchase premiums and redemption fees consisted of the following per share amounts: | $ | — | (b) | $ | 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.
(b) Purchase premiums and redemption fees were less than $0.01 per share.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
24
GMO Developed World Stock Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2006 (Unaudited) | Period from September 1, 2005 (commencement of operations) through February 28, 2006 | ||||||||||
Net asset value, beginning of period | $ | 22.25 | $ | 20.24 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)† | 0.31 | 0.12 | |||||||||
Net realized and unrealized gain (loss) | 0.60 | 1.95 | |||||||||
Total from investment operations | 0.91 | 2.07 | |||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | (0.05 | ) | (0.06 | ) | |||||||
From net realized gains | (0.20 | ) | — | ||||||||
Total distributions | (0.25 | ) | (0.06 | ) | |||||||
Net asset value, end of period | $ | 22.91 | $ | 22.25 | |||||||
Total Return(a) | 4.10 | %** | 10.23 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 142,987 | $ | 137,409 | |||||||
Net expenses to average daily net assets | 0.57 | %* | 0.57 | %* | |||||||
Net investment income to average daily net assets | 2.72 | %* | 1.20 | %* | |||||||
Portfolio turnover rate | 18 | %** | 15 | %**†† | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.13 | %* | 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 period shown. Calculation 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.
25
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its investment objective by outperforming the MSCI World Index. The Fund typically makes equity investments in companies from the world's developed markets, including the U.S.
Throughout the six months ended August 31, 2006, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different level of shareholder service fees.
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 generally 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 pursuant to procedures approved by the Trustees. 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 are generally valued by a third party vendor using fair value prices based on models to the extent that these fair value prices are available.
26
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 including 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 lo ss 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. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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,
27
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
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.
28
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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. There were no swap agreements outstanding at the end of the period.
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
29
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
of cash by the Fund may be delayed or limited. There were no repurchase agreements outstanding at the end of the period.
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 August 31, 2006, the Fund had loaned securities having a market value of $5,672,679, collateralized by cash in the amount of $5,990,091, which was invested in the Boston Global Investment Trust – Enhanced Portfolio.
Taxes and distributions
The Fund intends to qualify each tax 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 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.
30
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 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) | ||||||||||||
$ | 310,012,311 | $ | 35,849,694 | $ | (8,585,016 | ) | $ | 27,264,678 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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 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.
31
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Purchase and redemption of Fund shares
The premium on cash purchases and fee on redemptions of Fund shares are currently 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 six months ended August 31, 2006, the Fund received $16,202 in purchase premiums and $3,366 in redemption fees, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of est imated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in U.S. 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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006, was $1,716 and $920, respectively. No remuneration was paid by the Fund to any other officer of the Trust.
32
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2006 aggregated $59,135,084 and $54,172,941, 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 August 31, 2006, 71.6% 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:
Six Months Ended August 31, 2006 (Unaudited) | Period from August 1, 2005 (commencement of operations) through February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 236,946 | $ | 5,384,299 | 8,121,989 | $ | 165,726,450 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 87,754 | 1,953,413 | 18,807 | 395,896 | |||||||||||||||
Shares repurchased | (50,503 | ) | (1,125,332 | ) | (72,681 | ) | (1,504,500 | ) | |||||||||||
Purchase premiums and redemption fees | — | 19,568 | — | 415,290 | |||||||||||||||
Net increase (decrease) | 274,197 | $ | 6,231,948 | 8,068,115 | $ | 165,033,136 |
33
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Six Months Ended August 31, 2006 (Unaudited) | Period from September 1, 2005 (commencement of operations) through February 28, 2006 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | 6,157,362 | $ | 124,625,000 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 67,926 | 1,512,708 | 16,957 | 357,127 | |||||||||||||||
Shares repurchased | — | — | — | — | |||||||||||||||
Purchase premiums and redemption fees | — | — | — | 375,000 | |||||||||||||||
Net increase (decrease) | 67,926 | $ | 1,512,708 | 6,174,319 | $ | 125,357,127 |
34
GMO Developed World Stock Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Developed World Stock Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee
35
GMO Developed World Stock Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
36
GMO Developed World Stock Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
37
GMO Developed World Stock Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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.
38
GMO Developed World Stock Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 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 | 0.62 | % | $ | 1,000.00 | $ | 1,040.50 | $ | 3.19 | |||||||||||
2) Hypothetical | 0.62 | % | $ | 1,000.00 | $ | 1,022.08 | $ | 3.16 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.57 | % | $ | 1,000.00 | $ | 1,041.00 | $ | 2.93 | |||||||||||
2) Hypothetical | 0.57 | % | $ | 1,000.00 | $ | 1,022.33 | $ | 2.91 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
39
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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 Plus Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 97.2 | % | |||||
Short-Term Investments | 1.8 | ||||||
Forward Currency Contracts | 0.5 | ||||||
Swaps | 0.5 | ||||||
Loan Assignments | 0.2 | ||||||
Loan Participations | 0.2 | ||||||
Call Options Purchased | 0.1 | ||||||
Promissory Notes | 0.0 | ||||||
Put Options Purchased | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | 0.0 | ||||||
Futures | (0.3 | ) | |||||
Reverse Repurchase Agreements | (0.8 | ) | |||||
Other | 0.6 | ||||||
100.0 | % | ||||||
Country/Region Summary** | % of Investments | ||||||
United States | 81.8 | % | |||||
Australia | 20.9 | ||||||
Sweden | 19.4 | ||||||
Euro Region*** | 0.4 | ||||||
United Kingdom | 0.4 | ||||||
Canada | (10.4 | ) | |||||
Japan | (12.5 | ) | |||||
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. The table excludes short-term investments and any investment in the underlying fund(s) that are less than 3% of invested assets. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, Netherlands and Spain.
1
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 21.5% | |||||||||||
United States — 21.5% | |||||||||||
Corporate Debt — 0.7% | |||||||||||
13,850,000 | JP Morgan & Co. Series MTN, Variable Rate, CPI + 4.00%, 4.60%, due 02/15/12 | 14,877,670 | |||||||||
U.S. Government — 20.8% | |||||||||||
20,444,400 | U.S. Treasury Inflation Indexed Bond, 2.00%, due 01/15/26 (a) | 19,690,513 | |||||||||
82,770,546 | U.S. Treasury Inflation Indexed Bond, 2.38%, due 01/15/25 (a) | 84,503,554 | |||||||||
2,508,800 | U.S. Treasury Inflation Indexed Bond, 3.63%, due 04/15/28 (a) | 3,126,200 | |||||||||
185,274,350 | U.S. Treasury Inflation Indexed Note, 0.88%, due 04/15/10 (a) (b) | 175,981,683 | |||||||||
70,839,846 | U.S. Treasury Inflation Indexed Note, 2.00%, due 01/15/16 (a) | 69,312,362 | |||||||||
33,366,540 | U.S. Treasury Inflation Indexed Note, 2.00%, due 07/15/14 (a) | 32,725,277 | |||||||||
31,687,270 | U.S. Treasury Inflation Indexed Note, 2.38%, due 04/15/11 (a) (c) | 31,801,146 | |||||||||
417,140,735 | |||||||||||
Total United States | 432,018,405 | ||||||||||
TOTAL DEBT OBLIGATIONS (COST $428,377,674) | 432,018,405 | ||||||||||
MUTUAL FUNDS — 77.3% | |||||||||||
Affiliated Issuers — 77.3% | |||||||||||
5,361,922 | GMO Emerging Country Debt Fund, Class III | 59,731,809 | |||||||||
41,867,395 | GMO Short-Duration Collateral Fund | 1,090,226,973 | |||||||||
28,918 | GMO Special Purpose Holding Fund (d) | 140,543 | |||||||||
15,728,877 | GMO World Opportunity Overlay Fund | 400,142,640 | |||||||||
TOTAL MUTUAL FUNDS (COST $1,544,924,485) | 1,550,241,965 |
See accompanying notes to the financial statements.
2
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 0.2% | |||||||||||
Money Market Funds — 0.2% | |||||||||||
3,330,834 | Merrimac Cash Series-Premium Class | 3,330,834 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $3,330,834) | 3,330,834 | ||||||||||
TOTAL INVESTMENTS — 99.0% (Cost $1,976,632,993) | 1,985,591,204 | ||||||||||
Other Assets and Liabilities (net) — 1.0% | 20,635,457 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 2,006,226,661 |
See accompanying notes to the financial statements.
3
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
10/24/06 | AUD | 305,300,000 | $ | 232,872,155 | $ | 699,336 | |||||||||||||
9/19/06 | CHF | 42,500,000 | 34,579,198 | (42,086 | ) | ||||||||||||||
9/12/06 | GBP | 134,600,000 | 256,310,258 | 2,705,059 | |||||||||||||||
10/10/06 | JPY | 2,550,000,000 | 21,826,434 | (401,669 | ) | ||||||||||||||
10/03/06 | NZD | 141,900,000 | 92,832,507 | 3,516,739 | |||||||||||||||
9/05/06 | SEK | 1,921,583 | 265,163 | (1,413 | ) | ||||||||||||||
$ | 6,475,966 | ||||||||||||||||||
Sales | |||||||||||||||||||
10/24/06 | AUD | 47,500,000 | $ | 36,231,338 | $ | (151,280 | ) | ||||||||||||
10/31/06 | CAD | 39,600,000 | 35,891,556 | (186,670 | ) | ||||||||||||||
9/19/06 | CHF | 255,000,000 | 207,475,190 | 281,977 | |||||||||||||||
9/26/06 | EUR | 116,600,000 | 149,576,337 | (174,510 | ) | ||||||||||||||
10/10/06 | JPY | 38,830,000,000 | 332,360,951 | 6,657,119 | |||||||||||||||
$ | 6,426,636 |
Forward Cross Currency Contracts
Settlement Date | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | ||||||||||||
9/05/06 | EUR | 44,400,000 | SEK | 408,814,440 | $ | (469,962 | ) | ||||||||
10/17/06 | EUR | 65,300,000 | NOK | 515,931,968 | (2,049,277 | ) | |||||||||
9/05/06 | SEK | 410,736,023 | EUR | 44,400,000 | 204,799 | ||||||||||
10/17/06 | NOK | 135,587,760 | EUR | 16,800,000 | 74,955 | ||||||||||
11/07/06 | EUR | 38,300,000 | SEK | 354,035,625 | (162,049 | ) | |||||||||
$ | (2,401,534 | ) |
See accompanying notes to the financial statements.
4
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
1,740 | Australian Government Bond 10 Yr. | September 2006 | $ | 136,160,465 | $ | 1,436,405 | |||||||||||||
3,049 | Australian Government Bond 3 Yr. | September 2006 | 234,119,896 | 761,322 | |||||||||||||||
123 | Euro BOBL | September 2006 | 17,404,871 | 103,545 | |||||||||||||||
235 | Euro Bund | September 2006 | 35,607,578 | 436,663 | |||||||||||||||
5 | Japanese Government Bond 10 Yr. (LIF) | September 2006 | 5,754,504 | (1,387) | |||||||||||||||
$ | 2,736,548 | ||||||||||||||||||
Sales | |||||||||||||||||||
1,502 | Canadian Government Bond 10 Yr. | December 2006 | $ | 155,105,655 | $ | (1,101,367 | ) | ||||||||||||
204 | Japanese Government Bond 10 Yr. (TSE) | September 2006 | 234,557,856 | (4,642,958) | |||||||||||||||
1,182 | U.S. Long Bond | December 2006 | 131,275,875 | (687,481 | ) | ||||||||||||||
1,345 | U.S. Treasury Note 10 Yr. | December 2006 | 144,419,375 | (442,364 | ) | ||||||||||||||
1,879 | U.S. Treasury Note 2 Yr. | December 2006 | 383,961,906 | (630,893 | ) | ||||||||||||||
740 | U.S. Treasury Note 5 Yr. | December 2006 | 77,780,937 | (188,668 | ) | ||||||||||||||
95 | UK Gilt Long Bond | December 2006 | 19,928,073 | (61,785 | ) | ||||||||||||||
$ | (7,755,516 | ) |
As of August 31, 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) | |||||||||||||||||||||||||||||
110,000,000 | SEK | 9/20/2008 | JP Morgan | Receive | 3.20 | % | 3 month | ||||||||||||||||||||||||||||
Chase Bank | SEK STIBOR | $ | (125,530 | ) | |||||||||||||||||||||||||||||||
220,000,000 | SEK | 9/20/2008 | Merrill Lynch | Receive | 3.20 | % | 3 month SEK STIBOR | (251,061 | ) |
See accompanying notes to the financial statements.
5
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Interest Rate Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
667,000,000 | SEK | 9/20/2011 | Citigroup | Receive | 3.60 | % | 3 month | ||||||||||||||||||||||||
SEK STIBOR | $ | (1,322,915 | ) | ||||||||||||||||||||||||||||
545,000,000 | SEK | 9/20/2011 | Deutsche Bank AG | Receive | 3.60 | % | 3 month SEK STIBOR | (1,080,943 | ) | ||||||||||||||||||||||
75,000,000 | SEK | 9/20/2013 | Deutsche Bank AG | Receive | 3.70 | % | 3 month SEK STIBOR | (203,234 | ) | ||||||||||||||||||||||
425,000,000 | SEK | 9/20/2013 | JP Morgan Chase Bank | Receive | 3.70 | % | 3 month SEK STIBOR | (1,151,661 | ) | ||||||||||||||||||||||
145,000,000 | SEK | 9/20/2013 | Merrill Lynch | Receive | 3.70 | % | 3 month SEK STIBOR | (392,920 | ) | ||||||||||||||||||||||
350,000,000 | SEK | 9/20/2016 | Barclays Bank PLC | Receive | 3.75 | % | 3 month SEK STIBOR | (1,439,645 | ) | ||||||||||||||||||||||
75,000,000 | SEK | 9/20/2016 | JP Morgan Chase Bank | Receive | 3.75 | % | 3 month SEK STIBOR | (308,495 | ) | ||||||||||||||||||||||
$ | (6,276,404 | ) |
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
125,000,000 | USD | 9/29/2006 | Barclays Bank PLC | 1 month | Barclays TIPS | ||||||||||||||||||||||
LIBOR - 0.04% | Index Total Return | $ | 1,638,653 | ||||||||||||||||||||||||
250,000,000 | USD | 10/31/2006 | Barclays Bank PLC | 1 month LIBOR - 0.04% | Barclays TIPS Index Total Return | 2,081,295 | |||||||||||||||||||||
203,844,739 | USD | 11/13/2006 | Barclays Bank PLC | 1 month LIBOR - 0.04% | Barclays TIPS Index Total Return | 1,292,298 | |||||||||||||||||||||
280,120,042 | USD | 11/30/2006 | Barclays Bank PLC | 1 month LIBOR - 0.04% | Barclays TIPS Index Total Return | 3,713,425 | |||||||||||||||||||||
97,021,964 | USD | 12/29/2006 | Barclays Bank PLC | 1 month LIBOR - 0.04% | Barclays TIPS Index Total Return | 1,286,176 | |||||||||||||||||||||
600,000,000 | USD | 1/31/2007 | Barclays Bank PLC | 1 month LIBOR - 0.04% | Barclays TIPS Index Total Return | 4,995,109 | |||||||||||||||||||||
6,000,000 | USD | 2/28/2007 | JP Morgan Chase Bank | 1 month LIBOR - 0.08% | Lehman Brothers 1 - 10 Year TIPS Index | — | |||||||||||||||||||||
$ | 15,006,956 |
See accompanying notes to the financial statements.
6
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Notes to Schedule of Investments:
CPI - Consumer Price Index
LIBOR - London Interbank Offered Rate
MTN - Medium Term Note
STIBOR - Stockholm Interbank Offered Rate
TIPS - Treasury Inflation Protected Securities
Variable rates - The rates shown on variable rate notes are the current interest rates at August 31, 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 collateral requirements on open swap contracts (Note 2).
(c) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2).
(d) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - B ritish 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.
7
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $431,708,508) (Note 2) | $ | 435,349,239 | |||||
Investments in affiliated issuers, at value (cost $1,544,924,485) (Note 2 and 8) | 1,550,241,965 | ||||||
Receivable for Fund shares sold | 2,000,000 | ||||||
Interest receivable | 1,572,921 | ||||||
Unrealized appreciation on open forward currency and cross currency contracts (Note 2) | 14,139,984 | ||||||
Receivable for open swap contracts (Note 2) | 15,006,956 | ||||||
Receivable for closed swap contracts (Note 2) | 19,550 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 39,793 | ||||||
Total assets | 2,018,370,408 | ||||||
Liabilities: | |||||||
Foreign currency due to custodian | 182,328 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 387,737 | ||||||
Shareholder service fee | 111,639 | ||||||
Trustees and Chief Compliance Officer fees | 244 | ||||||
Unrealized depreciation on open forward currency and cross currency contracts (Note 2) | 3,638,916 | ||||||
Payable for open swap contracts (Note 2) | 6,276,404 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 1,529,015 | ||||||
Accrued expenses | 17,464 | ||||||
Total liabilities | 12,143,747 | ||||||
Net assets | $ | 2,006,226,661 |
See accompanying notes to the financial statements.
8
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 1,967,637,490 | |||||
Accumulated undistributed net investment income | 4,704,956 | ||||||
Accumulated net realized gain | 1,253,514 | ||||||
Net unrealized appreciation | 32,630,701 | ||||||
$ | 2,006,226,661 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 276,633,587 | |||||
Class IV shares | $ | 154,421,669 | |||||
Class VI shares | $ | 1,575,171,405 | |||||
Shares outstanding: | |||||||
Class III | 10,711,722 | ||||||
Class IV | 5,979,079 | ||||||
Class VI | 60,965,862 | ||||||
Net asset value per share: | |||||||
Class III | $ | 25.83 | |||||
Class IV | $ | 25.83 | |||||
Class VI | $ | 25.84 |
See accompanying notes to the financial statements.
9
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Statement of Operations — Period from May 31, 2006 (commencement of operations)
through August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 2,889,846 | |||||
Interest | 2,504,867 | ||||||
Total investment income | 5,394,713 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 564,226 | ||||||
Shareholder service fee – Class III (Note 3) | 47,525 | ||||||
Shareholder service fee – Class IV (Note 3) | 16,082 | ||||||
Shareholder service fee – Class VI (Note 3) | 97,859 | ||||||
Custodian, fund accounting agent and transfer agent fees | 13,892 | ||||||
Audit and tax fees | 22,356 | ||||||
Legal fees | 1,564 | ||||||
Trustees fees and related expenses (Note 3) | 1,293 | ||||||
Registration fees | 1,288 | ||||||
Miscellaneous | 1,104 | ||||||
Total expenses | 767,189 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (39,836 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (27,700 | ) | |||||
Shareholder service fee waived – (Note 3) | (9,896 | ) | |||||
Net expenses | 689,757 | ||||||
Net investment income (loss) | 4,704,956 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 170,895 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 236,468 | ||||||
Closed futures contracts | (7,156,379 | ) | |||||
Closed swap contracts | 5,913,569 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 2,088,961 | ||||||
Net realized gain (loss) | 1,253,514 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 8,958,211 | ||||||
Open futures contracts | (5,018,968 | ) | |||||
Open swap contracts | 18,187,567 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 10,503,891 | ||||||
Net unrealized gain (loss) | 32,630,701 | ||||||
Net realized and unrealized gain (loss) | 33,884,215 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 38,589,171 |
See accompanying notes to the financial statements.
10
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Period from May 31, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||
Increase (decrease) in net assets: | |||||||
Operations: | |||||||
Net investment income (loss) | $ | 4,704,956 | |||||
Net realized gain (loss) | 1,253,514 | ||||||
Change in net unrealized appreciation (depreciation) | 32,630,701 | ||||||
Net increase (decrease) in net assets from operations | 38,589,171 | ||||||
Net share transactions (Note 7): | |||||||
Class III | 270,825,907 | ||||||
Class IV | 150,778,165 | ||||||
Class VI | 1,546,033,418 | ||||||
Increase (decrease) in net assets resulting from net share transactions | 1,967,637,490 | ||||||
Total increase (decrease) in net assets | 2,006,226,661 | ||||||
Net assets: | |||||||
Beginning of period | — | ||||||
End of period (including accumulated undistributed net investment income of $4,704,956) | $ | 2,006,226,661 |
See accompanying notes to the financial statements.
11
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
Period from June 29, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||
Net asset value, beginning of period | $ | 24.96 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)(a)† | 0.12 | ||||||
Net realized and unrealized gain (loss) | 0.75 | ||||||
Total from investment operations | 0.87 | ||||||
Net asset value, end of period | $ | 25.83 | |||||
Total Return(b) | 3.49 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 276,634 | |||||
Net expenses to average daily net assets(c) | 0.38 | %* | |||||
Net investment income to average daily net assets(a) | 2.81 | %* | |||||
Portfolio turnover rate | 7 | %†† | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* |
(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 during the period shown.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying fund(s) (See Note 3).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
†† Calculation represents portfolio turnover of the Fund for the period from May 31, 2006 (commencement of operations) through August 31, 2006.
See accompanying notes to the financial statements.
12
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout the period)
Period from July 18, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||
Net asset value, beginning of period | $ | 25.07 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)(a)† | 0.02 | ||||||
Net realized and unrealized gain (loss) | 0.74 | ||||||
Total from investment operations | 0.76 | ||||||
Net asset value, end of period | $ | 25.83 | |||||
Total Return(b) | 3.03 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 154,422 | |||||
Net expenses to average daily net assets(c) | 0.33 | %* | |||||
Net investment income to average daily net assets(a) | 0.81 | %* | |||||
Portfolio turnover rate | 7 | %†† | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* |
(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 during the period shown.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying fund(s) (See Note 3).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
†† Calculation represents portfolio turnover of the Fund for the period from May 31, 2006 (commencement of operations) through August 31, 2006.
See accompanying notes to the financial statements.
13
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout the period)
Period from May 31, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||
Net asset value, beginning of period | $ | 25.00 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)(a)† | 0.13 | ||||||
Net realized and unrealized gain (loss) | 0.71 | ||||||
Total from investment operations | 0.84 | ||||||
Net asset value, end of period | $ | 25.84 | |||||
Total Return(b) | 3.36 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 1,575,171 | |||||
Net expenses to average daily net assets(c) | 0.29 | %* | |||||
Net investment income to average daily net assets(a) | 2.07 | %* | |||||
Portfolio turnover rate | 7 | %** | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* |
(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 during the period shown.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying fund(s) (See Note 3).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
14
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
1. Organization
GMO Inflation Indexed Plus Bond Fund (the "Fund"), which commenced operations on May 31, 2006, 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 Funds into classes.
The Fund seeks total return in excess of the Lehman Brothers U.S. Treasury Inflation Notes Index. The Fund primarily makes investments that are indexed or otherwise "linked" to general measures of inflation in the country of issue. The Fund seeks additional returns by investing in global interest rate, currency, and emerging country debt markets. The Fund may invest in or use inflation indexed bonds issued by the U.S. and foreign governments and their agencies or instrumentalities; shares of GMO Short-Duration Collateral Fund; shares of GMO World Opportunity Overlay Fund; futures contracts, currency forwards, swap contracts, and other types of derivatives; sovereign debt of emerging countries, primarily through investment in shares of GMO Emerging Country Debt Fund ("ECDF") (limited to 5% of the Fund's total assets); and non-inflation indexed (or nominal) fixed income securities issued by the U.S. and foreign governments and the ir agencies or instrumentalities.
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.
As of August 31, 2006, the Fund had three classes of shares outstanding: Class III, Class IV and Class VI. Class VI, Class III and Class IV commenced operations on May 31, 2006, June 29, 2006 and July 18, 2006, respectively. Each class of shares bears a different level of shareholder servicing fees.
The financial statements of the series 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.
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
15
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 generally 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 pursuant to procedures approved by the Trustees.
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 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. As of August 31, 2006, the total value of these securities represented 31.4% 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. The outcome of the lawsuits against the 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
16
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 of 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 including 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 lo ss 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. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
17
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
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
18
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no loan agreements outstanding at the end of the period.
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. Indexed securities held by the Fund at the end of the period are listed in the Fund's Schedule of Investments.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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. Credit default swaps may be used to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where a party 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
19
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. There were no repurchase agreements o utstanding at the end of the period.
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. There were no reverse repurchase agreements outstanding at the end of the period.
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
20
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 period ended August 31, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund has adopted a tax year-end of December 31. 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.
As of August 31, 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) | ||||||||||||
$ | 1,976,632,993 | $ | 10,433,396 | $ | (1,475,185 | ) | $ | 8,958,211 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
21
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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, if any, 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 capit al 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 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. 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 the 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 0.25% 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 of each class at the annual rate of 0.15% for Class III shares, 0.10% for Class IV shares and 0.055% for Class VI shares. The Manager will waive the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares, 0.10% for Class IV shares and 0.055% for Class VI shares; provided, however, that the amount of this waiver will not exceed the respective Class' shareholder service fee.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, expenses for legal services not procured or provided by the Manager for the Trust,
22
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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, "Excluded Fund Fees and Expenses")) exceed 0.25% of the Fund's average daily net assets. In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2007 to the extent that the sum of (a) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses) and (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in ECDF (excluding ECDF's fees and expenses of the independent trustees of the Trust, fees expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's CCO (excluding any employee benefits), and investment-related expenses such as brokerage commissions, hedging transaction fees, securities lending fees and expenses, interest expense and transfer taxes), exceeds 0.25% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.25% of the Fund's average daily net assets.
The Fund incurs fees and expenses indirectly as a shareholder in underlying fund(s). For the period ended August 31, 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 | ||||||||||||
0.014 | % | 0.005 | % | 0.017 | % | 0.036 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the period ended August 31, 2006 was $833 and $92, respectively. No remuneration was paid by the Fund to any other officer of the Trust.
4. Purchases and sales of securities
For the period ended August 31, 2006, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 411,986,377 | $ | — | |||||||
Investments (non-U.S. Government securities) | 1,612,773,554 | 53,000,000 |
23
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 62.9% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. One of the shareholders is a fund of the Trust. Investment activities of these shareholders may have a material effect on the Fund.
As of August 31, 2006, less than 0.1% of the Fund's shares were held by thirteen related parties comprised of certain GMO employee accounts, and 90.5% 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:
Period from June 29, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||||||
Class III: | Shares | Amount | |||||||||
Shares sold | 14,517,812 | $ | 366,244,577 | ||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | |||||||||
Shares repurchased | (3,806,090 | ) | (95,418,670 | ) | |||||||
Net increase (decrease) | 10,711,722 | $ | 270,825,907 |
24
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Period from July 18, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||||||
Class IV: | Shares | Amount | |||||||||
Shares sold | 5,979,079 | $ | 150,778,165 | ||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | |||||||||
Shares repurchased | — | — | |||||||||
Net increase (decrease) | 5,979,079 | $ | 150,778,165 | ||||||||
Period from May 31, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||||||
Class VI: | Shares | Amount | |||||||||
Shares sold | 60,970,420 | $ | 1,546,148,418 | ||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | |||||||||
Shares repurchased | (4,558 | ) | (115,000 | ) | |||||||
Net increase (decrease) | 60,965,862 | $ | 1,546,033,418 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the securities of affiliated issuers during the period ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class III | $ | — | $ | 58,330,103 | $ | — | $ | 93,635 | $ | 236,468 | $ | 59,731,809 | |||||||||||||||
GMO Short-Duration Collateral Fund | — | 1,137,796,211 | 53,000,000 | 2,796,211 | — | 1,090,226,973 | |||||||||||||||||||||
GMO Special Purpose Holding Fund | — | 139,034 | — | — | — | 140,543 | * | ||||||||||||||||||||
GMO World Opportunity Overlay Fund | — | 401,500,000 | — | — | — | 400,142,640 | |||||||||||||||||||||
Totals | $ | — | $ | 1,597,765,348 | $ | 53,000,000 | $ | 2,889,846 | $ | 236,468 | $ | 1,550,241,965 |
* After the effect of return of capital distributions of $11,757 on June 16, 2006.
25
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of investment management agreement for GMO Inflation Indexed Plus Bond Fund. In determining to approve the initial investment management agreement of the Fund, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. At a meeting on March 1, 2006, the Trustees discussed materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the Manager's proposal to establish the Fund, as well as two other funds of the Trust, as new series of the Trust and the proposed new investment management agreements between the Trust, on behalf of each such fund, and the Manager. The Trustees considered separately the investment manageme nt agreement for each fund, but noted the common interests of the funds. During the meeting, the Trustees met with a member of the Manager's Fixed Income Division – the investment division which would be responsible for the management of the Fund. As discussed below, at meetings throughout the year, the Trustees also considered other information relevant to approval of the Fund's investment management agreement.
The Trustees considered that they had met with the Fund's investment advisory personnel over the course of the year. The Trustees also considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel who will provide services under the Fund's investment management agreement. In addition, the Trustees considered information concerning the investment philosophy of, and investment process to be applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention to be devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
Since the Fund had not yet commenced operations, the Trustees were unable to consider its performance. However, the Trustees considered the qualifications and experience of the personnel responsible for managing the Trust's existing fixed income funds, the support those personnel received from the Manager, the investment techniques used to manage those funds, and the overall competence of the Manager.
The Trustees gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper Inc. ("Lipper") concerning fees paid to managers of funds deemed by Lipper to have similar objectives. Moreover, the Trustees discussed with the Manager differences in the Fund's advisory fee, projected expense ratio, and investment program as compared to GMO Inflation Indexed Bond Fund, an existing series of the Trust with a similar policy to invest primarily in inflation indexed bonds. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques to be used to manage the Fund. Since the Fund had not yet commenced operations, the Trustees were unable to review the Manager's profitability with respect to the Fund. The Trustees did, however, consider both the estimated
26
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
dollar amount of fees to be paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value to be derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered that the fee to be charged under the Fund's investment management agreement is based on services to be provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment ma nagement agreements of other funds of the Trust in which the Fund may invest, noting in particular that, pursuant to a proposed contractual expense reimbursement arrangement with respect to the Fund, the Manager would effectively reimburse the Fund for certain of the fees and expenses (including advisory fees) that the Fund would otherwise bear as a result of its investments in those other funds. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee to be charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services to be provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and res ults with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services to be provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund would be consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services to be provided by persons other than the Manager, considering, among other things, the Fund's estimated total expenses, the Manager's proposed contractual expense reimbursement arrangement wit h respect to the Fund, and the reputation of the Fund's other service providers.
27
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services to be provided supported the approval of the Fund's investment management agreement.
At the end of the meeting on March 1, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the Fund's initial investment management agreement for an initial period ending on the second anniversary of the agreement's execution.
28
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the period ended August 31, 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, as outlined in the notes to the table below.
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.
29
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 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. 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 | 0.42 | % | $ | 1,000.00 | $ | 1,034.90 | $ | 0.74 | (a) | |||||||||
2 | ) Hypothetical | 0.42 | % | $ | 1,000.00 | $ | 1,023.09 | $ | 2.14 | (b) | |||||||||
Class IV | |||||||||||||||||||
1 | ) Actual | 0.37 | % | $ | 1,000.00 | $ | 1,026.20 | $ | 0.45 | (c) | |||||||||
2 | ) Hypothetical | 0.37 | % | $ | 1,000.00 | $ | 1,023.34 | $ | 1.89 | (b) | |||||||||
Class VI | |||||||||||||||||||
1 | ) Actual | 0.33 | % | $ | 1,000.00 | $ | 1,033.60 | $ | 0.85 | (d) | |||||||||
2 | ) Hypothetical | 0.33 | % | $ | 1,000.00 | $ | 1,023.54 | $ | 1.68 | (b) |
(a) For the period June 29, 2006 (commencement of operations) through August 31, 2006. Expense is calculated using the Class's annualized net expense ratio (including interest expense and indirect expenses incurred) for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 63 days in the period, divided by 365 days in the year.
(b) For the period March 1, 2006 through August 31, 2006. Expense is calculated using the Class's annualized net expense ratio (including interest expense and indirect expenses incurred) for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
(c) For the period July 18, 2006 (commencement of operations) through August 31, 2006. Expense is calculated using the Class's annualized net expense ratio (including interest expense and indirect expenses incurred) for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 44 days in the period, divided by 365 days in the year.
(d) For the period May 31, 2006 (commencement of operations) through August 31, 2006. Expense is calculated using the Class's annualized net expense ratio (including interest expense and indirect expenses incurred) for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 92 days in the period, divided by 365 days in the year.
30
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 91.5 | % | |||||
Short-Term Investments | 7.7 | ||||||
Preferred Stocks | 3.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | (2.3 | ) | |||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
United Kingdom | 23.8 | % | |||||
Japan | 14.2 | ||||||
Germany | 14.0 | ||||||
France | 6.2 | ||||||
Italy | 5.3 | ||||||
Switzerland | 4.8 | ||||||
Brazil | 3.6 | ||||||
Canada | 3.3 | ||||||
Finland | 3.2 | ||||||
Norway | 2.8 | ||||||
Spain | 2.7 | ||||||
Ireland | 2.1 | ||||||
South Korea | 2.1 | ||||||
Hong Kong | 1.7 | ||||||
Taiwan | 1.6 | ||||||
Netherlands | 1.4 | ||||||
Sweden | 1.3 | ||||||
Singapore | 1.1 | ||||||
Austria | 1.1 | ||||||
Australia | 0.9 | ||||||
Belgium | 0.8 | ||||||
India | 0.5 | ||||||
Mexico | 0.3 | ||||||
Chile | 0.3 | ||||||
New Zealand | 0.3 | ||||||
Thailand | 0.2 | ||||||
Malaysia | 0.2 | ||||||
Egypt | 0.1 | ||||||
Philippines | 0.1 | ||||||
100.0 | % |
1
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Industry Sector Summary | % of Equity Investments | ||||||
Industrials | 25.8 | % | |||||
Consumer Discretionary | 23.0 | ||||||
Financials | 19.6 | ||||||
Materials | 8.1 | ||||||
Consumer Staples | 7.9 | ||||||
Information Technology | 5.5 | ||||||
Energy | 3.5 | ||||||
Utilities | 3.0 | ||||||
Health Care | 2.6 | ||||||
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 91.5% | |||||||||||
Australia — 0.9% | |||||||||||
491,866 | Brazin Ltd | 468,899 | |||||||||
421,897 | Consolidated Rutile Ltd | 197,942 | |||||||||
658,100 | Gunns Ltd | 1,385,733 | |||||||||
600,000 | Healthscope Ltd (a) | 2,214,684 | |||||||||
807,869 | McGuigan Simeon Wines Ltd | 1,222,328 | |||||||||
136,000 | Multiplex Group | 350,218 | |||||||||
850,000 | PaperlinX Ltd | 2,229,878 | |||||||||
438,800 | PMP Ltd * | 509,370 | |||||||||
8,579,052 | |||||||||||
Austria — 1.0% | |||||||||||
92,000 | Boehler Uddeholm (Bearer) | 4,950,163 | |||||||||
20,677 | Flughafen Wien AG | 1,676,216 | |||||||||
34,800 | OMV AG | 1,857,433 | |||||||||
35,000 | Wienerberger AG | 1,679,554 | |||||||||
10,163,366 | |||||||||||
Belgium — 0.8% | |||||||||||
102,000 | AGFA-Gevaert NV | 2,392,741 | |||||||||
33,278 | Bekaert NV | 3,265,858 | |||||||||
26,964 | Omega Pharma SA | 1,554,636 | |||||||||
5,006 | Unibra SA | 637,647 | |||||||||
7,850,882 | |||||||||||
Brazil — 1.5% | |||||||||||
290,000 | Abyara Planejamento * | 3,381,530 | |||||||||
138,500 | American Banknote SA | 1,078,801 | |||||||||
382,800 | Companhia de Concessoes Rodoviarias | 3,729,800 | |||||||||
300,000 | Porto Seguro SA | 6,366,604 | |||||||||
14,556,735 |
See accompanying notes to the financial statements.
3
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Canada — 3.1% | |||||||||||
90,600 | KAP Resources Ltd * (b) | 820 | |||||||||
301,500 | Linamar Corp | 3,696,123 | |||||||||
700,000 | Lionore Mining Intl Ltd * | 4,407,853 | |||||||||
123,200 | Magna International Inc Class A (a) | 8,841,241 | |||||||||
681,200 | QLT Inc * | 5,213,926 | |||||||||
308,400 | RONA Inc * | 6,068,669 | |||||||||
200,000 | Tanganyika Oil Co * (a) | 2,206,204 | |||||||||
30,434,836 | |||||||||||
Chile — 0.3% | |||||||||||
59,900 | Compania Cervecerias Unidas ADR | 1,489,114 | |||||||||
59,600 | Inversiones Aguas Metropolitanas SA ADR 144A | 1,321,994 | |||||||||
2,811,108 | |||||||||||
Egypt — 0.1% | |||||||||||
30,000 | Lecico Egypt SAE GDR | 307,500 | |||||||||
95,000 | Lecico Egypt SAE GDR 144A | 973,750 | |||||||||
1,281,250 | |||||||||||
Finland — 3.1% | |||||||||||
430,200 | Marimekko Oyj (a) | 7,335,486 | |||||||||
167,050 | Nokian Renkaat Oyj | 2,925,857 | |||||||||
577,100 | Poyry Oyj | 7,399,210 | |||||||||
56,100 | Ramirent Oyj | 2,314,065 | |||||||||
560,418 | Rapala VMC Oyj | 4,233,494 | |||||||||
222,800 | Uponor Oyj | 6,072,655 | |||||||||
30,280,767 | |||||||||||
France — 5.8% | |||||||||||
3,700 | Casino Guichard-Perrachon SA | 317,609 | |||||||||
23,271 | Christian Dalloz | 2,805,297 | |||||||||
51,420 | Clarins (a) | 3,755,817 | |||||||||
9,407 | Credit National | 2,422,094 | |||||||||
7,250 | Damart SA | 1,810,283 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
France — continued | |||||||||||
6,450 | Damartex SA | 317,718 | |||||||||
38,600 | Essilor International SA | 3,996,698 | |||||||||
41,870 | Eurazeo (a) | 4,936,725 | |||||||||
142,100 | Fimatex * | 1,761,366 | |||||||||
6,300 | Gaumont SA | 548,785 | |||||||||
48,200 | GFI Industries SA | 3,401,942 | |||||||||
31,108 | Groupe Partouche * | 650,936 | |||||||||
9,000 | Guyenne et Gascogne SA | 1,099,158 | |||||||||
17,700 | Klepierre | 2,486,943 | |||||||||
75,000 | M6-Metropole Television | 2,341,833 | |||||||||
53,500 | Michelin SA Class B | 3,633,558 | |||||||||
51,900 | Peugeot SA | 2,928,347 | |||||||||
1,351 | SAGA | 72,695 | |||||||||
30,400 | Schneider Electric SA | 3,242,728 | |||||||||
1,242,600 | SCOR SA | 2,975,049 | |||||||||
20,350 | Seb SA | 2,439,645 | |||||||||
30,001 | Sequana Capital (a) | 844,953 | |||||||||
21,000 | Thales SA | 912,508 | |||||||||
45,472 | Virbac SA | 2,557,849 | |||||||||
87,141 | Zodiac SA (a) | 5,295,866 | |||||||||
57,556,402 | |||||||||||
Germany — 12.1% | |||||||||||
116,080 | Aareal Bank AG * | 5,192,966 | |||||||||
142,664 | Adidas AG | 6,827,760 | |||||||||
55,800 | Beiresdorf AG (Bearer) | 3,095,516 | |||||||||
419,067 | Cat Oil AG * | 9,019,713 | |||||||||
141,200 | Commerzbank AG | 4,931,525 | |||||||||
15,900 | Continental AG | 1,702,988 | |||||||||
197,400 | Depfa Bank Plc | 3,684,410 | |||||||||
133,100 | Deutsche Lufthansa AG (Registered) | 2,635,829 | |||||||||
70,000 | DIC Asset AG | 2,254,308 | |||||||||
186,056 | Eurocastle Investment (a) | 7,416,342 | |||||||||
19,517 | Fraport AG (a) | 1,502,313 |
See accompanying notes to the financial statements.
5
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Germany — continued | |||||||||||
85,747 | Hannover Rueckversicherungs AG (Registered) * (a) | 3,306,749 | |||||||||
87,220 | Heidelberger Druckmaschinen | 3,493,253 | |||||||||
150,000 | Infineon Technologies AG * | 1,767,891 | |||||||||
118,903 | Medion AG (a) | 1,423,822 | |||||||||
288,300 | Metallgesellschaft * | 4,728,601 | |||||||||
110,400 | Metro AG | 6,481,723 | |||||||||
150,000 | Mobilcom AG * (a) | 3,173,498 | |||||||||
209,780 | MTU Aero Engines Holding (a) | 7,245,787 | |||||||||
193,600 | Patrizia Immobilien AG * | 5,172,481 | |||||||||
320,684 | Praktiker Bau-Und Heim | 10,230,147 | |||||||||
402,000 | SGL Carbon AG * | 7,510,004 | |||||||||
197,200 | Techem AG | 9,047,113 | |||||||||
97,300 | Thielert AG * | 2,781,871 | |||||||||
31,100 | Vossloh AG (a) | 1,562,011 | |||||||||
30,000 | Wacker-Chemie AG * | 3,616,302 | |||||||||
119,804,923 | |||||||||||
Hong Kong — 1.6% | |||||||||||
2,880,000 | Chinese Estates Holdings Ltd | 3,337,464 | |||||||||
800,000 | Hopewell Holdings Ltd | 2,283,285 | |||||||||
1,925,000 | Industrial & Commercial Bank of China | 3,206,555 | |||||||||
4,956,000 | Samson Holding Ltd | 2,068,874 | |||||||||
4,252,000 | Singamas Container Holdings Ltd | 2,177,870 | |||||||||
250,000 | Wing Lung Bank | 2,390,723 | |||||||||
15,464,771 | |||||||||||
India — 0.5% | |||||||||||
641,984 | Arvind Mills Ltd | 848,790 | |||||||||
206,115 | Jain Irrigation Systems Ltd * | 1,111,898 | |||||||||
231,794 | Mirc Electronics Ltd | 109,775 | |||||||||
363,756 | Sakthi Sugars Ltd * | 988,322 | |||||||||
900,000 | Welspun Gujarat Stahl Ltd * | 1,423,992 | |||||||||
4,482,777 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Ireland — 2.0% | |||||||||||
196,346 | Anglo Irish Bank Corp | 3,246,211 | |||||||||
507,600 | Blackrock International * | 253,622 | |||||||||
65,420 | CRH Plc | 2,264,464 | |||||||||
55,000 | FBD Holdings Plc | 2,740,978 | |||||||||
248,000 | Grafton Group Plc * | 3,395,561 | |||||||||
379,440 | IFG Group Plc | 1,002,184 | |||||||||
124,000 | Irish Continental Group Plc * | 1,715,081 | |||||||||
209,500 | Irish Life & Permanent Plc | 5,392,577 | |||||||||
20,010,678 | |||||||||||
Italy — 4.9% | |||||||||||
355,000 | Arnoldo Mondadori Editore SPA (a) | 3,438,532 | |||||||||
621,425 | Banca Intesa SPA | 4,159,506 | |||||||||
107,000 | Banca Popolare di Verona | 3,179,847 | |||||||||
187,500 | Banche Popolari Unite Scrl (a) | 5,294,448 | |||||||||
157,000 | Brembo Filatura del Brembo SPA | 1,684,814 | |||||||||
179,200 | Buzzi Unicem SPA | 4,023,701 | |||||||||
436,100 | Campari | 4,238,370 | |||||||||
232,700 | Finmeccanica SPA | 5,153,931 | |||||||||
307,716 | Grouppo Editoriale L'Espresso (a) | 1,636,726 | |||||||||
1,228,700 | IFIL SPA | 7,486,180 | |||||||||
300,300 | Indesit Company SPA | 3,495,766 | |||||||||
30,000 | Pagnossin SPA * (a) | 28,442 | |||||||||
600,000 | Snam Rete Gas SPA | 2,809,793 | |||||||||
909,364 | Telecom Italia SPA Di RISP | 2,236,511 | |||||||||
48,866,567 | |||||||||||
Japan — 13.4% | |||||||||||
350,000 | Akebono Brake Industry Co (a) | 2,928,435 | |||||||||
240,000 | Asahi Soft Drinks Co Ltd | 3,350,437 | |||||||||
80,000 | Bank of Iwate Ltd (The) | 4,366,917 | |||||||||
500,000 | Capcom (a) | 7,235,430 | |||||||||
180,000 | Daimaru Inc (The) | 2,211,063 | |||||||||
200,000 | Daito Trust Construction Co Ltd | 10,357,214 |
See accompanying notes to the financial statements.
7
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
45,800 | Diamond Lease Co Ltd | 2,062,774 | |||||||||
180,000 | Heiwado Co Ltd | 3,296,328 | |||||||||
360,000 | Hitachi High Technologies Corp | 9,465,984 | |||||||||
390,000 | Isuzu Motors Ltd (a) | 1,259,589 | |||||||||
100,000 | JACCS Co Ltd | 1,092,772 | |||||||||
600 | Japan Retail Fund Investment Corp | 4,327,487 | |||||||||
950,000 | Kobe Steel Ltd | 3,023,061 | |||||||||
800,000 | Marubeni Corp | 4,253,393 | |||||||||
450,000 | Nabtesco Corp | 5,041,062 | |||||||||
350,000 | NHK Spring Co Ltd | 3,879,515 | |||||||||
600,000 | Nippon Mining Holdings Inc | 4,369,483 | |||||||||
200,000 | Sanwa Shutter Corp | 1,139,373 | |||||||||
95,000 | Seiren Co Ltd (a) | 1,205,358 | |||||||||
625,000 | Shimadzu Corp | 4,870,952 | |||||||||
1,935,000 | Showa Denko (a) | 8,274,373 | |||||||||
530,000 | Sumitomo Rubber Industries | 5,621,920 | |||||||||
74 | The Tokyo Star Bank Ltd | 240,730 | |||||||||
2,100,000 | Tokyu Land Corp | 18,226,714 | |||||||||
325,000 | Toyo Suisan Kaisha Ltd | 4,946,345 | |||||||||
2,400,000 | Ube Industries Ltd | 6,538,559 | |||||||||
350,000 | Yamaha Motor Co Ltd | 9,285,031 | |||||||||
132,870,299 | |||||||||||
Malaysia — 0.2% | |||||||||||
7,750,000 | E & O Property Development * | 1,502,418 | |||||||||
Mexico — 0.3% | |||||||||||
611,000 | Controladora Comercial Mexicana SA de CV | 1,147,765 | |||||||||
1,500,000 | Sare Holding SA de CV * | 1,690,652 | |||||||||
2,838,417 | |||||||||||
Netherlands — 1.3% | |||||||||||
136,097 | Buhrmann NV (a) | 1,852,582 | |||||||||
96,300 | Fortis NV | 3,750,395 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Netherlands — continued | |||||||||||
463,139 | Hagemeyer NV * (a) | 2,341,955 | |||||||||
43,700 | Imtech NV | 2,359,893 | |||||||||
170,000 | Koninklijke Wessanen NV | 2,360,359 | |||||||||
12,665,184 | |||||||||||
New Zealand — 0.2% | |||||||||||
40,400 | Air New Zealand | 30,393 | |||||||||
2,750,000 | Canwest Mediaworks | 2,323,781 | |||||||||
2,354,174 | |||||||||||
Norway — 2.7% | |||||||||||
1,105,000 | Block Watne Gruppen ASA * | 6,641,885 | |||||||||
450,490 | Ekornes ASA | 9,037,804 | |||||||||
614,200 | Geo ASA * (a) | 4,715,671 | |||||||||
93,477 | Prosafe ASA (a) | 6,230,045 | |||||||||
26,625,405 | |||||||||||
Philippines — 0.1% | |||||||||||
1,147,500 | First Gen Corp | 1,050,694 | |||||||||
Singapore — 1.1% | |||||||||||
17,296,000 | Anwell Technologies Ltd * | 439,612 | |||||||||
2,200,000 | Banyan Tree Holdings Inc * | 1,244,162 | |||||||||
2,194,000 | GES International Ltd | 1,684,379 | |||||||||
614,000 | Gold Peak Batteries International | 592,717 | |||||||||
4,778,000 | Huan Hsin Holdings Ltd | 1,592,717 | |||||||||
2,962,000 | LMA International NV * | 1,428,912 | |||||||||
1,587,000 | People's Food Holdings Ltd | 1,085,463 | |||||||||
2,000,000 | Petra Foods Ltd | 1,790,246 | |||||||||
668,750 | Unisteel Technology Ltd | 841,382 | |||||||||
10,699,590 | |||||||||||
South Korea — 1.9% | |||||||||||
38,980 | Asia Cement Co Ltd | 1,499,868 | |||||||||
378,290 | Handsome Corp | 5,752,851 |
See accompanying notes to the financial statements.
9
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
South Korea — continued | |||||||||||
144,000 | Kooksoondang Co Ltd | 1,217,875 | |||||||||
81,100 | Korea Electric Terminal Co | 1,180,032 | |||||||||
320,963 | Kortek Corp | 1,845,460 | |||||||||
11,610 | LG Household & Health Care | 892,067 | |||||||||
61,000 | Pulmuone Co Ltd | 1,873,556 | |||||||||
49,800 | Samsung SDI Co Ltd | 4,114,149 | |||||||||
43,900 | Samsung SDI Co Ltd GDR 144A | 908,778 | |||||||||
19,284,636 | |||||||||||
Spain — 2.6% | |||||||||||
92,000 | ACS Actividades de Construccion y Servicios SA | 4,127,566 | |||||||||
63,060 | Aguas de Barcelona SA Class A | 1,769,197 | |||||||||
14,400 | Altadis SA | 682,051 | |||||||||
10,649 | Bankinter SA | 723,456 | |||||||||
38,296 | Cia de Distribucion Integral Logista SA | 2,324,577 | |||||||||
60,000 | Fomento de Construcciones y Contratas SA | 4,680,100 | |||||||||
15,597 | Gas Natural SDG SA | 522,336 | |||||||||
110,000 | Generale De Alquiler * | 1,479,728 | |||||||||
30,000 | Red Electrica de Espana | 1,157,505 | |||||||||
100,000 | Tecnicas Reunidas SA * | 2,726,287 | |||||||||
43,864 | Union Fenosa SA | 1,918,229 | |||||||||
628,157 | Uralita SA | 3,505,066 | |||||||||
25,616,098 | |||||||||||
Sweden — 1.2% | |||||||||||
137,670 | Lundin Mining Corp SDR * (a) | 4,005,489 | |||||||||
202,950 | Munters AB | 7,947,788 | |||||||||
11,953,277 | |||||||||||
Switzerland — 4.6% | |||||||||||
2,131 | Bank Sarasin & Cie AG Class B (Registered) | 5,987,889 | |||||||||
2,190 | Belimo Holding AG (Registered) | 1,758,082 | |||||||||
14,450 | Bobst Group AG (Registered) | 617,507 | |||||||||
86,286 | Charles Voegele Holding AG * | 6,836,310 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Switzerland — continued | |||||||||||
700 | Eichhof Holding AG | 939,530 | |||||||||
2,389 | Forbo Holdings AG (Registered) * | 687,269 | |||||||||
2,894 | Geberit AG (Registered) | 3,367,229 | |||||||||
17,510 | Helvetia Patria Holding (Registered) | 5,233,115 | |||||||||
1,000 | Jelmoli Holding AG (Bearer) | 1,850,345 | |||||||||
3,250 | Jelmoli Holding AG (Registered) | 1,201,719 | |||||||||
200,309 | Kardex AG * | 9,090,857 | |||||||||
18,700 | Swatch Group AG | 3,644,579 | |||||||||
17,908 | Valiant Holding (Registered) * | 1,974,769 | |||||||||
9,350 | Valora Holding AG | 2,100,289 | |||||||||
45,289,489 | |||||||||||
Taiwan — 1.5% | |||||||||||
4,319,000 | Arima Computer Corp * | 786,181 | |||||||||
2,975,500 | Benq Corp * | 1,540,324 | |||||||||
3,128,000 | China Life Insurance Co Ltd * | 1,470,706 | |||||||||
2,030,000 | China Motor Corp Ltd | 1,533,017 | |||||||||
2,354,663 | Compal Electronics Inc | 2,056,477 | |||||||||
427,380 | E.Sun Financial Holdings Co Ltd | 254,518 | |||||||||
826,000 | Fubon Financial Holding Co Ltd | 614,978 | |||||||||
29,000 | Fubon Financial Holding Co Ltd GDR (Registered) | 221,850 | |||||||||
1,641,000 | Phoenixtec Power Co Ltd | 1,679,735 | |||||||||
2,094,398 | Sunplus Technology Co Ltd | 2,004,629 | |||||||||
2,417,940 | Tsann Kuen Enterprises Co Ltd | 2,623,060 | |||||||||
14,785,475 | |||||||||||
Thailand — 0.2% | |||||||||||
13,500,000 | Asian Property Development Pcl (Foreign Registered) (b) | 1,271,502 | |||||||||
3,787,000 | Sino Thai Engineering & Construction Pcl (Foreign Registered) (b) | 451,508 | |||||||||
1,723,010 | |||||||||||
United Kingdom — 22.5% | |||||||||||
145,000 | Alliance & Leicester Plc | 2,834,174 | |||||||||
187,582 | Alliance Boots Plc | 2,753,853 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
582,342 | Balfour Beatty Plc | 4,133,194 | |||||||||
425,000 | BBA Group Plc | 2,159,245 | |||||||||
687,250 | Bodycote International Plc | 3,058,755 | |||||||||
385,000 | Brambles Industries Plc | 3,374,418 | |||||||||
533,333 | Brit Insurance Holdings Plc | 2,752,493 | |||||||||
438,800 | British Airways Plc * | 3,431,721 | |||||||||
450,000 | Brown (N) Group Plc | 1,926,394 | |||||||||
148,000 | Cable & Wireless Plc | 345,852 | |||||||||
514,100 | Carphone Warehouse Group Plc | 2,750,631 | |||||||||
565,308 | Cattle's Plc | 3,532,339 | |||||||||
500,000 | Centrica Plc | 2,808,855 | |||||||||
239,888 | Chemring Group | 6,725,636 | |||||||||
550,000 | Cobham Plc | 1,798,718 | |||||||||
742,000 | Compass Group Plc | 3,607,315 | |||||||||
106,951 | Computacenter Plc | 534,168 | |||||||||
200,000 | Davis Service Group (Ordinary) | 1,844,948 | |||||||||
3,300,000 | Dimension Data Holdings Plc * | 2,262,640 | |||||||||
61,000 | Filtrona Plc | 314,062 | |||||||||
696,493 | FKI Plc | 1,284,516 | |||||||||
307,600 | Fyffes Plc | 641,970 | |||||||||
189,952 | Gallaher Group Plc | 3,284,724 | |||||||||
50,000 | Go-Ahead Group Plc | 1,755,401 | |||||||||
615,000 | Group 4 Securicor Plc | 2,038,578 | |||||||||
315,000 | Hanson Plc | 3,968,416 | |||||||||
171,747 | Hays Plc | 445,558 | |||||||||
386,049 | ICAP Plc | 3,397,505 | |||||||||
102,400 | Imperial Tobacco Group Plc | 3,529,900 | |||||||||
600,000 | Inmarsat Plc | 4,092,641 | |||||||||
300,000 | ISOFT Group Plc | 295,832 | |||||||||
1,750,000 | ITV Plc | 3,524,682 | |||||||||
425,000 | JJB Sports Plc | 1,434,183 | |||||||||
115,000 | Johnson Matthey Plc | 2,892,822 | |||||||||
104,929 | Kazakhmys Plc | 2,450,665 | |||||||||
335,000 | Kelda Group Plc | 5,259,384 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
360,000 | Kesa Electricals Plc | 2,118,751 | |||||||||
237,344 | Kier Group Plc | 7,268,734 | |||||||||
362,200 | Matalan Plc | 1,200,399 | |||||||||
198,000 | Misys Plc | 931,798 | |||||||||
250,000 | Mitie Group Plc | 923,797 | |||||||||
100,000 | Next Plc | 3,173,785 | |||||||||
250,300 | Northern Rock Plc | 5,315,910 | |||||||||
1,100,000 | Northgate Info Solutions Plc * | 1,527,277 | |||||||||
522,357 | Pennon Group | 4,647,339 | |||||||||
823,614 | Photo-Me International Plc | 1,674,213 | |||||||||
555,555 | Playtech Ltd | 2,942,601 | |||||||||
425,000 | Premier Foods Plc | 2,136,506 | |||||||||
425,000 | Premier Foods Plc * | 2,138,367 | |||||||||
115,000 | Provident Financial Plc | 1,431,839 | |||||||||
50,000 | Punch Taverns Plc | 879,919 | |||||||||
600,000 | Qinetiq Plc | 1,900,775 | |||||||||
516,254 | Resolution Plc | 5,848,495 | |||||||||
375,736 | Rexam Plc | 3,882,728 | |||||||||
750,000 | RM Plc | 2,574,038 | |||||||||
2,021,893 | Royal & Sun Alliance Insurance Group | 5,331,568 | |||||||||
1,000,000 | Sage Group Plc | 4,558,105 | |||||||||
365,000 | Serco Group Plc | 2,446,740 | |||||||||
275,000 | Shire Plc | 4,682,573 | |||||||||
432,000 | Slough Estates Plc | 5,403,904 | |||||||||
755,160 | Smith (David S.) Holdings Plc | 2,257,444 | |||||||||
165,600 | Smith News Plc * | 1,497,726 | |||||||||
100,000 | Soco International Plc * | 2,469,896 | |||||||||
425,000 | SSL International Plc | 2,349,898 | |||||||||
58,600 | Tate & Lyle Plc | 817,003 | |||||||||
400,300 | Tomkins Plc | 2,170,340 | |||||||||
500,000 | Torex Retail Plc | 489,531 | |||||||||
110,000 | Travis Perkins Plc | 3,530,602 | |||||||||
220,000 | Trinity Mirror Plc | 1,908,593 | |||||||||
1,080,000 | TT Group Plc | 3,660,963 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
155,700 | Ultra Electronics Holdings | 3,026,536 | |||||||||
16,179 | Venture Production (Ordinary Shares) * | 248,848 | |||||||||
248,500 | Viridian Group Plc | 4,738,520 | |||||||||
270,366 | William Hill Plc | 3,271,647 | |||||||||
1,536,882 | William Morrison Supermarkets Plc | 6,476,488 | |||||||||
137,800 | Wolseley Plc | 3,000,897 | |||||||||
850,000 | Wood Group (John) Plc | 3,703,644 | |||||||||
130,441 | Xstrata Plc | 5,870,383 | |||||||||
275,000 | Yell Group Plc | 2,775,048 | |||||||||
222,450,356 | |||||||||||
TOTAL COMMON STOCKS (COST $623,237,482) | 903,852,636 | ||||||||||
PREFERRED STOCKS — 3.1% | |||||||||||
Brazil — 1.9% | |||||||||||
1,000,000 | Iochpe Maxion SA 3.16% | 8,069,030 | |||||||||
337,500 | Saraiva SA Livreiros 0.17% | 3,227,029 | |||||||||
280,000 | Suzano Bahia Sul Papel e Celulose SA * | 1,704,291 | |||||||||
194,200 | Tam SA 0.30% | 6,022,555 | |||||||||
19,022,905 | |||||||||||
France — 0.1% | |||||||||||
6,800 | Casino Guichard-Perrachon SA 3.86% | 472,728 | |||||||||
Germany — 1.1% | |||||||||||
33,600 | Henkel KGaA 1.34% | 4,289,765 | |||||||||
115,000 | Volkswagen AG 2.70% | 6,494,538 | |||||||||
10,784,303 | |||||||||||
Italy — 0.0% | |||||||||||
10,000 | IFI Istituto Finanziario Industries * | 239,487 |
See accompanying notes to the financial statements.
14
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
South Korea — 0.0% | |||||||||||
5,600 | Samsung SDI Co Ltd 3.22% | 283,285 | |||||||||
TOTAL PREFERRED STOCKS (COST $22,546,302) | 30,802,708 | ||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Thailand — 0.0% | |||||||||||
631,167 | Sino Thai Engineering & Construction Pcl Warrants, Expires 04/18/08 * (b) | 4,143 | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $49,387) | 4,143 | ||||||||||
SHORT-TERM INVESTMENTS — 7.7% | |||||||||||
54,307,310 | Boston Global Investment Trust - Enhanced Portfolio (c) | 54,307,310 | |||||||||
21,500,000 | ING Bank Time Deposit, 5.29%, due 09/01/06 | 21,500,000 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $75,807,310) | 75,807,310 | ||||||||||
TOTAL INVESTMENTS — 102.3% (Cost $721,640,481) | 1,010,466,797 | ||||||||||
Other Assets and Liabilities (net) — (2.3%) | (22,407,573 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 988,059,224 |
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) 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) All or a portion of this security represents investment of security lending collateral (Note 2).
As of August 31, 2006, 84.4% of the Net Assets of the Fund were valued using fair value prices based on models used by a third party vendor (Note 2).
See accompanying notes to the financial statements.
15
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $49,586,663 (cost $721,640,481) (Note 2) | $ | 1,010,466,797 | |||||
Cash | 16,267 | ||||||
Foreign currency, at value (cost $34,474,871) (Note 2) | 34,569,899 | ||||||
Receivable for investments sold | 3,170,694 | ||||||
Dividends and interest receivable | 1,577,820 | ||||||
Foreign taxes receivable | 134,852 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 93,155 | ||||||
Total assets | 1,050,029,484 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 54,307,310 | ||||||
Payable for investments purchased | 4,533,517 | ||||||
Payable for Fund shares repurchased | 2,250,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 575,903 | ||||||
Shareholder service fee | 97,349 | ||||||
Trustees and Chief Compliance Officer fees | 2,166 | ||||||
Accrued expenses | 204,015 | ||||||
Total liabilities | 61,970,260 | ||||||
Net assets | $ | 988,059,224 |
See accompanying notes to the financial statements.
16
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 592,110,619 | |||||
Accumulated undistributed net investment income | 3,696,200 | ||||||
Accumulated net realized gain | 103,299,282 | ||||||
Net unrealized appreciation | 288,953,123 | ||||||
$ | 988,059,224 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 360,662,389 | |||||
Class IV shares | $ | 627,396,835 | |||||
Shares outstanding: | |||||||
Class III | 20,703,604 | ||||||
Class IV | 35,988,059 | ||||||
Net asset value per share: | |||||||
Class III | $ | 17.42 | |||||
Class IV | $ | 17.43 |
See accompanying notes to the financial statements.
17
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $1,772,661) | $ | 15,040,808 | |||||
Interest (including securities lending income of $686,577) | 1,443,024 | ||||||
Total investment income | 16,483,832 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 3,456,352 | ||||||
Shareholder service fee – Class III (Note 3) | 274,058 | ||||||
Shareholder service fee – Class IV (Note 3) | 311,059 | ||||||
Custodian and fund accounting agent fees | 427,064 | ||||||
Transfer agent fees | 21,620 | ||||||
Audit and tax fees | 32,844 | ||||||
Legal fees | 10,421 | ||||||
Trustees fees and related expenses (Note 3) | 9,893 | ||||||
Registration fees | 736 | ||||||
Miscellaneous | 10,212 | ||||||
Total expenses | 4,554,259 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (497,812 | ) | |||||
Net expenses | 4,056,447 | ||||||
Net investment income (loss) | 12,427,385 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of foreign capital gains tax and CPMF tax of $26,553 and $3,469, respectively) (Note 2) | 102,618,802 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 1,066,285 | ||||||
Net realized gain (loss) | 103,685,087 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments (net of foreign capital gains tax accrual of $(159,972)) (Note 2) | (37,171,732 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 64,139 | ||||||
Net unrealized gain (loss) | (37,107,593 | ) | |||||
Net realized and unrealized gain (loss) | 66,577,494 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 79,004,879 |
See accompanying notes to the financial statements.
18
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 12,427,385 | $ | 15,736,983 | |||||||
Net realized gain (loss) | 103,685,087 | 235,520,059 | |||||||||
Change in net unrealized appreciation (depreciation) | (37,107,593 | ) | (34,784,859 | ) | |||||||
Net increase (decrease) in net assets from operations | 79,004,879 | 216,472,183 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (544,390 | ) | (7,882,142 | ) | |||||||
Class IV | (1,030,048 | ) | (11,233,463 | ) | |||||||
Total distributions from net investment income | (1,574,438 | ) | (19,115,605 | ) | |||||||
Net realized gains | |||||||||||
Class III | (36,643,107 | ) | (57,805,430 | ) | |||||||
Class IV | (62,832,926 | ) | (80,047,426 | ) | |||||||
Total distributions from net realized gains | (99,476,033 | ) | (137,852,856 | ) | |||||||
(101,050,471 | ) | (156,968,461 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 3,363,057 | (87,014,942 | ) | ||||||||
Class IV | 3,557,134 | 36,890,176 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 6,920,191 | (50,124,766 | ) | ||||||||
Total increase (decrease) in net assets | (15,125,401 | ) | 9,378,956 | ||||||||
Net assets: | |||||||||||
Beginning of period | 1,003,184,625 | 993,805,669 | |||||||||
End of period (including accumulated undistributed net investment income of $3,696,200 and distributions in excess of net investment income of $7,156,747, respectively) | $ | 988,059,224 | $ | 1,003,184,625 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 17.98 | $ | 17.19 | $ | 14.79 | $ | 9.13 | $ | 9.59 | $ | 9.68 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss) | 0.23 | † | 0.26 | † | 0.26 | † | 0.20 | † | 0.16 | † | 0.15 | ||||||||||||||||
Net realized and unrealized gain (loss) | 1.19 | 3.19 | 3.76 | 5.77 | (0.51 | )(a) | 0.00 | (a)(b) | |||||||||||||||||||
Total from investment operations | 1.42 | 3.45 | 4.02 | 5.97 | (0.35 | ) | 0.15 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.03 | ) | (0.32 | ) | (0.38 | ) | (0.31 | ) | (0.11 | ) | (0.24 | ) | |||||||||||||||
From net realized gains | (1.95 | ) | (2.34 | ) | (1.24 | ) | — | — | — | ||||||||||||||||||
Total distributions | (1.98 | ) | (2.66 | ) | (1.62 | ) | (0.31 | ) | (0.11 | ) | (0.24 | ) | |||||||||||||||
Net asset value, end of period | $ | 17.42 | $ | 17.98 | $ | 17.19 | $ | 14.79 | $ | 9.13 | $ | 9.59 | |||||||||||||||
Total Return(c) | 8.36 | %** | 22.32 | % | 28.40 | % | 65.76 | % | (3.64 | )% | 1.59 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 360,662 | $ | 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 | % | 0.85 | % | 0.86 | %(d) | |||||||||||||||
Net investment income to average daily net assets | 2.50 | %* | 1.52 | % | 1.71 | % | 1.71 | % | 1.59 | % | 1.48 | % | |||||||||||||||
Portfolio turnover rate | 18 | %** | 40 | % | 25 | % | 31 | % | 24 | % | 17 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.10 | %* | 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.
* Annualized.
** Not annualized.
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 17.99 | $ | 17.20 | $ | 14.80 | $ | 9.13 | $ | 10.60 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.23 | 0.26 | 0.26 | 0.21 | 0.08 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 1.19 | 3.20 | 3.76 | 5.77 | (1.43 | ) | |||||||||||||||||
Total from investment operations | 1.42 | 3.46 | 4.02 | 5.98 | (1.35 | ) | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.03 | ) | (0.33 | ) | (0.38 | ) | (0.31 | ) | (0.12 | ) | |||||||||||||
From net realized gains | (1.95 | ) | (2.34 | ) | (1.24 | ) | — | — | |||||||||||||||
Total distributions | (1.98 | ) | (2.67 | ) | (1.62 | ) | (0.31 | ) | (0.12 | ) | |||||||||||||
Net asset value, end of period | $ | 17.43 | $ | 17.99 | $ | 17.20 | $ | 14.80 | $ | 9.13 | |||||||||||||
Total Return(b) | 8.38 | %** | 22.37 | % | 28.44 | % | 65.92 | % | (12.76 | )%** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 627,397 | $ | 638,634 | $ | 567,048 | $ | 333,731 | $ | 202,319 | |||||||||||||
Net expenses to average daily net assets | 0.80 | %* | 0.80 | % | 0.81 | % | 0.80 | % | 0.80 | %* | |||||||||||||
Net investment income to average daily net assets | 2.53 | %* | 1.55 | % | 1.69 | % | 1.78 | % | 1.13 | %* | |||||||||||||
Portfolio turnover rate | 18 | %** | 40 | % | 25 | % | 31 | % | 24 | %†† | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.10 | %* | 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
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its investment objective by outperforming the S&P/Citigroup Extended Market Index World ex-U.S. Index, the Fund's benchmark. The Fund typically makes equity investments in companies located or doing business outside of the U.S. that are in the smallest 30% of companies in a particular country as measured by total market capitalization. The Fund generally seeks to be fully invested and generally will not take temporary defensive positions, but may hold up to 10% of its total assets in cash and other high quality investments in order to manage cash inflows and outflows as a result of shareholder purchases and redemptions. The Fund may make investments in emerging countries, but these investments (excluding investments in companies from emerging countries included in the Fund's benchmark) generally will represent 10% or less of the Fund's total assets.
Throughout the six months ended August 31, 2006, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different level of shareholder servicing 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 generally valued at the most recent quoted bid price. Short-term
22
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 pursuant to procedures approved by the Trustees. 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 are generally valued by a third party vendor using fair value prices based on models 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 including 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 lo ss 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. There were no forward currency contracts outstanding at the end of the period.
23
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. There were no futures contracts outstanding at the end of the period.
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
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
24
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no purchased option contracts outstanding at the end of the period.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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
25
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
may be unfavorable changes in interest rates or the price of the index or security underlying these transactions. There were no swap agreements outstanding at the end of the period.
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 August 31, 2006, the Fund had loaned securities having a market value of $49,586,663, collateralized by cash in the amount of $54,307,310, which was invested in the Boston Global Investment Trust – Enhanced Portfolio.
Taxes and distributions
The Fund intends to qualify each tax 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 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. The Fund has recorded a deferred tax liability in respect of unrealized appreciation on foreign securities of $0 for potential capital gains and repatriation taxes as of August 31, 2006. For the six months ended August 31, 2006, the Fund incurred $26,553 in capital gains taxes which is included in net realized gain (loss) in the Statement of Operations.
26
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 six months ended August 31, 2006, the Fund incurred $3,469 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.
As of August 31, 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) | ||||||||||||
$ | 721,917,334 | $ | 315,088,255 | $ | (26,538,792 | ) | $ | 288,549,463 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
27
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 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.
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in U.S. 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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $7,041 and $3,036, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $166,013,135 and $232,649,795, respectively.
28
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 57.7% 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 August 31, 2006, less than 0.1% of the Fund's shares were held by eight 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | 2,105,870 | $ | 36,900,000 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 2,194,852 | 36,697,931 | 3,919,744 | 63,826,169 | |||||||||||||||
Shares repurchased | (1,770,990 | ) | (33,334,874 | ) | (10,575,215 | ) | (187,741,111 | ) | |||||||||||
Net increase (decrease) | 423,862 | $ | 3,363,057 | (4,549,601 | ) | $ | (87,014,942 | ) |
29
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | — | $ | — | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 3,811,664 | 63,769,134 | 5,485,547 | 89,390,176 | |||||||||||||||
Shares repurchased | (3,329,606 | ) | (60,212,000 | ) | (2,953,972 | ) | (52,500,000 | ) | |||||||||||
Net increase (decrease) | 482,058 | $ | 3,557,134 | 2,531,575 | $ | 36,890,176 |
30
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Foreign Small Companies Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to
31
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
32
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
33
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | $ | 1,083.60 | $ | 4.46 | |||||||||||
2) Hypothetical | 0.85 | % | $ | 1,000.00 | $ | 1,020.92 | $ | 4.33 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.80 | % | $ | 1,000.00 | $ | 1,083.80 | $ | 4.20 | |||||||||||
2) Hypothetical | 0.80 | % | $ | 1,000.00 | $ | 1,021.17 | $ | 4.08 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
34
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 92.1 | % | |||||
Preferred Stocks | 6.2 | ||||||
Short-Term Investments | 3.3 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | (1.6 | ) | |||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
South Korea | 19.0 | % | |||||
Taiwan | 14.3 | ||||||
Russia | 12.6 | ||||||
Brazil | 9.7 | ||||||
China | 9.3 | ||||||
South Africa | 8.6 | ||||||
India | 6.8 | ||||||
Mexico | 6.0 | ||||||
Israel | 2.9 | ||||||
Malaysia | 2.7 | ||||||
Poland | 1.7 | ||||||
Thailand | 1.6 | ||||||
Indonesia | 1.3 | ||||||
Chile | 1.3 | ||||||
Turkey | 0.8 | ||||||
Argentina | 0.7 | ||||||
Philippines | 0.4 | ||||||
Hungary | 0.2 | ||||||
Czech Republic | 0.1 | ||||||
100.0 | % |
1
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Industry Sector Summary | % of Equity Investments | ||||||
Information Technology | 26.2 | % | |||||
Energy | 22.8 | ||||||
Telecommunication Services | 16.9 | ||||||
Materials | 9.8 | ||||||
Consumer Staples | 7.8 | ||||||
Consumer Discretionary | 5.4 | ||||||
Industrials | 4.7 | ||||||
Financials | 3.0 | ||||||
Health Care | 2.4 | ||||||
Utilities | 1.0 | ||||||
100.0 | % |
2
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 92.1% | |||||||||||
Argentina — 0.7% | |||||||||||
125,000 | Tenaris SA ADR | 4,588,750 | |||||||||
Brazil — 3.8% | |||||||||||
46,600 | Companhia Siderurgica Nacional SA | 1,360,616 | |||||||||
267,800 | �� | Compania Vale do Rio Doce | 5,745,709 | ||||||||
50,000 | Gol-Linhas Aereas Intel | 1,725,979 | |||||||||
732,300 | Petroleo Brasileiro SA (Petrobras) | 16,230,828 | |||||||||
20,000 | Unibanco-Uniao de Bancos Brasileiros SA GDR | 1,447,000 | |||||||||
26,510,132 | |||||||||||
Chile — 1.3% | |||||||||||
33,269 | Banco De Chile ADR | 1,320,114 | |||||||||
40,300 | Banco Santander Chile SA ADR | 1,755,468 | |||||||||
82,300 | Compania Cervecerias Unidas ADR | 2,045,978 | |||||||||
84,900 | Distribucion y Servicio ADR | 1,348,212 | |||||||||
67,200 | Lan Airlines SA | 2,342,592 | |||||||||
8,812,364 | |||||||||||
China — 9.1% | |||||||||||
770,138 | China Merchants Holdings International Co Ltd | 2,267,413 | |||||||||
4,469,000 | China Mobile Ltd * | 30,052,872 | |||||||||
2,708,000 | China Petroleum & Chemical Corp Class H | 1,603,125 | |||||||||
342,000 | China Resources Enterprise Ltd | 777,569 | |||||||||
1,410,000 | China Shenhua Energy Co Ltd Class H | 2,491,959 | |||||||||
4,196,000 | CNOOC Ltd | 3,658,879 | |||||||||
1,154,000 | Cosco Pacific Ltd | 2,583,173 | |||||||||
1,400,000 | Datang International Power Generation Co Ltd | 933,795 | |||||||||
5,348,592 | Denway Motors Ltd | 1,704,108 | |||||||||
2,544,000 | Huaneng Power International Inc Class H | 1,690,559 | |||||||||
4,694,000 | Lenovo Group Ltd | 1,963,184 | |||||||||
108,000 | Netease.Com Inc ADR * (a) | 1,890,000 | |||||||||
7,632,842 | PetroChina Co Ltd Class H | 8,567,607 |
See accompanying notes to the financial statements.
3
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
China — continued | |||||||||||
44,000 | Sina.com * (a) | 1,060,400 | |||||||||
56,000 | Sohu.Com Inc * | 1,221,360 | |||||||||
1,033,600 | Yanzhou Coal Mining Co Ltd | 728,959 | |||||||||
63,194,962 | |||||||||||
Czech Republic — 0.1% | |||||||||||
22,300 | CEZ AS | 831,520 | |||||||||
Hungary — 0.2% | |||||||||||
10,700 | MOL Magyar Olaj es Gazipari Rt (New Shares) | 1,086,155 | |||||||||
India — 6.7% | |||||||||||
105,000 | GAIL India Ltd | 586,968 | |||||||||
10,400 | GAIL India Ltd GDR | 353,600 | |||||||||
64,700 | Hero Honda Motors Ltd | 1,002,161 | |||||||||
882,500 | Hindustan Lever | 4,446,833 | |||||||||
449,000 | Infosys Technologies Inc | 17,443,348 | |||||||||
911,100 | ITC Ltd | 3,750,294 | |||||||||
88,800 | Oil & Natural Gas Corp Ltd | 2,324,436 | |||||||||
164,200 | Reliance Communication Venture * | 1,051,017 | |||||||||
208,800 | Reliance Industries Ltd | 5,014,575 | |||||||||
237,200 | Satyam Computer Services Ltd | 4,126,477 | |||||||||
131,600 | Tata Consultancy Services Ltd | 2,820,539 | |||||||||
345,300 | Wipro Ltd | 3,846,109 | |||||||||
46,766,357 | |||||||||||
Indonesia — 1.3% | |||||||||||
829,585 | Astra International Tbk PT | 1,011,987 | |||||||||
850,000 | Gudang Garam Tbk PT | 942,843 | |||||||||
7,312,000 | Telekomunikasi Indonesia Tbk PT | 6,369,224 | |||||||||
25,200 | Telekomunikasi Indonesia Tbk PT ADR | 881,748 | |||||||||
9,205,802 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Israel — 2.9% | |||||||||||
190,100 | Check Point Software Technologies Ltd * | 3,533,959 | |||||||||
56,900 | Teva Pharmaceutical Industries | 1,982,801 | |||||||||
415,600 | Teva Pharmaceutical Industries ADR | 14,446,256 | |||||||||
19,963,016 | |||||||||||
Malaysia — 2.7% | |||||||||||
103,000 | British American Tobacco Berhad | 1,162,078 | |||||||||
383,000 | Genting Berhad | 2,559,420 | |||||||||
409,000 | IOI Corp Berhad | 1,881,078 | |||||||||
524,000 | Malakoff Berhad | 1,381,731 | |||||||||
1,786,800 | Maxis Communications Berhad | 4,274,971 | |||||||||
1,198,200 | MISC Berhad | 2,755,437 | |||||||||
379,000 | Resorts World Berhad | 1,226,906 | |||||||||
525,000 | Sime Darby Berhad | 849,955 | |||||||||
214,000 | Tanjong Plc | 767,232 | |||||||||
409,837 | Telekom Malaysia Berhad | 1,012,579 | |||||||||
1,683,640 | YTL Power Internationl Berhad | 878,502 | |||||||||
18,749,889 | |||||||||||
Mexico — 5.9% | |||||||||||
223,400 | America Movil SA de CV Class L ADR | 8,335,054 | |||||||||
348,000 | America Telecom SA de CV * | 2,372,521 | |||||||||
725,198 | Cemex SA de CV CPO * | 2,090,611 | |||||||||
308,000 | Fomento Economico Mexicano SA de CV | 2,901,360 | |||||||||
356,000 | Grupo Modelo SA de CV Class C | 1,499,950 | |||||||||
215,000 | Grupo Televisa SA (Participating Certificates) | 816,622 | |||||||||
195,000 | Kimberly Clark (Series A) | 734,403 | |||||||||
484,300 | Telefonos de Mexico SA de CV Class L ADR (a) | 11,691,002 | |||||||||
3,002,780 | Wal-Mart de Mexico SA de CV Class V | 10,235,859 | |||||||||
40,677,382 |
See accompanying notes to the financial statements.
5
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Philippines — 0.4% | |||||||||||
62,000 | Philippine Long Distance Telephone | 2,330,696 | |||||||||
508,101 | San Miguel Corp Class B | 709,481 | |||||||||
3,040,177 | |||||||||||
Poland — 1.7% | |||||||||||
15,100 | Bank Pekao SA | 961,539 | |||||||||
43,000 | KGHM Polska Miedz SA | 1,496,190 | |||||||||
236,000 | Polski Koncern Naftowy Orlen SA | 3,940,222 | |||||||||
20,800 | Prokom Software SA | 891,434 | |||||||||
635,800 | Telekomunikacja Polska SA | 4,171,759 | |||||||||
11,461,144 | |||||||||||
Russia — 12.4% | |||||||||||
71,600 | JSC Mining & Smelting Co ADR | 9,737,600 | |||||||||
425,100 | Lukoil ADR | 35,495,850 | |||||||||
288,600 | Mobile Telesystems ADR | 10,562,760 | |||||||||
361,050 | OAO Gazprom ADR | 17,005,455 | |||||||||
70,100 | Surgutneftegaz ADR (a) | 5,099,775 | |||||||||
38,900 | Unified Energy Systems GDR | 2,878,600 | |||||||||
93,700 | Vimpel-Communications ADR * | 5,089,784 | |||||||||
85,869,824 | |||||||||||
South Africa — 8.4% | |||||||||||
289,000 | African Bank Investments Ltd | 1,018,442 | |||||||||
18,000 | Anglo American Platinum Corp | 2,019,503 | |||||||||
99,800 | Barloworld Ltd | 1,877,394 | |||||||||
192,100 | Bidvest Group Ltd | 2,904,986 | |||||||||
315,600 | Edgars Consolidated Stores Ltd | 1,239,488 | |||||||||
1,238,104 | FirstRand Ltd | 3,061,043 | |||||||||
86,500 | Gold Fields Ltd | 1,699,957 | |||||||||
55,700 | Impala Platinum Holdings Ltd | 10,317,410 | |||||||||
116,367 | Imperial Holdings Ltd * | 2,300,459 | |||||||||
101,600 | JD Group Ltd | 937,350 | |||||||||
521,900 | MTN Group Ltd | 4,136,341 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
South Africa — continued | |||||||||||
282,440 | Nampak Ltd | 671,636 | |||||||||
49,529 | Nedbank Group Ltd | 757,748 | |||||||||
113,900 | Remgro Ltd | 2,260,559 | |||||||||
320,600 | RMB Holdings Ltd | 1,206,434 | |||||||||
455,700 | Sasol Ltd | 15,828,593 | |||||||||
156,714 | Standard Bank Group Ltd | 1,690,374 | |||||||||
754,500 | Steinhoff International Holdings | 2,460,946 | |||||||||
102,176 | Tiger Brands Ltd | 2,158,684 | |||||||||
58,547,347 | |||||||||||
South Korea — 18.2% | |||||||||||
50,700 | Daewoo Shipbuilding & Marine Engineering Co Ltd | 1,562,794 | |||||||||
59,900 | Doosan Infracore Co Ltd | 1,031,195 | |||||||||
29,200 | GS Engineering & Construction Corp | 1,991,316 | |||||||||
78,700 | Hynix Semiconductor Inc * | 3,000,599 | |||||||||
48,900 | Hyundai Engineering & Construction * | 2,572,223 | |||||||||
74,800 | Hyundai Mobis | 6,850,575 | |||||||||
84,830 | Hyundai Motor Co | 7,135,164 | |||||||||
67,800 | Kangwon Land Inc | 1,281,599 | |||||||||
130,540 | KIA Motors Corp | 2,070,354 | |||||||||
116,100 | KT Corp ADR | 2,565,810 | |||||||||
84,700 | KT Freetel Co Ltd | 2,448,405 | |||||||||
130,600 | KT&G Corp | 7,651,709 | |||||||||
47,300 | LG Chemicals Ltd | 1,923,130 | |||||||||
38,400 | LG Electronics Inc | 2,562,909 | |||||||||
34,300 | NCSoft Corp * | 1,898,202 | |||||||||
42,900 | NHN Corp * | 4,035,796 | |||||||||
39,800 | POSCO | 9,966,254 | |||||||||
66,700 | Samsung Electronics Co Ltd | 44,955,486 | |||||||||
37,000 | Samsung SDI Co Ltd | 3,056,697 | |||||||||
45,600 | Samsung Techwin Co Ltd | 1,593,534 | |||||||||
12,500 | Shinsegae Co Ltd | 6,192,771 | |||||||||
10,900 | SK Telecom Co Ltd | 2,128,943 |
See accompanying notes to the financial statements.
7
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
South Korea — continued | |||||||||||
373,200 | SK Telecom Co Ltd ADR | 8,173,080 | |||||||||
126,648,545 | |||||||||||
Taiwan — 14.0% | |||||||||||
1,164,248 | Acer Inc | 1,796,254 | |||||||||
2,909,459 | Asustek Computer Inc | 6,512,938 | |||||||||
524,548 | AU Optronics Corp | 768,052 | |||||||||
1,189,115 | Benq Corp * | 615,568 | |||||||||
1,051,127 | China Motor Corp Ltd | 793,791 | |||||||||
3,104,223 | China Steel Corp | 2,516,255 | |||||||||
3,308,400 | Chunghwa Telecom Co Ltd | 5,459,411 | |||||||||
5,610 | Chunghwa Telecom Co Ltd ADR | 97,109 | |||||||||
2,078,110 | Compal Electronics Inc | 1,814,945 | |||||||||
342,302 | Delta Electronics Inc | 950,741 | |||||||||
1,657,167 | Formosa Chemicals & Fibre Co | 2,388,821 | |||||||||
504,582 | Formosa Petrochemical Corp | 996,757 | |||||||||
1,242,869 | Formosa Plastics Corp | 1,691,626 | |||||||||
227,700 | Foxconn Technology Co Ltd | 1,717,300 | |||||||||
114,000 | High Tech Computer Corp | 2,866,627 | |||||||||
3,567,738 | Hon Hai Precision Industry Co Ltd | 20,077,158 | |||||||||
1,150,120 | Lite-On Technology Corp * | 1,424,801 | |||||||||
1,047,660 | MediaTek Inc | 9,532,125 | |||||||||
2,379,444 | Nan Ya Plastics Corp | 3,216,121 | |||||||||
414,351 | Novatek Microelectronics | 2,038,732 | |||||||||
2,104,458 | Quanta Computer Inc | 3,014,352 | |||||||||
933,712 | Realtek Semiconductor Corp | 1,178,362 | |||||||||
843,241 | Sunplus Technology Co Ltd | 807,098 | |||||||||
14,174,043 | Taiwan Semiconductor Manufacturing Co Ltd | 25,094,302 | |||||||||
97,369,246 | |||||||||||
Thailand — 1.5% | |||||||||||
959,000 | Advanced Info Service Pcl (Foreign Registered) (b) | 2,282,762 | |||||||||
842,400 | PTT Exploration & Production Pcl (Foreign Registered) (b) | 2,398,531 | |||||||||
687,611 | PTT Pcl (Foreign Registered) (b) | 4,316,492 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Thailand — continued | |||||||||||
48,000 | Siam Cement Pcl (Foreign Registered) (b) | 298,651 | |||||||||
101,000 | Siam Cement Pcl (Foreign Registered) NVDR (b) | 585,443 | |||||||||
3,537,216 | Tanayong Public Co Ltd * (b) | 941 | |||||||||
519,000 | Thai Oil Pcl (Foreign Registered) (b) | 842,136 | |||||||||
10,724,956 | |||||||||||
Turkey — 0.8% | |||||||||||
281,448 | Akbank TAS | 1,529,374 | |||||||||
133,630 | Arcelik AS | 861,757 | |||||||||
255,140 | KOC Holding AS * | 946,616 | |||||||||
66,575 | Tupras-Turkiye Petrol Rafineriler AS | 1,213,149 | |||||||||
394,935 | Vestel Elektronik Sanayi * | 1,036,829 | |||||||||
5,587,725 | |||||||||||
TOTAL COMMON STOCKS (COST $503,904,192) | 639,635,293 | ||||||||||
PREFERRED STOCKS — 6.2% | |||||||||||
Brazil — 5.7% | |||||||||||
222,900 | Aracruz Class B (Registered) 1.36% | 1,148,808 | |||||||||
43,800 | Banco Bradesco SA 6.08% | 1,435,349 | |||||||||
64,200 | Banco Itau Holding Financeira SA 3.02% | 1,931,689 | |||||||||
11,577,900 | Companhia de Bebidas das Americas 3.54% | 5,200,335 | |||||||||
214,674 | Companhia Vale do Rio Doce Class A 0.61% | 4,033,148 | |||||||||
68,500 | Empresa Brasileira de Aeronautica SA ADR 2.17% | 2,644,100 | |||||||||
233,500 | Gerdau SA 4.58% | 3,370,720 | |||||||||
956,500 | Petroleo Brasileiro SA (Petrobras) 0.93% | 19,326,297 | |||||||||
29,200 | Usinas Siderrurgicas de Minas Gerais SA 4.29% | 915,496 | |||||||||
40,005,942 | |||||||||||
South Korea — 0.5% | |||||||||||
6,200 | Samsung Electronics Co Ltd (Non Voting) 1.13% | 3,216,581 | |||||||||
TOTAL PREFERRED STOCKS (COST $28,177,348) | 43,222,523 |
See accompanying notes to the financial statements.
9
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | 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 INVESTMENTS — 3.3% | |||||||||||
2,000,000 | Bank Nationale de Paris Time Deposit, 5.27%, due 09/01/06 | 2,000,000 | |||||||||
1,100,000 | Branch Bank & Trust Time Deposit, 5.26% due 09/01/06 | 1,100,000 | |||||||||
2,000,000 | Rabobank Time Deposit, 5.28%, due 09/01/06 | 2,000,000 | |||||||||
14,005,650 | Boston Global Investment Trust - Enhanced Portfolio (c) | 14,005,650 | |||||||||
2,000,000 | ING Bank Time Deposit, 5.29%, due 09/01/06 | 2,000,000 | |||||||||
2,000,000 | Societe Generale Time Deposit, 5.27%, due 09/01/06 | 2,000,000 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $23,105,650) | 23,105,650 | ||||||||||
TOTAL INVESTMENTS — 101.6% (Cost $555,187,190) | 705,963,466 | ||||||||||
Other Assets and Liabilities (net) — (1.6%) | (11,314,045 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 694,649,421 |
See accompanying notes to the financial statements.
10
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
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) 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) All or a portion of this security represents investment of security lending collateral (Note 2).
As of August 31, 2006, 57.9% of the Net Assets of the Fund were valued using fair value prices based on models used by a third party vendor (Note 2).
See accompanying notes to the financial statements.
11
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $13,381,048 (cost $555,187,190) (Note 2) | $ | 705,963,466 | |||||
Cash | 18,815 | ||||||
Foreign currency, at value (cost $843,604) (Note 2) | 842,307 | ||||||
Receivable for investments sold | 205,474 | ||||||
Receivable for Fund shares sold | 1,000,000 | ||||||
Dividends and interest receivable | 2,581,208 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 11,656 | ||||||
Total assets | 710,622,926 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 14,005,650 | ||||||
Accrued capital gain and repatriation taxes payable (Note 2) | 1,497,921 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 228,209 | ||||||
Shareholder service fee | 50,561 | ||||||
Trustees and Chief Compliance Officer fees | 1,251 | ||||||
Accrued expenses | 189,913 | ||||||
Total liabilities | 15,973,505 | ||||||
Net assets | $ | 694,649,421 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 526,965,166 | |||||
Accumulated undistributed net investment income | 8,114,013 | ||||||
Accumulated net realized gain | 10,315,173 | ||||||
Net unrealized appreciation | 149,255,069 | ||||||
$ | 694,649,421 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 249,190,197 | |||||
Class VI shares | $ | 445,459,224 | |||||
Shares outstanding: | |||||||
Class III | 23,970,818 | ||||||
Class VI | 42,754,547 | ||||||
Net asset value per share: | |||||||
Class III | $ | 10.40 | |||||
Class VI | $ | 10.42 |
See accompanying notes to the financial statements.
12
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $1,328,678) | $ | 10,333,060 | |||||
Interest (including securities lending income of $24,599) | 490,777 | ||||||
Total investment income | 10,823,837 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 1,273,477 | ||||||
Shareholder service fee – Class III (Note 3) | 165,193 | ||||||
Shareholder service fee – Class VI (Note 3) | 114,532 | ||||||
Custodian and fund accounting agent fees | 463,404 | ||||||
Transfer agent fees | 21,344 | ||||||
Audit and tax fees | 36,064 | ||||||
Legal fees | 6,808 | ||||||
Trustees fees and related expenses (Note 3) | 4,809 | ||||||
Registration fees | 828 | ||||||
Miscellaneous | 6,164 | ||||||
Total expenses | 2,092,623 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (66,332 | ) | |||||
Net expenses | 2,026,291 | ||||||
Net investment income (loss) | 8,797,546 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of foreign capital gains tax and CPMF tax of $16,946 and $4,595, respectively) (Note 2) | 8,474,289 | ||||||
Closed swap contracts | 1,981,166 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 75,360 | ||||||
Net realized gain (loss) | 10,530,815 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments (net of foreign capital gains tax accrual of $777,972) (Note 2) | 1,857,561 | ||||||
Open swap contracts | (31,187 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (54,766 | ) | |||||
Net unrealized gain (loss) | 1,771,608 | ||||||
Net realized and unrealized gain (loss) | 12,302,423 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 21,099,969 |
See accompanying notes to the financial statements.
13
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 8,797,546 | $ | 6,586,198 | |||||||
Net realized gain (loss) | 10,530,815 | 17,952,288 | |||||||||
Change in net unrealized appreciation (depreciation) | 1,771,608 | 122,161,744 | |||||||||
Net increase (decrease) in net assets from operations | 21,099,969 | 146,700,230 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (438,362 | ) | (2,359,713 | ) | |||||||
Class VI | (881,645 | ) | (3,821,368 | ) | |||||||
Total distributions from net investment income | (1,320,007 | ) | (6,181,081 | ) | |||||||
Net realized gains | |||||||||||
Class III | (6,071,320 | ) | (823,974 | ) | |||||||
Class VI | (11,100,715 | ) | (1,152,023 | ) | |||||||
Total distributions from net realized gains | (17,172,035 | ) | (1,975,997 | ) | |||||||
(18,492,042 | ) | (8,157,078 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 50,847,700 | 59,430,146 | |||||||||
Class VI | 51,277,107 | 204,518,388 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 102,124,807 | 263,948,534 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 323,161 | 703,183 | |||||||||
Class VI | 197,400 | 895,785 | |||||||||
Increase in net assets resulting from net purchase premiums and redemption fees | 520,561 | 1,598,968 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions net and net purchase premiums and redemption fees | 102,645,368 | 265,547,502 | |||||||||
Total increase (decrease) in net assets | 105,253,295 | 404,090,654 | |||||||||
Net assets: | |||||||||||
Beginning of period | 589,396,126 | 185,305,472 | |||||||||
End of period (including accumulated undistributed net investment income of $8,114,013 and $636,474, respectively) | $ | 694,649,421 | $ | 589,396,126 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.38 | $ | 7.71 | $ | 13.77 | $ | 7.25 | $ | 8.09 | $ | 7.87 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss) | 0.14 | † | 0.15 | † | 0.17 | † | 0.23 | 0.06 | 0.07 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.18 | 2.67 | 0.19 | 6.35 | (0.85 | ) | 0.26 | ||||||||||||||||||||
Total from investment operations | 0.32 | 2.82 | 0.36 | 6.58 | (0.79 | ) | 0.33 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.02 | ) | (0.11 | ) | (0.52 | ) | (0.06 | ) | (0.05 | ) | (0.11 | ) | |||||||||||||||
From net realized gains | (0.28 | ) | (0.04 | ) | (5.90 | ) | — | — | — | ||||||||||||||||||
Total distributions | (0.30 | ) | (0.15 | ) | (6.42 | ) | (0.06 | ) | (0.05 | ) | (0.11 | ) | |||||||||||||||
Net asset value, end of period | $ | 10.40 | $ | 10.38 | $ | 7.71 | $ | 13.77 | $ | 7.25 | $ | 8.09 | |||||||||||||||
Total Return(a) | 3.16 | %** | 36.86 | % | 16.19 | % | 91.04 | % | (9.82 | )% | 4.41 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 249,190 | $ | 197,026 | $ | 82,153 | $ | 141,614 | $ | 105,354 | $ | 117,878 | |||||||||||||||
Net expenses to average daily net assets | 0.70 | %* | 0.73 | % | 1.22 | % | 1.25 | % | 1.35 | % | 1.28 | % | |||||||||||||||
Net investment income to average daily net assets | 1.36 | %**(b) | 1.71 | % | 1.84 | % | 1.76 | % | 0.80 | % | 1.01 | % | |||||||||||||||
Portfolio turnover rate | 4 | %** | 18 | % | 141 | % | 39 | % | 72 | % | 68 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.04 | % | 0.11 | % | 0.07 | % | 0.06 | % | 0.09 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.02 | $ | 0.04 | $ | 0.06 | $ | 0.02 | $ | 0.00 | (c) | $ | 0.00 | (c) |
(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) The ratio for the six months ended August 31, 2006, 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.
(c) Purchase premiums and redemption 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.
15
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||
(Unaudited) | 2006 | 2005(a) | |||||||||||||
Net asset value, beginning of period | $ | 10.39 | $ | 7.72 | $ | 6.52 | |||||||||
Income (loss) from investment operations:† | |||||||||||||||
Net investment income (loss) | 0.15 | 0.15 | 0.03 | ||||||||||||
Net realized and unrealized gain (loss) | 0.18 | 2.67 | 1.44 | ||||||||||||
Total from investment operations | 0.33 | 2.82 | 1.47 | ||||||||||||
Less distributions to shareholders: | |||||||||||||||
From net investment income | (0.02 | ) | (0.11 | ) | (0.01 | ) | |||||||||
From net realized gains | (0.28 | ) | (0.04 | ) | (0.26 | ) | |||||||||
Total distributions | (0.30 | ) | (0.15 | ) | (0.27 | ) | |||||||||
Net asset value, end of period | $ | 10.42 | $ | 10.39 | $ | 7.72 | |||||||||
Total Return(b) | 3.27 | %** | 36.92 | % | 23.05 | %** | |||||||||
Ratios/Supplemental Data: | |||||||||||||||
Net assets, end of period (000's) | $ | 445,459 | $ | 392,370 | $ | 103,152 | |||||||||
Net expenses to average daily net assets | 0.60 | %* | 0.64 | % | 0.71 | %* | |||||||||
Net investment income to average daily net assets | 1.41 | %**(c) | 1.66 | % | 0.99 | %* | |||||||||
Portfolio turnover rate | 4 | %** | 18 | % | 141 | %†† | |||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.04 | % | 0.16 | %* | |||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 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.
(c) The ratio for the six months ended August 31, 2006, 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.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2005.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
16
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks broad exposure to the higher quality companies in the S&P/IFCI (Investable) Composite Index. The Fund typically makes equity investments in companies whose stocks are traded in the securities markets of the world's non-developed markets, which excludes countries that are included in the MSCI EAFE Index.
For the six months ended August 31, 2006, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different level of shareholder service 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 generally 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 pursuant to procedures approved by the Trustees. 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
17
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
before the close of the NYSE. As a result, foreign equity securities are generally valued by a third party vendor using fair value prices based on models 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 including 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 lo ss 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. There were no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. 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
18
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no futures contracts outstanding at the end of the period.
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
19
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no indexed securities held by the Fund at the end of the period.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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
20
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
in interest rates or the price of the index or security underlying these transactions. There were no swap agreements outstanding at the end of the period.
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 August 31, 2006, the Fund had loaned securities having a market value of $13,381,048, collateralized by cash in the amount of $14,005,650, which was invested in the Boston Global Investment Trust – Enhanced Portfolio.
Taxes and distributions
The Fund intends to qualify each tax 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 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. The Fund has recorded a deferred tax liability in respect of unrealized appreciation on foreign securities of $1,497,921 for potential capital gains and repatriation taxes as of August 31, 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)
August 31, 2006 (Unaudited)
Operations. For the six months ended August 31, 2006, the Fund incurred $16,946 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 six months ended August 31, 2006, the Fund incurred $4,595 in CPMF tax which is included in the net realized gain (loss) on investments in the Statement of Operations.
The Fund is currently subject to a Taiwanese security transaction tax of 0.3% of the transaction amount on equities and 0.1% of the transaction amount on corporate bonds and mutual fund shares, which must be paid by the Fund upon the sale or transfer of any portfolio securities subject to such tax.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP.
As of August 31, 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) | ||||||||||||
$ | 555,357,615 | $ | 158,136,904 | $ | (7,531,053 | ) | $ | 150,605,851 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount
22
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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.
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 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 0.50% 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 six months ended August 31, 2006 and the year ended February 28, 2006, the Fund received $475,927 and $1,444,193 in purchase premiums and $44, 634 and $154,775 in redemption fees, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
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)
August 31, 2006 (Unaudited)
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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 custodial fees) exceed 0.40% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $3,337 and $1,748, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $128,454,954 and $24,266,385, 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 August 31, 2006, 49.9% 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.
24
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 2006, 0.1% of the Fund's shares were held by seven related parties comprised of certain GMO employee accounts, and 98.5% 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares Sold | 5,291,889 | $ | 55,426,852 | 14,333,276 | $ | 116,063,878 | |||||||||||||
Shares issued to shareholders in reinvestment of distribution | 643,708 | 6,462,843 | 329,743 | 2,997,691 | |||||||||||||||
Shares repurchased | (955,185 | ) | (11,041,995 | ) | (6,332,605 | ) | (59,631,423 | ) | |||||||||||
Purchase premiums and redemption fees | — | 323,161 | — | 703,183 | |||||||||||||||
Net increase (decrease) | 4,980,412 | $ | 51,170,861 | 8,330,414 | $ | 60,133,329 | |||||||||||||
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares Sold | 3,813,953 | $ | 39,294,747 | 24,022,660 | $ | 201,253,447 | |||||||||||||
Shares issued to shareholders in reinvestment of distribution | 1,191,089 | 11,982,360 | 541,077 | 4,973,390 | |||||||||||||||
Shares repurchased | — | — | (178,181 | ) | (1,708,449 | ) | |||||||||||||
Purchase premiums and redemption fees | — | 197,400 | — | 895,785 | |||||||||||||||
Net increase (decrease) | 5,005,042 | $ | 51,474,507 | 24,385,556 | $ | 205,414,173 |
25
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Emerging Markets Quality Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee
26
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
27
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
28
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | 0.70 | % | $ | 1,000.00 | $ | 1,031.60 | $ | 3.58 | |||||||||||
2) Hypothetical | 0.70 | % | $ | 1,000.00 | $ | 1,021.68 | $ | 3.57 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.60 | % | $ | 1,000.00 | $ | 1,032.70 | $ | 3.07 | |||||||||||
2) Hypothetical | 0.60 | % | $ | 1,000.00 | $ | 1,022.18 | $ | 3.06 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
29
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Debt Obligations | 100.2 | % | |||||
Short-Term Investments | 0.3 | ||||||
Swaps | 0.1 | ||||||
Call Options Purchased | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures | 0.0 | ||||||
Reverse Repurchase Agreements | (1.0 | ) | |||||
Other | 0.4 | ||||||
100.0 | % | ||||||
Industry Sector Summary | % of Debt Obligations | ||||||
Residential Asset-Backed Securities (United States) | 23.9 | % | |||||
Credit Cards | 16.5 | ||||||
Auto Financing | 7.6 | ||||||
Student Loans | 6.7 | ||||||
CMBS | 6.3 | ||||||
Residential Mortgage-Backed Securities (European) | 5.8 | ||||||
Business Loans | 5.6 | ||||||
Insured Auto Financing | 4.2 | ||||||
Residential Mortgage-Backed Securities (Australian) | 3.6 | ||||||
Investment Grade Corporate Collateralized Debt Obligations | 3.3 | ||||||
Collateralized Loan Obligations | 2.2 | ||||||
CMBS Collateralized Debt Obligations | 1.7 | ||||||
Insured Residential Mortgage-Backed Securities (United States) | 1.6 | ||||||
U.S. Government Agency | 1.2 | ||||||
Insured High Yield Collateralized Debt Obligations | 1.1 | ||||||
Other | 1.1 | ||||||
Rate Reduction Bonds | 1.1 | ||||||
Equipment Leases | 0.9 | ||||||
Insurance Premiums | 0.9 | ||||||
Insured Credit Cards | 0.8 | ||||||
Insured Time Share | 0.6 | ||||||
Airlines | 0.5 | ||||||
Insured Transportation | 0.5 | ||||||
Corporate Debt | 0.4 | ||||||
Emerging Markets Collateralized Debt Obligations | 0.3 | ||||||
Insured Business Loans | 0.3 | ||||||
Insured Residential Asset-Backed Securities (European) | 0.3 | ||||||
Insured Residential Asset-Backed Securities (United States) | 0.3 | ||||||
ABS Collateralized Debt Obligations | 0.2 | ||||||
Residential Mortgage-Backed Securities (United States) | 0.2 | ||||||
Trade Receivable | 0.2 | ||||||
High Yield Collateralized Debt Obligations | 0.1 | ||||||
100.0 | % |
1
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 100.2% | |||||||||||||||
Asset-Backed Securities — 98.6% | |||||||||||||||
ABS Collateralized Debt Obligations — 0.2% | |||||||||||||||
15,000,000 | Paragon CDO Ltd., Series 04-1A, Class A, 144A, Variable Rate, 3 mo. LIBOR + .65%, 6.15%, due 10/20/44 | 15,000,000 | |||||||||||||
Airlines — 0.5% | |||||||||||||||
23,000,000 | Aircraft Finance Trust, Series 99-1A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .48%, 5.81%, due 05/15/24 | 16,157,500 | |||||||||||||
11,995,879 | Continental Airlines Inc., Series 99-1A, 6.55%, due 02/02/19 | 11,941,897 | |||||||||||||
28,099,397 | |||||||||||||||
Auto Financing — 7.7% | |||||||||||||||
30,000,000 | ARG Funding Corp., Series 05-2A, Class A3, 144A, Variable Rate, 1 mo. LIBOR + .14%, 5.47%, due 05/20/10 | 30,014,013 | |||||||||||||
410,683 | Capital Auto Receivables Asset Trust, Series 03-1, Class A3A, 2.75%, due 04/16/07 | 410,169 | |||||||||||||
28,000,000 | Daimler Chrysler Master Owner Trust, Series 04-A, Class A, Variable Rate, 1 mo. LIBOR + .025%, 5.36%, due 01/15/09 | 28,008,400 | |||||||||||||
24,272,533 | Ford Credit Auto Owner Trust, Series 06-A, Class A2B, Variable Rate, 1 mo. LIBOR + .01%, 5.34%, due 09/15/08 | 24,272,533 | |||||||||||||
40,000,000 | Ford Credit Floorplan Master Owner Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .15%, 5.48%, due 05/15/10 | 39,999,780 | |||||||||||||
58,000,000 | Ford Credit Floorplan Master Owner Trust, Series 06-3, Class A, Variable Rate, 1 mo. LIBOR + .18%, 5.51%, due 06/15/11 | 58,029,453 | |||||||||||||
14,456,310 | Household Automotive Trust, Series 02-3, Class A4B, Variable Rate, 1 mo. LIBOR + .34%, 5.67%, due 05/18/09 | 14,471,489 | |||||||||||||
15,000,000 | Nissan Auto Receivables Owner Trust, Series 04-C, Class A4, Variable Rate, 1 mo. LIBOR + .04%, 5.37%, due 03/15/10 | 15,006,445 | |||||||||||||
33,370,000 | Nissan Master Owner Trust Receivables, Series 03-A, Class A1, Variable Rate, 1 mo. LIBOR + .06%, 5.39%, due 09/15/08 | 33,421,390 | |||||||||||||
12,000,000 | Nissan Master Owner Trust Receivables, Series 05-A, Class A, Variable Rate, 1 mo. LIBOR + .03%, 5.36%, due 07/15/10 | 12,005,625 | |||||||||||||
47,000,000 | Sovereign Dealer Floor Plan Master Trust, Series 06-1, Class A, 144A, Variable Rate, 1 mo. LIBOR + .05%, 5.38%, due 08/15/11 | 46,999,780 | |||||||||||||
38,000,000 | Superior Wholesale Inventory Financing Trust, Series 05, Class A, Variable Rate, 1 mo. LIBOR + .18%, 5.51%, due 06/15/10 | 38,011,780 |
See accompanying notes to the financial statements.
2
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Auto Financing — continued | |||||||||||||||
32,000,000 | Truck Retail Installment Paper Corp., Series 05-1A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .27%, 5.60%, due 12/15/16 | 31,977,920 | |||||||||||||
16,000,000 | Volkswagen Auto Lease Trust, Series 04-A, Class A4B, Variable Rate, 1 mo. LIBOR + .10%, 5.43%, due 08/20/10 | 16,004,480 | |||||||||||||
10,000,000 | Volkswagen Auto Lease Trust, Series 06-A, Class A1, 5.52%, due 08/20/07 | 10,004,107 | |||||||||||||
10,000,000 | Volkswagen Credit Auto Master Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .02%, 5.35%, due 07/21/10 | 10,003,586 | |||||||||||||
46,355,837 | Wachovia Auto Owner Trust, Series 06-A, Class A1, 5.31%, due 06/20/07 | 46,348,594 | |||||||||||||
1,919,913 | World Omni Auto Receivables Trust, Series 06-A, Class A1, 4.85%, due 03/15/07 | 1,919,613 | |||||||||||||
456,909,157 | |||||||||||||||
Business Loans — 5.6% | |||||||||||||||
9,441,949 | Bayview Commercial Asset Trust, Series 04-1, Class A, 144A, Variable Rate, 1 mo. LIBOR + .36%, 5.68%, due 04/25/34 | 9,477,554 | |||||||||||||
7,937,975 | Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .37%, 5.69%, due 01/25/35 | 7,959,407 | |||||||||||||
22,856,453 | Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .39%, 5.71%, due 01/25/36 | 22,890,738 | |||||||||||||
4,110,020 | Capitalsource Commercial Loan Trust, Series 04-1A, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .33%, 5.66%, due 04/20/13 | 4,114,171 | |||||||||||||
3,315,312 | Capitalsource Commercial Loan Trust, Series 04-2A, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .25%, 5.58%, due 08/20/13 | 3,323,302 | |||||||||||||
27,363,079 | Capitalsource Commercial Loan Trust, Series 06-1A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .12%, 5.45%, due 08/22/16 | 27,395,915 | |||||||||||||
20,000,000 | CNH Wholesale Master Note Trust, Series 06-1A, Class A, Variable Rate, 1 mo. LIBOR + .06%, 5.49%, due 07/15/12 | 20,003,000 | |||||||||||||
7,945,585 | GE Business Loan Trust, Series 04-1, Class A, 144A, Variable Rate, 1 mo. LIBOR + .29%, 5.62%, due 05/15/32 | 7,973,156 | |||||||||||||
10,252,037 | GE Business Loan Trust, Series 05-2A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .24%, 5.57%, due 11/15/33 | 10,269,298 | |||||||||||||
25,000,000 | GE Commercial Equipment Financing LLC, Series 05-1, Class A3B, Variable Rate, 1 mo. LIBOR + .01%, 5.34%, due 03/20/09 | 25,001,801 | |||||||||||||
49,000,000 | GE Commercial Loan Trust Series 06-2, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .06%, 5.60%, due 08/19/08 | 49,029,400 | |||||||||||||
14,824,444 | GE Commercial Loan Trust, Series 06-1, Class A1, 144A, Variable Rate, 3 mo. LIBOR + .08%, 5.57%, due 04/19/17 | 14,823,703 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Business Loans — continued | |||||||||||||||
18,936,202 | Lehman Brothers Small Balance Commercial, Series 05-1, Class A, 144A, Variable Rate, 1 mo. LIBOR + .25%, 5.57%, due 02/25/30 | 18,958,078 | |||||||||||||
16,880,454 | Lehman Brothers Small Balance Commercial, Series 05-2, Class 1A, 144A, Variable Rate, 1 mo. LIBOR + .25%, 5.57%, due 09/25/30 | 16,904,787 | |||||||||||||
18,000,000 | Navistar Financial Dealer Note Master Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .11%, 5.43%, due 02/25/13 | 17,915,400 | |||||||||||||
20,000,000 | Navistar Financial Dealer Note Master Trust, Series 98-1, Class A, Variable Rate, 1 mo. LIBOR + .16%, 5.48%, due 07/25/11 | 19,985,200 | |||||||||||||
53,000,000 | Textron Financial Floorplan Master Note, Series 05-1A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .12%, 5.45%, due 05/13/10 | 53,016,562 | |||||||||||||
3,645,035 | The Money Store Business Loan Backed Trust, Series 99-1, Class AN, Variable Rate, 1 mo. LIBOR + .50%, 5.58%, due 09/15/17 | 3,628,633 | |||||||||||||
332,670,105 | |||||||||||||||
CMBS — 6.3% | |||||||||||||||
14,500,000 | Banc of America Commercial Mortgage, Inc., Series 06-3, Class A2, 5.81%, due 07/10/44 | 14,817,187 | |||||||||||||
37,000,000 | Banc of America Large Loan, Series 06-LAQ, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .16%, 5.49%, due 02/09/21 | 37,011,562 | |||||||||||||
14,792,980 | Bear Stearns Commercial Mortgage Securities, Inc., Series 05-PW10, Class A1, 5.09%, due 12/11/40 | 14,788,935 | |||||||||||||
22,500,000 | Citigroup/Deutsche Bank Commercial Mortgage, Series 05-CD1, Class A2FL, Variable Rate, 1 mo. LIBOR + .12%, 5.45%, due 07/15/44 | 22,527,000 | |||||||||||||
32,000,000 | GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45 | 31,990,000 | |||||||||||||
19,850,000 | GE Capital Commercial Mortgage Corp., Series 06-C1, Class A2, Variable Rate, 5.52%, due 03/10/44 | 19,601,875 | |||||||||||||
18,144,006 | Greenwich Capital Commercial Funding Corp., Series 05-FL3A, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .20%, 5.53%, due 10/05/20 | 18,144,006 | |||||||||||||
32,000,000 | GS Mortgage Securities Corp., Series 06-GG6, Class A2, Variable Rate, 5.51%, due 04/10/38 | 32,244,295 | |||||||||||||
13,000,000 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-FL1AC, Class A1B, 144A, Variable Rate, 1 mo. LIBOR + .12%, 5.45%, due 02/15/20 | 13,000,000 | |||||||||||||
57,000,000 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-LDP7, Class A2, 6.05%, due 04/15/45 | 58,451,790 | |||||||||||||
42,000,000 | Lehman Brothers Floating Rate Commercial, Series 06-LLFA, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .08%, 5.41%, due 09/15/21 | 42,000,000 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
CMBS — continued | |||||||||||||||
33,000,000 | Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, Variable Rate, 5.80%, due 05/12/39 | 33,522,070 | |||||||||||||
12,000,000 | Morgan Stanley Capital I, Series 06-IQ11, Class A2, 5.69%, due 10/15/42 | 12,012,000 | |||||||||||||
13,000,000 | Morgan Stanley Capital I, Series 06-IQ11, Class A3, Variable Rate, 5.91%, due 10/15/42 | 13,008,125 | |||||||||||||
12,216,925 | Morgan Stanley Dean Witter Capital I, Series 03-TOP9, Class A1, 3.98%, due 11/13/36 | 11,806,513 | |||||||||||||
374,925,358 | |||||||||||||||
CMBS Collateralized Debt Obligations — 1.7% | |||||||||||||||
18,725,063 | Crest Exeter Street Solar, Series 04-1A, Class A1, 144A, Variable Rate, 3 mo. LIBOR + .35%, 5.84%, due 06/28/19 | 18,760,641 | |||||||||||||
20,000,000 | G-Force LLC, Series 05-RR2, Class A2, 144A, 5.16%, due 12/25/39 | 19,874,000 | |||||||||||||
30,000,000 | Guggenheim Structured Real Estate Funding, Series 05-2A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .32%, 5.64%, due 08/26/30 | 30,014,062 | |||||||||||||
35,500,000 | Marathon Real Estate CDO, Series 06-1, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .33%, 5.65%, due 05/25/46 | 35,500,000 | |||||||||||||
104,148,703 | |||||||||||||||
Collateralized Loan Obligations — 2.2% | |||||||||||||||
6,000,000 | Archimedes Funding IV (Cayman) Ltd., 4A A1, 144A, Variable Rate, 1 mo. LIBOR + .48%, 5.88%, due 02/25/13 | 6,017,700 | |||||||||||||
78,000,000 | Arran, Series 06-1A, Class A3, 144A, Variable Rate, 3 mo LIBOR + .17%, 5.65%, due 06/20/25 | 78,000,000 | |||||||||||||
45,500,000 | Omega Capital Europe Plc, Series GLOB-5A, Class A1, 144A, Variable Rate, 3 mo. LIBOR + .25%, 5.75%, due 07/05/11 | 45,501,777 | |||||||||||||
129,519,477 | |||||||||||||||
Credit Cards — 16.5% | |||||||||||||||
13,500,000 | Advanta Business Card Master Trust, Series 05-A1, Class A1, Variable Rate, 1 mo. LIBOR + .07%, 5.40%, due 04/20/11 | 13,505,535 | |||||||||||||
20,000,000 | Advanta Business Card Master Trust, Series 05-A2, Class A2, Variable Rate, 1 mo. LIBOR + .13%, 5.46%, due 05/20/13 | 20,055,469 | |||||||||||||
7,000,000 | Advanta Business Card Master Trust, Series 05-A5, Class A5, Variable Rate, 1 mo. LIBOR + .06%, 5.39%, due 04/20/12 | 7,001,750 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Credit Cards — continued | |||||||||||||||
15,000,000 | American Express Credit Account Master Trust, Series 02-6, Class A, Variable Rate, 1 mo. LIBOR + .14%, 5.47%, due 03/15/10 | 15,021,075 | |||||||||||||
5,000,000 | American Express Credit Account Master Trust, Series 03-1, Class A, Variable Rate, 1 mo. LIBOR + .11%, 5.44%, due 09/15/10 | 5,009,100 | |||||||||||||
9,800,000 | American Express Credit Account Master Trust, Series 05-3, Class A, Variable Rate, 1 mo. LIBOR, 5.33%, due 01/18/11 | 9,813,524 | |||||||||||||
35,000,000 | American Express Credit Account Master Trust, Series 05-5, Class A, Variable Rate, 1 mo. LIBOR + .04%, 5.37%, due 02/15/13 | 35,012,250 | |||||||||||||
25,000,000 | American Express Credit Account Master Trust, Series 06-1, Class A, Variable Rate, 1 mo. LIBOR + .03%, 5.36%, due 12/15/13 | 25,003,750 | |||||||||||||
25,000,000 | Arran, Series 2005-A, Class A, Variable Rate, 1 mo. LIBOR + .02%, 5.35%, 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%, 5.45%, due 06/15/10 | 20,028,200 | |||||||||||||
5,000,000 | Bank One Issuance Trust, Series 03-A1, Class A1, Variable Rate, 1 mo. LIBOR + .12%, 5.45%, due 09/15/10 | 5,008,600 | |||||||||||||
11,670,000 | Bank One Issuance Trust, Series 03-A10, Class A10, Variable Rate, 1 mo. LIBOR + .11%, 5.44%, due 06/15/11 | 11,714,346 | |||||||||||||
38,635,000 | Bank One Issuance Trust, Series 03-A3, Class A3, Variable Rate, 1 mo. LIBOR + .11%, 5.44%, due 12/15/10 | 38,754,768 | |||||||||||||
10,000,000 | Capital One Master Trust, Series 01-6, Class A, Variable Rate, 1 mo. LIBOR + .19%, 5.52%, due 06/15/11 | 10,035,400 | |||||||||||||
30,000,000 | Capital One Master Trust, Series 02-1A, Class A, Variable Rate, 1 mo. LIBOR + .20%, 5.53%, due 11/15/11 | 30,140,625 | |||||||||||||
15,000,000 | Capital One Multi-Asset Execution Trust, Series 04-A2, Class A2, Variable Rate, 1 mo. LIBOR + .09%, 5.42%, due 01/17/12 | 15,032,335 | |||||||||||||
15,000,000 | Capital One Multi-Asset Execution Trust, Series 04-A3, Class A3, Variable Rate, 1 mo. LIBOR + .10%, 5.43%, due 02/15/12 | 15,036,855 | |||||||||||||
26,275,000 | Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, Variable Rate, 3 mo. LIBOR + .15%, 5.56%, due 06/16/14 | 26,396,390 | |||||||||||||
25,000,000 | Chase Credit Card Master Trust, Series 01-6, Class A, Variable Rate, 1 mo. LIBOR + .13%, 5.46%, due 03/16/09 | 25,007,621 | |||||||||||||
15,650,000 | Chase Credit Card Master Trust, Series 02-1, Class A, Variable Rate, 1 mo. LIBOR + .10%, 5.43%, due 06/15/09 | 15,657,788 | |||||||||||||
14,000,000 | Chase Issuance Trust, Series 05-A9, Class A9, Variable Rate, 1 mo. + .02%, 5.35%, due 11/15/11 | 14,021,420 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Credit Cards — continued | |||||||||||||||
22,000,000 | Citibank Credit Card Issuance Trust, Series 01-A1, Class A1, Variable Rate, 3 mo. LIBOR + .17%, 5.65%, due 02/07/10 | 22,051,341 | |||||||||||||
61,500,000 | Citibank Credit Card Issuance Trust, Series 03-A4, Class A4, Variable Rate, 3 mo. LIBOR + .07%, 5.44%, due 03/20/09 (a) | 61,531,230 | |||||||||||||
20,000,000 | Citibank Credit Card Issuance Trust, Series 04-A3, Class A3, Variable Rate, 3 mo. LIBOR + .07%, 5.58%, due 07/25/11 | 20,034,654 | |||||||||||||
10,000,000 | Citibank Credit Card Issuance Trust, Series 05-A3, Class A3, Variable Rate, 1 mo. LIBOR + .07%, 5.40%, due 04/24/14 | 10,014,721 | |||||||||||||
23,000,000 | Citibank Credit Card Issuance Trust, Series 06-A6, Class A6, Variable Rate, 1 mo. LIBOR + .01%, 5.34%, due 05/24/12 | 23,020,700 | |||||||||||||
22,000,000 | Discover Card Master Trust I, Series 01-1, Class A, Variable Rate, 1 mo. LIBOR + .22%, 5.55%, due 01/15/08 | 22,070,336 | |||||||||||||
10,000,000 | Discover Card Master Trust I, Series 02-3, Class A, Variable Rate, 1 mo. LIBOR + .11%, 5.44%, due 11/17/09 | 10,009,000 | |||||||||||||
45,000,000 | Discover Card Master Trust I, Series 03-2, Class A, Variable Rate, 1 mo. LIBOR + .13%, 5.46%, due 08/15/10 | 45,090,000 | |||||||||||||
12,000,000 | Discover Card Master Trust I, Series 03-4, Class A1, Variable Rate, 1 mo. LIBOR + .11%, 5.44%, due 05/15/11 | 12,031,875 | |||||||||||||
5,405,000 | Discover Card Master Trust I, Series 04-2, Class A1, Variable Rate, 1 mo. LIBOR + .02%, 5.35%, due 05/15/10 | 5,405,610 | |||||||||||||
46,000,000 | Discover Card Master Trust I, Series 05-3, Class A, Variable Rate, 1 mo. LIBOR + .02%, 5.35%, due 05/15/11 | 46,009,468 | |||||||||||||
7,000,000 | Discover Card Master Trust I, Series 05-4, Class A1, Variable Rate, 1 mo. LIBOR + .06%, 5.39%, due 06/18/13 | 7,004,375 | |||||||||||||
GBP | 10,000,000 | Earls Five Ltd., Series E, MTN, Variable Rate, 3 mo. GBP LIBOR + .14%, 5.11%, due 02/27/08 | 19,126,944 | ||||||||||||
5,400,000 | GE Capital Credit Card Master Note Trust, Series 04-2, Class A, Variable Rate, 1 mo. LIBOR + .04%, 5.37%, due 09/15/10 | 5,403,809 | |||||||||||||
25,000,000 | GE Capital Credit Card Master Note Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .04%, 5.37%, due 03/15/13 | 25,024,232 | |||||||||||||
20,000,000 | Gracechurch Card Funding Plc, Series 2, Class A, Variable Rate, 1 mo. LIBOR + .12%, 5.45%, due 10/15/09 | 20,028,496 | |||||||||||||
3,000,000 | MBNA Credit Card Master Note Trust Series 01-A5 Class A5, Variable Rate, 1 mo. LIBOR + .21%, 5.54%, due 03/15/11 | 3,011,490 | |||||||||||||
6,220,000 | MBNA Credit Card Master Note Trust, Series 02-A9, Class A9, Variable Rate, 3 mo. LIBOR + .09%, 5.60%, due 12/15/09 | 6,226,929 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Credit Cards — continued | |||||||||||||||
31,976,000 | MBNA Credit Card Master Note Trust, Series 03-A3, Class A3, Variable Rate, 1 mo. LIBOR + .12%, 5.45%, due 08/16/10 | 32,023,324 | |||||||||||||
14,000,000 | MBNA Credit Card Master Note Trust, Series 04-A7, Class A7, Variable Rate, 1 mo. LIBOR + .10%, 5.43%, due 12/15/11 | 14,041,562 | |||||||||||||
15,000,000 | MBNA Credit Card Master Note Trust, Series 04-A8, Class A8, Variable Rate, 1 mo. LIBOR + .15%, 5.48%, due 01/15/14 | 15,065,834 | |||||||||||||
19,000,000 | MBNA Credit Card Master Note Trust, Series 05-A5, Class A5, Variable Rate, 1 mo. LIBOR, 5.33%, due 12/15/10 | 19,006,680 | |||||||||||||
20,000,000 | MBNA Credit Card Master Note Trust, Series 06-A4, Class A4, Variable Rate, 1 mo. LIBOR - .01%, 5.32%, due 09/15/11 | 20,000,023 | |||||||||||||
9,100,000 | Nordstrom Credit Card Master Note Trust, Series 02-1A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .27%, 5.60%, due 10/13/10 | 9,113,462 | |||||||||||||
25,000,000 | Pillar Funding Plc, Series 04-2, Class A, 144A, Variable Rate, 3 mo. LIBOR + .14%, 5.47%, due 09/15/11 | 25,033,918 | |||||||||||||
32,500,000 | Turquoise Card Backed Securities Plc, Series 06-1A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .01%, 5.34%, due 05/16/11 | 32,500,000 | |||||||||||||
18,000,000 | World Financial Network Credit Card Master Trust, Series 02-A, Class A, Variable Rate, 1 mo. LIBOR + .43%, 5.76%, due 08/15/11 | 18,106,200 | |||||||||||||
31,100,000 | World Financial Network Credit Card Master Trust, Series 04-A, Class A, Variable Rate, 1 mo. LIBOR + .18%, 5.51%, due 03/15/13 | 31,155,160 | |||||||||||||
7,000,000 | World Financial Network Credit Card Master Trust, Series 04-A, Class B, Variable Rate, 1 mo. LIBOR + .10%, 5.43%, due 07/15/10 | 6,999,930 | |||||||||||||
15,000,000 | World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .13%, 5.46%, due 02/15/17 | 14,999,918 | |||||||||||||
983,395,522 | |||||||||||||||
Emerging Markets Collateralized Debt Obligations — 0.3% | |||||||||||||||
16,000,000 | Santiago CDO Ltd., Series 05-1A, Class A, 144A, Variable Rate, 6 mo. LIBOR + .40%, 5.61%, due 04/18/17 | 16,000,000 | |||||||||||||
Equipment Leases — 0.9% | |||||||||||||||
7,500,000 | CNH Equipment Trust, Series 04-A, Class A4A, Variable Rate, 1 mo. LIBOR + .11%, 5.44%, due 09/15/11 | 7,506,445 | |||||||||||||
23,000,000 | CNH Equipment Trust, Series 05-A, Class A4A, Variable Rate, 1 mo. LIBOR + .04%, 5.37%, due 06/15/12 | 23,003,450 | |||||||||||||
24,346,977 | CNH Equipment Trust, Series 06-A, Class A1, 4.99%, due 04/05/07 | 24,323,658 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Equipment Leases — continued | |||||||||||||||
346,034 | GE Equipment Small Ticket LLC, Series 05-2A, Class A1, 144A, 4.56%, due 12/22/06 | 346,450 | |||||||||||||
55,180,003 | |||||||||||||||
High Yield Collateralized Debt Obligations — 0.1% | |||||||||||||||
1,885,533 | Rhyno CBO Delaware Corp., Series 97-1, Class A-2, 144A, Step Up, 6.33%, due 09/15/09 | 1,885,533 | |||||||||||||
1,968,954 | SHYPPCO Finance Co., Series II, Class A-2B, 6.64%, due 06/15/10 | 1,939,420 | |||||||||||||
3,824,953 | |||||||||||||||
Insurance Premiums — 0.9% | |||||||||||||||
25,000,000 | AICCO Premium Finance Master Trust, Series 04-1A, Class A, Variable Rate, 1 mo. LIBOR + .18%, 5.51%, due 11/17/08 | 25,019,531 | |||||||||||||
16,000,000 | AICCO Premium Finance Master Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .08%, 5.41%, due 04/15/10 | 16,030,400 | |||||||||||||
11,000,000 | Mellon Bank Premium Finance Loan Master Trust, Series 04-1, Class A, Variable Rate, 3 mo. LIBOR + .16%, 5.55%, due 06/15/09 | 11,017,050 | |||||||||||||
52,066,981 | |||||||||||||||
Insured Auto Financing — 4.2% | |||||||||||||||
17,500,000 | Aesop Funding II LLC, Series 03-5A, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .38%, 5.70%, due 12/20/09 | 17,606,575 | |||||||||||||
9,000,000 | Aesop Funding II LLC, Series 04-2A, Class A2, 144A, FGIC, Variable Rate, 1 mo. LIBOR + .12%, 5.45%, 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%, 5.45%, due 04/20/10 | 9,959,100 | |||||||||||||
19,550,000 | AmeriCredit Automobile Receivables Trust, Series 05-BM, Class A4, MBIA, Variable Rate, 1 mo. LIBOR + .08%, 5.41%, due 05/06/12 | 19,571,021 | |||||||||||||
35,000,000 | AmeriCredit Automobile Receivables Trust, Series 06-RM, Class A1, MBIA, Variable Rate, 5.37%, due 10/06/09 | 35,038,176 | |||||||||||||
17,000,000 | Capital One Auto Finance Trust, Series 04-A, Class A4, AMBAC, Variable Rate, 1 mo. LIBOR + .10%, 5.43%, due 03/15/11 | 17,015,980 | |||||||||||||
11,000,000 | Capital One Auto Finance Trust, Series 04-B, Class A4, MBIA, Variable Rate, 1 mo. LIBOR + .11%, 5.44%, due 08/15/11 | 11,014,520 | |||||||||||||
37,000,000 | Capital One Auto Finance Trust, Series 06-A, Class A4, AMBAC, Variable Rate, 1 mo. LIBOR + .01%, 5.34%, due 12/15/12 | 36,815,000 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Auto Financing — continued | |||||||||||||||
29,000,000 | Capital One Auto Finance Trust, Series 06-B, Class A4, MBIA, Variable Rate, 1 mo. LIBOR + .015%, 5.35%, due 07/15/13 | 28,995,360 | |||||||||||||
28,070,338 | Drive Auto Receivables Trust, Series 06-1, Class A1, FSA, 5.34%, due 06/15/07 | 28,062,478 | |||||||||||||
8,000,000 | Hertz Vehicle Financing LLC, Series 05-2A, Class A5, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .25%, 5.57%, due 11/25/11 | 8,029,074 | |||||||||||||
15,000,000 | Rental Car Finance Corp., Series 04-1A, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .20%, 5.52%, due 06/25/09 | 15,016,125 | |||||||||||||
8,322,459 | Triad Auto Receivables Owner Trust, Series 6-B, Class A1, 5.14%, due 06/12/07 | 8,332,446 | |||||||||||||
8,720,981 | UPFC Auto Receivables Trust, Series 06-A, Class A1, MBIA, 5.27%, due 06/15/07 | 8,720,109 | |||||||||||||
253,178,776 | |||||||||||||||
Insured Business Loans — 0.3% | |||||||||||||||
7,265,378 | CNL Commercial Mortgage Loan Trust, Series 03-2A, Class A1, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .44%, 5.76%, due 10/25/30 | 7,292,623 | |||||||||||||
8,607,609 | Golden Securities Corp., Series 03-A, Class A1, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .30%, 5.63%, due 12/02/13 | 8,614,151 | |||||||||||||
15,906,774 | |||||||||||||||
Insured Collateralized Loan Obligations — 0.0% | |||||||||||||||
1,835,721 | PAM Capital Funding Corp, Series 98-1W, Class A, 144A, FSA, Variable Rate, 3 mo. LIBOR + .165%, 5.65%, due 05/01/10 | 1,834,491 | |||||||||||||
Insured Credit Cards — 0.8% | |||||||||||||||
11,000,000 | Cabela's Master Credit Card Trust, Series 03-1A, Class A, 144A, MBIA, Variable Rate, 1 mo. LIBOR + .30%, 5.63%, due 01/15/10 | 11,029,150 | |||||||||||||
35,000,000 | Cabela's Master Credit Card Trust, Series 04-2A, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .12%, 5.45%, due 03/15/11 | 35,084,700 | |||||||||||||
46,113,850 | |||||||||||||||
Insured High Yield Collateralized Debt Obligations — 1.1% | |||||||||||||||
29,615,385 | Augusta Funding Ltd., Series 10A, Class F-1, 144A, CapMAC, Variable Rate, 3 mo. LIBOR + .25%, 5.23%, due 06/30/17 | 29,467,308 | |||||||||||||
1,754,358 | Cigna CBO Ltd, Series 96-1, Class A2, 144A, Variable Rate, CapMAC, 6.46%, due 11/15/08 | 1,754,358 | |||||||||||||
2,708 | Clydesdale CBO 1 Ltd, Series 1A, Class A2, 144A, FSA, 6.83%, due 03/25/11 | 2,708 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured High Yield Collateralized Debt Obligations — continued | |||||||||||||||
487,636 | DLJ CBO Ltd, Series 1A, Class A2, FSA, 6.68%, due 04/15/11 | 488,611 | |||||||||||||
4,614,629 | GSC Partners CDO Fund Ltd, Series 1A, Class A, 144A, FSA, Variable Rate, 6 mo. LIBOR + .40%, 5.68%, due 05/09/12 | 4,614,398 | |||||||||||||
10,000,000 | GSC Partners CDO Fund Ltd., Series 03-4A, Class A3, 144A, AMBAC, Variable Rate, 3 mo. LIBOR + .46%, 5.96%, due 12/16/15 | 9,999,500 | |||||||||||||
17,604,436 | GSC Partners CDO Fund Ltd., Series 2A, Class A, 144A, FSA, Variable Rate, 6 mo. LIBOR + .52%, 5.82%, due 05/22/13 | 17,654,609 | |||||||||||||
63,981,492 | |||||||||||||||
Insured Residential Asset-Backed Securities (European) — 0.3% | |||||||||||||||
GBP | 4,041,917 | RMAC Plc, Series 03-NS1A, Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .45%, 5.17%, due 06/12/35 | 7,729,190 | ||||||||||||
GBP | 6,765,074 | RMAC Plc, Series 03-NS2A, Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .40%, 4.98%, due 09/12/35 | 12,911,954 | ||||||||||||
20,641,144 | |||||||||||||||
Insured Residential Asset-Backed Securities (United States) — 0.3% | |||||||||||||||
7,828,212 | Citigroup Mortgage Loan Trust, Inc., Series 03-HE3, Class A, AMBAC, Variable Rate, 1 mo. LIBOR + .38%, 5.70%, due 12/25/33 | 7,891,621 | |||||||||||||
2,037,807 | Quest Trust, Series 03-X4A, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .43%, 5.75%, due 12/25/33 | 2,039,327 | |||||||||||||
2,539,308 | Quest Trust, Series 04-X1, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .33%, 5.65%, due 03/25/34 | 2,550,227 | |||||||||||||
2,997,630 | Residential Asset Securities Corp., Series 02-KS3, Class A1B, AMBAC, Variable Rate, 1 mo. LIBOR + .25%, 5.82%, due 05/25/32 | 2,997,870 | |||||||||||||
1,381,471 | Residential Asset Securities Corp., Series 02-KS5, Class AIB3, AMBAC, Variable Rate, 1 mo. LIBOR + .27%, 5.59%, due 08/25/32 | 1,382,852 | |||||||||||||
16,861,897 | |||||||||||||||
Insured Residential Mortgage-Backed Securities (United States) — 1.6% | |||||||||||||||
2,700,191 | Chevy Chase Mortgage Funding Corp., Series 03-4, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .34%, 5.66%, due 10/25/34 | 2,704,512 | |||||||||||||
6,377,303 | Chevy Chase Mortgage Funding Corp., Series 04-1A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .33%, 5.65%, due 01/25/38 | 6,385,275 | |||||||||||||
10,000,000 | GMAC Mortgage Corp. Loan Trust, Series 04-HE3, Class A3, FSA, Variable Rate, 1 mo. LIBOR + .23%, 5.55%, due 10/25/34 | 10,024,219 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Residential Mortgage-Backed Securities (United States) — continued | |||||||||||||||
37,000,000 | GMAC Mortgage Corp. Loan Trust, Series 05-HE3, Class A1, AMBAC, Variable Rate, 1 mo. LIBOR + .11%, 5.43%, due 02/25/36 | 37,007,932 | |||||||||||||
1,711,444 | GreenPoint Home Equity Loan Trust, Series 04-1, Class A, AMBAC, Variable Rate, 1 mo. LIBOR + .23%, 5.55%, due 07/25/29 | 1,713,584 | |||||||||||||
1,867,229 | GreenPoint Home Equity Loan Trust, Series 04-4, Class A, AMBAC, Variable Rate, 1 mo. LIBOR + .28%, 5.61%, due 08/15/30 | 1,870,030 | |||||||||||||
4,355,425 | Lehman ABS Corp., Series 04-2, Class A, AMBAC, Variable Rate, 1 mo. LIBOR + .22%, 5.54%, due 06/25/34 | 4,359,564 | |||||||||||||
1,393,077 | Residential Funding Mortgage Securities II, Series 03-HS1, Class AII, FGIC, Variable Rate, 1 mo. LIBOR + .29%, 5.61%, due 12/25/32 | 1,394,149 | |||||||||||||
11,489,944 | SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, Variable Rate, 1 mo. LIBOR + .19%, 5.51%, due 11/25/35 | 11,504,307 | |||||||||||||
8,307,967 | Wachovia Asset Securitization Inc., Series 04-HE1, Class A, MBIA, Variable Rate, 1 mo. LIBOR + .22%, 5.54%, due 06/25/34 | 8,318,352 | |||||||||||||
7,569,393 | Wachovia Asset Securitization, Inc., Series 02-HE1, Class A, AMBAC, Variable Rate, 1 mo. LIBOR + .37%, 5.76%, due 09/27/32 | 7,595,659 | |||||||||||||
92,877,583 | |||||||||||||||
Insured Time Share — 0.6% | |||||||||||||||
5,826,719 | Cendant Timeshare Receivables Funding LLC, Series 04-1A, Class A2, 144A, MBIA, Variable Rate, 1 mo. LIBOR + .18%, 5.51%, due 05/20/16 | 5,820,712 | |||||||||||||
11,030,044 | Cendant Timeshare Receivables Funding LLC, Series 05-1A, Class A2, 144A, FGIC, Variable Rate, 1 mo. LIBOR + .18%, 5.51%, due 05/20/17 | 11,026,597 | |||||||||||||
21,010,654 | Sierra Receivables Funding Co., Series 06-1A, Class A2, 144A, MBIA, Variable Rate, 1 mo. LIBOR + .15%, 5.48%, due 05/20/18 | 21,010,549 | |||||||||||||
37,857,858 | |||||||||||||||
Insured Transportation — 0.5% | |||||||||||||||
11,500,000 | GE Seaco Finance, Series 04-1A, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .30%, 5.63%, due 04/17/19 | 11,499,425 | |||||||||||||
20,500,000 | Westralia Airports Corp., 144A, MBIA, 6.48%, due 04/01/10 | 21,197,615 | |||||||||||||
32,697,040 | |||||||||||||||
Investment Grade Corporate Collateralized Debt Obligations — 3.3% | |||||||||||||||
20,000,000 | Counts Trust, Series 04-2, 144A, Variable Rate, 3 mo. LIBOR + .95%, 6.34%, due 09/20/09 | 20,315,000 |
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)
August 31, 2006 (Unaudited)
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%, 6.08%, due 08/05/09 | 10,060,000 | |||||||||||||
7,000,000 | Morgan Stanley ACES SPC, Series 04-12, Class I, 144A, Variable Rate, 3 mo. LIBOR + 0.80%, 6.28%, due 08/05/09 | 7,024,500 | |||||||||||||
6,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class I, 144A, Variable Rate, 3 mo. LIBOR + .45%, 5.86%, due 12/20/09 | 6,030,000 | |||||||||||||
11,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class II, 144A, Variable Rate, 3 mo. LIBOR + .65%, 6.06%, due 12/20/09 | 11,055,000 | |||||||||||||
3,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class III, 144A, Variable Rate, 3 mo. LIBOR + .75%, 6.16%, due 12/20/09 | 3,007,500 | |||||||||||||
16,000,000 | Morgan Stanley ACES SPC, Series 05-10, Class A1, 144A, Variable Rate, 3 mo. + .52%, 5.93%, due 03/20/10 | 15,984,000 | |||||||||||||
30,000,000 | Morgan Stanley ACES SPC, Series 05-15, Class A, 144A, Variable Rate, 3 mo. LIBOR + .40%, 5.81%, due 12/20/10 | 29,940,000 | |||||||||||||
16,000,000 | Morgan Stanley ACES SPC, Series 05-2A, Class A, 144A, Variable Rate, 3 mo. LIBOR + .45%, 5.86%, due 03/20/10 | 16,016,000 | |||||||||||||
46,000,000 | Morgan Stanley ACES SPC, Series 06-13A, Class A, 144A, Variable Rate, 3 mo. LIBOR + .29%, 5.79%, due 06/20/13 | 46,046,000 | |||||||||||||
30,000,000 | Salisbury International Investments Ltd., Series E, MTN, Variable Rate, 3 mo. LIBOR + .42%, 5.81%, due 06/22/10 | 29,923,500 | |||||||||||||
195,401,500 | |||||||||||||||
Other — 1.1% | |||||||||||||||
30,000,000 | DB Master Finance LLC, Series 06-1, Class A2, 144A, AMBAC, 5.78%, due 06/20/31 | 30,359,548 | |||||||||||||
4,843,750 | Ensec Home Finance Pool Ltd., Series 05-R1A, 144A, Variable Rate, 1 mo. LIBOR + .20%, 5.53%, due 05/15/14 | 4,847,028 | |||||||||||||
29,000,000 | TIB Card Receivables Fund, 144A, FGIC, Variable Rate, 4 mo. LIBOR + .25%, 5.73%, due 01/05/14 | 29,034,800 | |||||||||||||
64,241,376 | |||||||||||||||
Rate Reduction Bonds — 1.1% | |||||||||||||||
1,431,032 | California Infrastructure PG&E-1, Series 97-1, Class A7, 6.42%, due 09/25/08 | 1,431,805 | |||||||||||||
3,510,000 | Connecticut RRB Special Purpose Trust CL&P-1, Series 01-1, Class A4, Variable Rate, 3 mo. LIBOR + .31%, 5.81%, due 12/30/10 | 3,526,161 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Rate Reduction Bonds — continued | |||||||||||||||
23,000,000 | Massachusetts RRB Special Purpose Trust, Series 05-1, Class A3, 4.13%, due 09/15/13 | 22,195,555 | |||||||||||||
30,000,000 | PG&E Energy Recovery Funding LLC, Series 05-1, Class A4, 4.37%, due 06/25/14 | 28,950,000 | |||||||||||||
12,500,000 | PSE&G Transition Funding LLC, Series 01-1, Class A4, Variable Rate, 3 mo. LIBOR + .30%, 5.63%, due 06/15/11 | 12,546,786 | |||||||||||||
68,650,307 | |||||||||||||||
Residential Asset-Backed Securities (United States) — 23.9% | |||||||||||||||
6,668,216 | Accredited Mortgage Loan Trust, Series 04-4, Class A1B, Variable Rate, 1 mo. LIBOR + .39%, 5.71%, due 01/25/35 | 6,691,659 | |||||||||||||
16,378,000 | ACE Securities Corp., Series 05-AG1, Class A2B, Variable Rate, 1 mo. LIBOR + .21%, 5.53%, due 08/25/35 | 16,379,638 | |||||||||||||
20,000,000 | ACE Securities Corp., Series 05-ASP1, Class A2B, Variable Rate, 1 mo. LIBOR + .21%, 5.53%, due 09/25/35 | 20,015,400 | |||||||||||||
7,000,000 | ACE Securities Corp., Series 05-ASP1, Class A2C, Variable Rate, 1 mo. LIBOR + .27%, 5.59%, due 09/25/35 | 7,015,120 | |||||||||||||
4,702,281 | ACE Securities Corp., Series 05-RM2, Class A2B, Variable Rate, 1 mo. LIBOR + .20%, 5.52%, due 06/25/35 | 4,702,939 | |||||||||||||
12,342,123 | ACE Securities Corp., Series 06-ASL1, Class A, Variable Rate, 1 mo. LIBOR + .14%, 5.46%, due 02/25/36 | 12,346,196 | |||||||||||||
36,409,000 | ACE Securities Corp., Series 06-ASP1, Class A2B, Variable Rate, 1 mo. LIBOR + .15%, 5.47%, due 12/25/35 | 36,409,364 | |||||||||||||
30,000,000 | ACE Securities Corp., Series 06-ASP2, Class A2B, Variable Rate, 1 mo. LIBOR + .14%, 5.46%, due 03/25/36 | 30,000,300 | |||||||||||||
10,000,000 | ACE Securities Corp., Series 06-ASP2, Class A2C, Variable Rate, 1 mo. LIBOR + .18%, 5.50%, due 03/25/36 | 9,998,800 | |||||||||||||
17,000,000 | ACE Securities Corp., Series 06-ASP4, Class A2B, Variable Rate, 1 mo. LIBOR + .10%, 5.50%, due 08/25/36 | 16,999,830 | |||||||||||||
11,618,251 | ACE Securities Corp., Series 06-CW1, Class A2A, Variable Rate, 1 mo. LIBOR + .05%, 5.44%, due 07/25/36 | 11,618,135 | |||||||||||||
22,000,000 | ACE Securities Corp., Series 06-CW1, Class A2B, Variable Rate, 1 mo. LIBOR + .10%, 5.49%, due 07/25/36 | 21,999,780 | |||||||||||||
17,500,000 | ACE Securities Corp., Series 06-HE3, Class A2B, Variable Rate, 1 mo. LIBOR + .09%, 5.41%, due 06/25/36 | 17,495,275 | |||||||||||||
13,000,000 | ACE Securities Corp., Series 06-OP1, Class A2C, Variable Rate, 1 mo. LIBOR + .15%, 5.47%, due 04/25/36 | 13,000,130 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
23,973,383 | ACE Securities Corp., Series 06-SL1, Class A, Variable Rate, 1 mo. LIBOR + .16%, 5.24%, due 09/25/35 | 23,981,534 | |||||||||||||
28,489,438 | ACE Securities Corp., Series 06-SL3, Class A1, Variable Rate, 1 mo. LIBOR + .10%, 5.42%, due 06/25/36 | 28,490,008 | |||||||||||||
14,036,000 | ACE Securities Corp., Series 06-SL3, Class A2, Variable Rate, 1 mo. LIBOR + .17%, 5.49%, due 06/25/36 | 14,036,281 | |||||||||||||
609,684 | Aegis Asset Backed Securities Trust, Series 04-1, Class A, Variable Rate, 1 mo. LIBOR + .35%, 5.67%, due 04/25/34 | 609,873 | |||||||||||||
11,379,295 | Aegis Asset Backed Securities Trust, Series 04-5, Class 1A2, Variable Rate, 1 mo. LIBOR + .34%, 5.66%, due 03/25/31 | 11,391,698 | |||||||||||||
24,010,230 | Aegis Asset Backed Securities Trust, Series 04-6, Class 1A2, Variable Rate, 1 mo. LIBOR + .27%, 5.59%, due 03/25/35 | 24,028,958 | |||||||||||||
2,435,769 | Aegis Asset Backed Securities Trust, Series 05-3, Class A1, Variable Rate, 1 mo. LIBOR + .10%, 5.42%, due 08/25/35 | 2,435,862 | |||||||||||||
7,000,000 | Aegis Asset Backed Securities Trust, Series 05-5, Class 1A2, Variable Rate, 1 mo. LIBOR + .18%, 5.50%, due 12/25/35 | 7,012,040 | |||||||||||||
11,880,666 | Argent Securities, Inc., Series 04-W8, Class A5, Variable Rate, 1 mo. LIBOR + .52%, 5.84%, due 05/25/34 | 11,882,522 | |||||||||||||
35,000,000 | Argent Securities, Inc., Series 06-W2, Class A2B, Variable Rate, 1 mo. LIBOR + .19%, 5.51%, due 03/25/36 | 35,030,373 | |||||||||||||
13,000,000 | Argent Securities, Inc., Series 06-W5, Class A2C, Variable Rate, 1 mo. LIBOR + .15%, 5.47%, due 06/25/36 | 13,000,000 | |||||||||||||
10,000,000 | Bayview Financial Acquisition Trust, Series 04-B, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .50%, 5.83%, due 05/28/39 | 10,039,650 | |||||||||||||
10,400,000 | Bayview Financial Acquisition Trust, Series 04-B, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .65%, 5.98%, due 05/28/39 | 10,457,724 | |||||||||||||
15,000,000 | Bayview Financial Acquisition Trust, Series 05-A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .50%, 5.90%, due 02/28/40 | 15,033,984 | |||||||||||||
2,858,394 | Carrington Mortgage Loan Trust, Series 05-OPT2, Class A1B, Variable Rate, 1 mo. LIBOR + .15%, 5.47%, due 05/25/35 | 2,862,396 | |||||||||||||
26,000,000 | Carrington Mortgage Loan Trust, Series 05-OPT2, Class A1C, Variable Rate, 1 mo. LIBOR + .23%, 5.55%, due 05/25/35 | 26,039,780 | |||||||||||||
39,000,000 | Carrington Mortgage Loan Trust, Series 06-NC1, Class A2, Variable Rate, 1 mo. LIBOR + .16%, 5.48%, due 01/25/36 | 39,068,250 | |||||||||||||
6,799,907 | Centex Home Equity, Series 05-A, Class AV2, Variable Rate, 1 mo. LIBOR + .20%, 5.52%, due 07/25/34 | 6,797,782 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
7,000,000 | Centex Home Equity, Series 05-A, Class AV3, Variable Rate, 1 mo. LIBOR + .34%, 5.66%, due 01/25/35 | 7,016,406 | |||||||||||||
32,000,000 | Centex Home Equity, Series 05-C, Class AV3, Variable Rate, 1 mo. LIBOR + .23%, 5.55%, due 06/25/35 | 32,000,000 | |||||||||||||
16,500,000 | Centex Home Equity, Series 06-A, Class AV3, Variable Rate, 1 mo. LIBOR + .16%, 5.48%, due 06/25/36 | 16,519,800 | |||||||||||||
999,799 | Chase Funding Mortgage Loan Trust, Series 03-3, Class 2A2, Variable Rate, 1 mo. LIBOR + .27%, 5.59%, due 04/25/33 | 997,611 | |||||||||||||
366,531 | Citifinancial Mortgage Securities, Inc., Series 04-1, Class AF1, Variable Rate, 1 mo. LIBOR + .09%, 5.41%, due 04/25/34 | 367,044 | |||||||||||||
2,272,287 | Citigroup Mortgage Loan Trust, Inc., Series 04-OPT1, Class A1B, Variable Rate, 1 mo. LIBOR + .41%, 5.73%, due 10/25/34 | 2,277,513 | |||||||||||||
1,058,160 | Countrywide Asset-Backed Certificates, Series 04-9, Class 2AV2, Variable Rate, 1 mo. LIBOR + .34%, 5.66%, due 05/25/33 | 1,058,332 | |||||||||||||
6,887,232 | Countrywide Asset-Backed Certificates, Series 05-4, Class AF1, Variable Rate, 1 mo. LIBOR + .13%, 5.45%, due 10/25/35 | 6,886,828 | |||||||||||||
46,500,000 | Countrywide Asset-Backed Certificates, Series 06-BC3, Class 2A2, Variable Rate, 1 mo. LIBOR + .14%, 5.47%, due 08/25/12 | 46,500,000 | |||||||||||||
33,072,890 | Credit-Based Asset Servicing & Securitization, Series 06-RP1, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .11%, 5.43%, due 04/25/36 | 33,072,890 | |||||||||||||
1,563,751 | Credit-Based Asset Servicing and Securitization, Series 04-CB6, Class AV1, Variable Rate, 1 mo. LIBOR + .33%, 5.65%, due 07/25/35 | 1,564,850 | |||||||||||||
1,340,000 | Equity One ABS, Inc., Series 04-1, Class AV2, Variable Rate, 1 mo. LIBOR + .30%, 5.62%, due 04/25/34 | 1,340,419 | |||||||||||||
18,500,000 | First Franklin Mortgage Loan Asset Backed Certificates, Series 06-FF5, Class 2A3, Variable Rate, 1 mo. LIBOR + .16%, 5.48%, due 04/25/36 | 18,505,781 | |||||||||||||
25,456,560 | Fremont Home Loan Trust, Series 05-B, Class 2A2, Variable Rate, 1 mo. LIBOR + .20%, 5.52%, due 04/25/35 | 25,460,885 | |||||||||||||
8,756,150 | Fremont Home Loan Trust, Series 05-C, Class 2A2, Variable Rate, 1 mo. LIBOR + .16%, 5.48%, due 07/25/35 | 8,757,518 | |||||||||||||
23,625,000 | Fremont Home Loan Trust, Series 06-B, Class 2A3, Variable Rate, 1 mo. LIBOR + .16%, 5.55%, due 08/25/36 | 23,625,000 | |||||||||||||
29,477,000 | GE-WMC Mortgage Securities, Series 05-2, Class A2B, Variable Rate, 1 mo. LIBOR + .17%, 5.49%, due 12/25/35 | 29,513,846 | |||||||||||||
19,000,000 | GE-WMC Mortgage Securities, Series 06-1, Class A2B, Variable Rate, 1 mo. LIBOR + .15%, 5.48%, due 08/25/36 | 19,005,700 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
10,659,000 | GreenPoint Mortgage Funding Trust, Series 05-HE4, Class 2A3C, Variable Rate, 1 mo. LIBOR + .25%, 5.57%, due 07/25/30 | 10,668,993 | |||||||||||||
19,145,000 | GSAMP Trust, Series 05-HE3, Class A2B, Variable Rate, 1 mo. LIBOR + .22%, 5.54%, due 06/25/35 | 19,150,379 | |||||||||||||
17,000,000 | Home Equity Asset Trust, Series 05-4, Class 2A2, Variable Rate, 1 mo. LIBOR + .23%, 5.55%, due 10/25/35 | 17,032,903 | |||||||||||||
8,672,254 | Household Home Equity Loan Trust, Series 05-2, Class A2, Variable Rate, 1 mo. LIBOR + .31%, 5.64%, due 01/20/35 | 8,692,580 | |||||||||||||
9,480,777 | Household Home Equity Loan Trust, Series 05-3, Class A2, Variable Rate, 1 mo. LIBOR + .29%, 5.62%, due 01/20/35 | 9,500,034 | |||||||||||||
28,484,072 | Household Home Equity Loan Trust, Series 06-1, Class A1, Variable Rate, 1 mo. LIBOR + .16%, 5.49%, due 01/20/36 | 28,484,072 | |||||||||||||
3,303,815 | Household Mortgage Loan Trust, Series 04-HC1, Class A, Variable Rate, 1 mo. LIBOR + .35%, 5.68%, due 02/20/34 | 3,304,354 | |||||||||||||
13,810,934 | IndyMac Residential Asset Backed Trust, Series 06-B, Class 2A1, Variable Rate, 1 mo. LIBOR + .06%, 5.38%, due 03/14/10 | 13,811,367 | |||||||||||||
1,502,633 | Master Asset Backed Securities Trust, Series 04-OPT1, Class A3, Variable Rate, 1 mo. LIBOR + .26%, 5.58%, due 02/25/34 | 1,504,511 | |||||||||||||
42,000,000 | Master Asset Backed Securities Trust, Series 06-WMC1, Class A2, Variable Rate, 1 mo. LIBOR + .11%, 5.43%, due 02/25/36 | 41,970,026 | |||||||||||||
10,000,000 | Master Asset-Backed Securities Trust, Series 05-FRE1, Class A4, Variable Rate, 1 mo. LIBOR + .25%, 5.57%, due 10/25/35 | 10,027,916 | |||||||||||||
25,910,000 | Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, Variable Rate, 1 mo. LIBOR + .15%, 5.47%, due 03/25/36 | 25,914,542 | |||||||||||||
9,612,554 | Master Asset-Backed Securities Trust, Series 06-HE1, Class A1, Variable Rate, 1 mo. LIBOR + .08%, 5.40%, due 01/25/36 | 9,615,533 | |||||||||||||
14,300,000 | Master Asset-Backed Securities Trust, Series 06-HE2, Class A3, Variable Rate, 1 mo. LIBOR + .15%, 5.47%, due 06/25/36 | 14,299,173 | |||||||||||||
30,390,000 | Master Asset-Backed Securities Trust, Series 06-HE3, Class A3, Variable Rate, 1 mo. LIBOR + .15% Mabs, 5.48%, due 08/25/36 | 30,390,000 | |||||||||||||
22,658,627 | Master Second Lien Trust, Series 06-1, Class A, Variable Rate, 1 mo. LIBOR + .16%, 5.48%, due 03/25/36 | 22,683,437 | |||||||||||||
7,778,677 | Morgan Stanley ABS Capital I, Series 04-HE5, Class A4, Variable Rate, 1 mo. LIBOR + .53%, 5.85%, due 06/25/34 | 7,790,832 | |||||||||||||
3,869,458 | Morgan Stanley ABS Capital I, Series 04-HE9, Class A3C, Variable Rate, 1 mo. LIBOR + .30%, 5.62%, due 11/25/34 | 3,875,649 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
7,131,866 | Morgan Stanley ABS Capital I, Series 04-SD1, Class A, Variable Rate, 1 mo. LIBOR + .40%, 5.72%, due 08/25/34 | 7,134,184 | |||||||||||||
30,000,000 | Morgan Stanley Home Equity Loans, Series 05-2, Class A2B, Variable Rate, 1 mo. LIBOR + 0.22%, 5.54%, due 05/25/35 | 30,032,700 | |||||||||||||
7,929,783 | Morgan Stanley Home Equity Loans, Series 06-2, Class A1, Variable Rate, 1 mo. LIBOR + 0.07%, 5.39%, due 02/25/36 | 7,937,217 | |||||||||||||
27,500,000 | Morgan Stanley Home Equity Loans, Series 06-3, Class A3, Variable Rate, 1 mo. LIBOR + .16%, 5.48%, due 04/25/36 | 27,156,250 | |||||||||||||
194,551 | New Century Home Equity Loan Trust, Series 04-3, Class A5, Variable Rate, 1 mo. LIBOR + .35%, 5.67%, due 11/25/34 | 194,581 | |||||||||||||
2,106,362 | New Century Home Equity Loan Trust, Series 05-3, Class A2A, Variable Rate, 1 mo. LIBOR + .09%, 5.41%, due 07/25/35 | 2,106,551 | |||||||||||||
20,000,000 | Nomura Home Equity Loan, Inc., Series 05-FM1, Class 2A2, Variable Rate, 1 mo. LIBOR + .22%, 5.54%, due 05/25/35 | 20,021,875 | |||||||||||||
16,016,000 | Nomura Home Equity Loan, Inc., Series 06-FM1, Class 2A2, Variable Rate, 1 mo. LIBOR + .16%, 5.48%, due 11/25/35 | 16,028,512 | |||||||||||||
4,000,000 | Option One Mortgage Loan Trust, Series 05-3, Class A4, Variable Rate, 1 mo. LIBOR + .25%, 5.57%, due 08/25/35 | 4,007,500 | |||||||||||||
1,595,529 | Ownit Mortgage Loan Asset Backed Certificates, Series 05-2, Class A2A, Variable Rate, 1 mo. LIBOR + .11%, 5.43%, due 03/25/36 | 1,599,892 | |||||||||||||
29,774,328 | Park Place Securities, Inc., Series 05-WCW2, Class A2B, Variable Rate, 1 mo. LIBOR + .15%, 5.47%, due 07/25/35 | 29,827,921 | |||||||||||||
23,531,868 | People's Choice Home Loan Securities Trust, Series 05-3, Class 1A2, Variable Rate, 1 mo. LIBOR + .27%, 5.59%, due 08/25/35 | 23,563,963 | |||||||||||||
28,000,000 | People's Choice Home Loan Securities Trust, Series 05-4, Class 1A2, Variable Rate, 1 mo. LIBOR + .26%, 5.58%, due 03/15/30 | 28,074,480 | |||||||||||||
14,803,711 | RAAC Series Trust, Series 05-RP3, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .23%, 5.55%, due 05/25/39 | 14,803,563 | |||||||||||||
24,235,000 | RAAC Series Trust, Series 06-SP1, Class A2, Variable Rate, 1 mo. LIBOR + .19%, 5.51%, due 09/25/45 | 24,252,040 | |||||||||||||
16,000,000 | Residential Asset Mortgage Products, Inc., Series 05-RS4, Class A3, Variable Rate, 1 mo. LIBOR + .23%, 5.55%, due 04/25/35 | 16,005,000 | |||||||||||||
12,000,000 | Residential Asset Mortgage Products, Inc., Series 05-RS8, Class A2, Variable Rate, 1 mo. LIBOR + .29%, 5.61%, due 10/25/33 | 12,037,440 | |||||||||||||
1,493,291 | Saxon Asset Securities Trust, Series 04-1, Class A, Variable Rate, 1 mo. LIBOR + .27%, 5.59%, due 03/25/35 | 1,493,291 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
5,434,446 | Security National Mortgage Loan Trust, Series 05-2A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .29%, 5.61%, due 02/25/36 | 5,437,206 | |||||||||||||
14,455,000 | SG Mortgage Securities Trust, Series 05-OPT1, Class A2, Variable Rate, 1 mo. LIBOR + .26%, 5.58%, due 10/25/35 | 14,488,825 | |||||||||||||
12,258,536 | Soundview Home Equity Loan Trust, Series 06-OPT1, Class 2A1, Variable Rate, 1 LIBOR + .07%, 5.39%, due 03/25/36 | 12,254,705 | |||||||||||||
2,061,856 | Specialty Underwriting & Residential Finance, Series 05-BC2, Class A2A, Variable Rate, 1 mo. LIBOR + .10%, 5.42%, due 12/25/35 | 2,068,058 | |||||||||||||
20,000,000 | Specialty Underwriting & Residential Finance, Series 06-BC3, Class A2C, Variable Rate, 1 mo. LIBOR + .15%, 5.47%, due 06/25/37 | 20,000,000 | |||||||||||||
13,000,000 | Structured Asset Investment Loan Trust, Series 06-1, Class A3, Variable Rate, 1 mo. LIBOR + .20%, 5.52%, due 01/25/36 | 13,015,554 | |||||||||||||
34,000,000 | Structured Asset Securities Corp., Series 05-S6, Class A2, Variable Rate, 1 mo. LIBOR + .29%, 5.61%, due 11/25/35 | 34,067,662 | |||||||||||||
1,427,666,975 | |||||||||||||||
Residential Mortgage-Backed Securities (Australian) — 3.6% | |||||||||||||||
15,761,634 | Australian Mortgage Securities II, Series G3, Class A1A, Variable Rate, 3 mo. LIBOR + .21%, 5.72%, due 01/10/35 | 15,799,462 | |||||||||||||
16,458,702 | Crusade Global Trust, Series 04-2, Class A1, Variable Rate, 3 mo. LIBOR + .13%, 5.52%, due 11/19/37 | 16,483,690 | |||||||||||||
7,877,254 | Crusade Global Trust, Series 05-1, Class A1, Variable Rate, 3 mo. LIBOR + .06%, 5.46%, due 06/17/37 | 7,873,630 | |||||||||||||
23,638,290 | Crusade Global Trust, Series 06-1, Class A1, 144A, Variable Rate, 3 mo. LIBOR + .06%, 5.56%, due 07/20/38 | 23,610,870 | |||||||||||||
12,761,936 | Interstar Millennium Trust Series 03-3G Class A2, Variable Rate, 3 mo. LIBOR + .25%, 5.73%, due 09/27/35 | 12,798,418 | |||||||||||||
12,568,225 | Interstar Millennium Trust, Series 03-5G, Class A2, Variable Rate, 3 mo. LIBOR + .25%, 5.75%, due 01/20/36 | 12,595,635 | |||||||||||||
12,922,139 | Interstar Millennium Trust, Series 04-2G, Class A, Variable Rate, 3 mo. LIBOR + .20%, 5.59%, due 03/14/36 | 12,948,775 | |||||||||||||
5,941,652 | Interstar Millennium Trust, Series 05-1G, Class A, Variable Rate, 3 mo. LIBOR + .12%, 5.51%, due 12/08/36 | 5,945,395 | |||||||||||||
8,121,775 | Medallion Trust, Series 03-1G, Class A, Variable Rate, 3 mo. LIBOR + .19%, 5.61%, due 12/21/33 | 8,139,156 | |||||||||||||
11,091,510 | Medallion Trust, Series 04-1G, Class A1, Variable Rate, 3 mo. LIBOR + .13%, 5.53%, due 05/25/35 | 11,129,221 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Mortgage-Backed Securities (Australian) — continued | |||||||||||||||
6,107,199 | Medallion Trust, Series 05-1G, Class A1, Variable Rate, 3 mo. LIBOR + .08%, 5.53%, due 05/10/36 | 6,107,504 | |||||||||||||
29,315,777 | Medallion Trust, Series 06-1G, Class A1, Variable Rate, 3 mo. LIBOR + .05%, 5.44%, due 06/14/37 | 29,314,897 | |||||||||||||
19,604,622 | National RMBS Trust, Series 04-1, Class A1, Variable Rate, 3 mo. LIBOR + .11%, 5.52%, due 03/20/34 | 19,606,778 | |||||||||||||
7,013,309 | Superannuation Members Home Loans Global Fund, Series 7, Class A1, Variable Rate, 3 mo. LIBOR + .14%, 5.53%, due 03/09/36 | 7,022,293 | |||||||||||||
5,977,409 | Superannuation Members Home Loans Global Fund, Series 8, Class A1, Variable Rate, 3 mo. LIBOR + .07%, 5.57%, due 01/12/37 | 5,976,423 | |||||||||||||
17,772,083 | Westpac Securitization Trust, Series 05-1G, Class A1, Variable Rate, 3 mo. LIBOR + .07%, 5.52%, due 03/23/36 | 17,768,884 | |||||||||||||
213,121,031 | |||||||||||||||
Residential Mortgage-Backed Securities (European) — 5.8% | |||||||||||||||
16,600,000 | Aire Valley Mortgages, Series 06-1A, Class 1A, 144A, Variable Rate, 1 mo. LIBOR + .11%, 5.43%, due 09/20/66 | 16,604,980 | |||||||||||||
15,000,000 | Gracechurch Mortgage Funding Plc, Series 1A, Class A2B, 144A, Variable Rate, 3 mo. LIBOR + .07%, 5.58%, due 10/11/41 | 15,004,250 | |||||||||||||
2,857,126 | Granite Master Issuer Plc, Series 05-1, Class A1, Variable Rate, 1 mo. LIBOR + .04%, 5.37%, due 12/20/19 | 2,857,158 | |||||||||||||
9,000,000 | Granite Master Issuer Plc, Series 05-2, Class A4, Variable Rate, 3 mo. LIBOR + .08%, 5.47%, due 12/20/54 | 9,000,000 | |||||||||||||
15,000,000 | Granite Master Issuer Plc, Series 06-2, Class A4, Variable Rate, 3 mo. LIBOR + .04%, 5.54%, due 12/20/54 | 15,014,063 | |||||||||||||
15,000,000 | Granite Mortgages Plc, Series 04-3, Class 2A1, Variable Rate, 3 mo. LIBOR + .14%, 5.55%, due 09/20/44 | 15,018,450 | |||||||||||||
49,000,000 | Holmes Financing Plc, Series 10A, Class 4A1, 144A, Variable Rate, 3 mo. LIBOR + .08%, 5.55%, due 07/15/40 | 49,002,450 | |||||||||||||
14,303,200 | Leek Finance Plc, Series 14A Class A2B, 144A, Variable Rate, 3 mo. LIBOR + .18%, 5.60%, due 09/21/36 | 14,308,921 | |||||||||||||
18,702,000 | Leek Finance Plc, Series 15A, Class AB, 144A, Variable Rate, 3 mo. LIBOR + .14%, 5.56%, due 03/21/37 | 18,692,649 | |||||||||||||
4,629,120 | Leek Finance Plc, Series 16A, Class A1B, 144A, Variable Rate, 3 mo. LIBOR + .06%, 5.48%, due 09/21/37 | 4,629,074 | |||||||||||||
5,000,000 | Leek Finance Plc, Series 17A, Class A2B, 144A, Variable Rate, 3 mo. LIBOR + .14%, 5.31%, due 03/23/09 | 4,997,500 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Mortgage-Backed Securities (European) — continued | |||||||||||||||
16,773,210 | Lothian Mortgages Master Issuer Plc, Series 06-1A, Class A1, 144A, Variable Rate, 1 mo. LIBOR - .03%, 5.30%, due 01/24/28 | 16,793,338 | |||||||||||||
7,370,382 | Lothian Mortgages Plc, Series 3A, Class A1, 144A, Variable Rate, 3 mo. LIBOR + .14%, 5.65%, due 07/24/19 | 7,374,988 | |||||||||||||
14,000,000 | Mound Financing Plc, Series 5A, Class 2A, 144A, Variable Rate, 3 mo. LIBOR + .04%, 5.54%, due 05/08/16 | 14,002,188 | |||||||||||||
25,436,330 | Paragon Mortgages Plc, Series 11A, Class A1, 144A, Variable Rate, 1 mo. LIBOR - .01%, 5.32%, due 10/15/41 | 25,431,243 | |||||||||||||
20,000,000 | Paragon Mortgages Plc, Series 12A, Class A2C, 144A, Variable Rate, 3 mo. LIBOR + .11%, 5.63%, due 11/15/38 | 19,998,352 | |||||||||||||
14,000,000 | Paragon Mortgages Plc, Series 6A, Class A2A, 144A, Variable Rate, 3 mo. LIBOR + .35%, 5.68%, due 03/15/30 | 14,030,743 | |||||||||||||
14,873,560 | Paragon Mortgages Plc, Series 7A, Class A1A, 144A, Variable Rate, 3 mo. LIBOR, 5.62%, due 05/15/34 | 14,882,633 | |||||||||||||
20,000,000 | Permanent Financing Plc, Series 5, Class 2A, Variable Rate, 3 mo. LIBOR + .11%, 5.50%, due 06/10/11 | 20,012,500 | |||||||||||||
10,000,000 | Permanent Financing Plc, Series 6, Class 2A, Variable Rate, 3 mo. LIBOR + .09%, 5.48%, due 12/10/11 | 10,016,400 | |||||||||||||
5,000,000 | Permanent Financing Plc, Series 7, Class 2A, Variable Rate, 3 mo. LIBOR + .04%, 5.43%, due 09/10/14 | 5,004,688 | |||||||||||||
22,500,000 | Permanent Financing Plc, Series 8, Class 2A, Variable Rate, 3 mo. LIBOR + .07%, 5.46%, due 06/10/14 | 22,540,275 | |||||||||||||
9,690,560 | Residential Mortgage Securities, Series 20A, Class A1B, 144A, Variable Rate, 3 mo. LIBOR + .07%, 5.52%, due 08/10/30 | 9,690,560 | |||||||||||||
344,907,403 | |||||||||||||||
Residential Mortgage-Backed Securities (United States) — 0.2% | |||||||||||||||
3,823,323 | Chevy Chase Mortgage Funding Corp., Series 04-3, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .25%, 5.62%, due 08/25/35 | 3,832,245 | |||||||||||||
11,171,241 | Mellon Residential Funding Corp., Series 04-TBC1, Class A, 144A, Variable Rate, 1 mo. LIBOR + .25%, 5.58%, due 02/26/34 | 11,167,750 | |||||||||||||
14,999,995 | |||||||||||||||
Student Loans — 6.8% | |||||||||||||||
22,000,000 | College Loan Corp. Trust, Series 04-1, Class A2, Variable Rate, 3 mo. LIBOR + .11%, 5.60%, due 04/25/16 | 22,020,625 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Student Loans — continued | |||||||||||||||
8,000,000 | College Loan Corp. Trust, Series 05-1, Class A1, Variable Rate, 3 mo. LIBOR + .03%, 5.52%, due 01/25/14 | 8,008,750 | |||||||||||||
15,500,000 | College Loan Corp. Trust, Series 06-1, Class A2, Variable Rate, 3 mo. LIBOR + .02%, 5.51%, due 04/25/22 | 15,523,250 | |||||||||||||
10,820,731 | Collegiate Funding Services Education Loan Trust I, Series 05-A, Class A1, Variable Rate, 3 mo. LIBOR + .02%, 5.51%, due 09/29/14 | 10,820,731 | |||||||||||||
22,227,388 | Goal Capital Funding Trust, Series 06-1, Class A1, Variable Rate, 3 mo. LIBOR, 5.40%, due 08/25/20 | 22,227,088 | |||||||||||||
17,687,285 | Keycorp Student Loan Trust, Series 05-A, Class 2A1, Variable Rate, 3 mo. LIBOR + .05%, 5.53%, due 09/27/21 | 17,687,462 | |||||||||||||
10,058,379 | Montana Higher Education Student Assistance Corp., Series 05-1, Class A, Variable Rate, 3 mo. LIBOR + .04%, 5.45%, due 06/20/15 | 10,075,478 | |||||||||||||
13,017,618 | National Collegiate Student Loan Trust, Series 04-1, Class A1, Variable Rate, 3 mo. LIBOR +.12%, 5.60%, due 06/25/14 | 13,017,618 | |||||||||||||
10,756,631 | National Collegiate Student Loan Trust, Series 04-2, Class A1, Variable Rate, 1 mo. LIBOR + .11%, 5.43%, due 04/25/23 | 10,762,870 | |||||||||||||
21,000,000 | National Collegiate Student Loan Trust, Series 06-1, Class A2, Variable Rate, 1 mo. LIBOR + .14%, 5.46%, due 08/25/23 | 21,013,125 | |||||||||||||
38,908,478 | National Collegiate Student Loan Trust, Series 06-A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .08%, 5.40%, due 08/26/19 | 38,908,089 | |||||||||||||
20,000,000 | Nelnet Student Loan Corp., Series 04-2A, Class A3, Variable Rate, 3 mo. LIBOR + .10%, 5.50%, due 11/25/15 | 20,009,600 | |||||||||||||
37,000,000 | Nelnet Student Loan Trust, Series 05-3, Class A3, Variable Rate, 3 mo. LIBOR + .05%, 5.49%, due 06/22/17 | 36,976,875 | |||||||||||||
29,000,000 | SLM Student Loan Trust, Series 05-1, Class A2, Variable Rate, 3 mo. LIBOR + .08%, 5.57%, due 04/27/20 | 29,049,838 | |||||||||||||
20,000,000 | SLM Student Loan Trust, Series 05-10, Class A2, Variable Rate, 3 mo. LIBOR + .01%, 5.50%, due 04/25/15 | 19,993,750 | |||||||||||||
17,000,000 | SLM Student Loan Trust, Series 05-3, Class A3, Variable Rate, 3 mo. LIBOR + .03%, 5.52%, due 07/25/16 | 16,985,749 | |||||||||||||
23,821,530 | SLM Student Loan Trust, Series 05-6, Class A2, Variable Rate, 3 mo. LIBOR, 5.49%, due 07/25/16 | 23,828,974 | |||||||||||||
18,930,668 | SLM Student Loan Trust, Series 05-7, Class A1, Variable Rate, 3 mo. LIBOR, 5.49%, due 01/25/18 | 18,928,964 | |||||||||||||
13,671,724 | SLM Student Loan Trust, Series 06-1, Class A1, Variable Rate, 3 mo. LIBOR - .02%, 5.47%, due 01/25/12 | 13,671,724 |
See accompanying notes to the financial statements.
22
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Student Loans — continued | |||||||||||||||
6,450,545 | SMS Student Loan Trust, Series 97-A, Class A, Variable Rate, 3 mo. U.S. Treasury Bill + .60%, 5.55%, due 10/27/25 | 6,469,574 | |||||||||||||
27,500,000 | Wachovia Student Loan Trust, Series 06-1, Class A1, 144A, Variable Rate, 3 mo. LIBOR - .02%, 5.51%, due 10/25/13 | 27,504,125 | |||||||||||||
403,484,259 | |||||||||||||||
Trade Receivable — 0.2% | |||||||||||||||
13,000,000 | SSCE Funding LLC, Series 04-1, Class A, 144A, Variable Rate, 1 mo. LIBOR + .23%, 5.56%, due 11/15/10 | 13,000,000 | |||||||||||||
Total Asset-Backed Securities | 5,879,163,407 | ||||||||||||||
Corporate Debt — 0.4% | |||||||||||||||
22,000,000 | TIAA Global Markets, 144A, Variable Rate, 3 mo. LIBOR + .10%, 5.60%, due 01/12/11 | 22,012,320 | |||||||||||||
U.S. Government — 0.0% | |||||||||||||||
3,000,000 | U.S. Treasury Note, 4.63%, due 03/31/08 (b) | 2,988,281 | |||||||||||||
U.S. Government Agency — 1.2% | |||||||||||||||
750,000 | Agency for International Development Floater (Support of Belize), Variable Rate, 6 mo. U.S. Treasury Bill + .50%, 5.67%, due 01/01/14 | 749,063 | |||||||||||||
2,711,875 | Agency for International Development Floater (Support of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 5.57%, due 10/01/12 | 2,701,705 | |||||||||||||
1,103,700 | Agency for International Development Floater (Support of Honduras), Variable Rate, 3 mo. U.S. Treasury Bill x 117%, 4.71%, due 10/01/11 | 1,096,112 | |||||||||||||
15,000,000 | Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10%, 5.59%, due 02/01/27 | 14,887,500 | |||||||||||||
4,087,636 | Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. U.S. Treasury Bill + .75%, 5.92%, due 03/30/19 | 4,100,410 | |||||||||||||
18,500,000 | Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. LIBOR - .015%, 5.31%, due 02/01/25 | 18,257,188 | |||||||||||||
15,000,000 | Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. LIBOR + .15%, 5.60%, due 10/29/26 | 14,962,500 | |||||||||||||
952,680 | Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. U.S. Treasury Bill + .45%, 5.48%, due 11/15/14 | 947,917 |
See accompanying notes to the financial statements.
23
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) / Principal Amount / Shares | Description | Value ($) | |||||||||||||
U.S. Government Agency — continued | |||||||||||||||
456,434 | Agency for International Development Floater (Support of Peru), Series A, Variable Rate, 6 mo. U.S. Treasury Bill + .35%, 5.52%, due 05/01/14 | 453,296 | |||||||||||||
1,292,168 | Agency for International Development Floater (Support of Peru), Series A, Variable Rate, 6 mo. U.S. Treasury Bill +.35%, 5.38%, due 05/01/14 | 1,283,284 | |||||||||||||
11,985,000 | Agency for International Development Floater (Support of Tunisia), Variable Rate, 6 mo. LIBOR, 5.32%, due 07/01/23 | 11,895,113 | |||||||||||||
916,668 | Agency for International Development Floater (Support of Zimbabwe), Variable Rate, 3 mo. U.S. Treasury Bill x 115%, 5.41%, due 01/01/12 | 905,782 | |||||||||||||
72,239,870 | |||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $5,970,948,557) | 5,976,403,878 | ||||||||||||||
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 | 47,511 | |||||||||||||
TOTAL CALL OPTIONS PURCHASED (COST $2,281,250) | 47,511 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.3% | |||||||||||||||
Money Market Funds — 0.3% | |||||||||||||||
20,332,795 | Merrimac Cash Series-Premium Class | 20,332,795 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $20,332,795) | 20,332,795 | ||||||||||||||
TOTAL INVESTMENTS — 100.5% (Cost $5,993,562,602) | 5,996,784,184 | ||||||||||||||
Other Assets and Liabilities (net) — (0.5%) | (32,780,656 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 5,964,003,528 |
See accompanying notes to the financial statements.
24
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales | |||||||||||||||||||
847 | U.S. Treasury Note 5 Yr. (CBT) | December 2006 | $ | 89,027,641 | $ | (221,609 | ) |
As of August 31, 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 | 60,307,000 | Barclays Bank, 5.36%, dated 8/11/06, to be repurchased on demand at face value plus accrued interest. | $ | (60,495,560 | ) | ||||||
$ | (60,495,560 | ) |
Average balance outstanding | $ | (60,307,000 | ) | ||||
Average interest rate | 5.43 | % | |||||
Maximum balance outstanding | $ | (60,307,000 | ) | ||||
Average shares outstanding | 229,051,870 | ||||||
Average balance per share outstanding | $ | (0.26 | ) |
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund had entered into reverse repurchase agreements.
Forward Currency Contracts
Settlement Date | Deliver | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales | |||||||||||||||||||
9/12/06 | GBP | 25,000,000 | $ | 47,605,917 | $ | (1,340,667 | ) |
See accompanying notes to the financial statements.
25
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
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 | Receive | �� | 0.40 | % | Credit Swap | |||||||||||||||||||||||
Capital Services Inc. | Eagle Creek CDO | $ | 518,146 | ||||||||||||||||||||||||||||
31,000,000 | USD | 3/20/2013 | Morgan Stanley Capital Services Inc. | Receive | 0.25 | % | MS Synthetic 2006-1 | (220,380 | ) | ||||||||||||||||||||||
28,000,000 | USD | 3/20/2015 | Lehman Brothers | Receive | 0.88 | % | Credit Swap AAA CDO | (244,044 | ) | ||||||||||||||||||||||
$ | 53,722 |
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
50,000,000 | USD | 1/9/2008 | JP Morgan | (Pay) | 3.43 | % | 3 month LIBOR | ||||||||||||||||||||||||
Chase Bank | $ | 1,447,171 | |||||||||||||||||||||||||||||
45,000,000 | USD | 3/4/2008 | JP Morgan Chase Bank | (Pay) | 3.10 | % | 3 month LIBOR | 1,812,498 | * | ||||||||||||||||||||||
40,000,000 | USD | 1/24/2011 | Goldman Sachs | (Pay) | 6.07 | % | 3 month LIBOR | 3,564,570 | ** | ||||||||||||||||||||||
30,000,000 | USD | 2/7/2012 | Deutsche Bank AG | (Pay) | 4.33 | % | 3 month LIBOR | 1,247,270 | |||||||||||||||||||||||
38,100,000 | USD | 2/24/2013 | JP Morgan Chase Bank | (Pay) | 4.54 | % | 3 month LIBOR | 1,823,467 | * | ||||||||||||||||||||||
$ | 9,894,976 |
* 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.
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
See accompanying notes to the financial statements.
26
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
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.
CMBS – Commercial Mortgage Backed Security
CBO - Collateralized Bond Obligation
CDO - Collateralized Debt Obligation
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
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
(a) All or a portion of this security has been segregated to cover collateral requirements on reverse repurchase agreements (Note 2).
(b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts and collateral on open swap contracts (Note 2).
Currency Abbreviations:
GBP - British Pound | |||
USD - United States Dollar | |||
See accompanying notes to the financial statements.
27
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value (cost $5,993,562,602) (Note 2) | $ | 5,996,784,184 | |||||
Interest receivable | 25,316,696 | ||||||
Receivable for open swap contracts (Note 2) | 6,335,511 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 66,682 | ||||||
Total assets | 6,028,503,073 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 9,121 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 1,340,667 | ||||||
Interest payable for open swap contracts | 531,242 | ||||||
Payable for open swap contracts (Note 2) | 1,787,003 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 131,430 | ||||||
Payable for reverse repurchase agreements (Note 2) | 60,495,560 | ||||||
Accrued expenses | 204,522 | ||||||
Total liabilities | 64,499,545 | ||||||
Net assets | $ | 5,964,003,528 | |||||
Net asset: | |||||||
Paid-in capital | $ | 5,842,151,299 | |||||
Accumulated undistributed net investment income | 145,209,474 | ||||||
Accumulated net realized loss | (34,087,015 | ) | |||||
Net unrealized appreciation | 10,729,770 | ||||||
$ | 5,964,003,528 | ||||||
Net assets: | $ | 5,964,003,528 | |||||
Shares outstanding: | 229,013,321 | ||||||
Net asset value per share: | $ | 26.04 |
See accompanying notes to the financial statements.
28
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Interest (including securities lending income of $200) | $ | 147,625,289 | |||||
Total investment income | 147,625,289 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 264,868 | ||||||
Audit and tax fees | 42,044 | ||||||
Legal fees | 56,028 | ||||||
Trustees fees and related expenses (Note 3) | 39,787 | ||||||
Interest expense (Note 2) | 188,560 | ||||||
Miscellaneous | 37,628 | ||||||
Total expenses | 628,915 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (379,316 | ) | |||||
Net expenses | 249,599 | ||||||
Net investment income (loss) | 147,375,690 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (318,223 | ) | |||||
Closed futures contracts | (401,925 | ) | |||||
Closed swap contracts | (171,774 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (1,663,252 | ) | |||||
Net realized gain (loss) | (2,555,174 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 6,557,504 | ||||||
Open futures contracts | (169,821 | ) | |||||
Open swap contracts | 1,379,365 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (1,968,777 | ) | |||||
Net unrealized gain (loss) | 5,798,271 | ||||||
Net realized and unrealized gain (loss) | 3,243,097 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 150,618,787 |
See accompanying notes to the financial statements.
29
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 147,375,690 | $ | 158,502,195 | |||||||
Net realized gain (loss) | (2,555,174 | ) | 7,627,592 | ||||||||
Change in net unrealized appreciation (depreciation) | 5,798,271 | (11,250,384 | ) | ||||||||
Net increase (decrease) in net assets from operations | 150,618,787 | 154,879,403 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | (59,432,218 | ) | (117,072,626 | ) | |||||||
Net share transactions (Note 7): | 1,392,504,576 | 958,616,426 | |||||||||
Total increase (decrease) in net assets | 1,483,691,145 | 996,423,203 | |||||||||
Net assets: | |||||||||||
Beginning of period | 4,480,312,383 | 3,483,889,180 | |||||||||
End of period (including accumulated undistributed net investment income of $145,209,474 and $57,266,002, respectively) | $ | 5,964,003,528 | $ | 4,480,312,383 |
See accompanying notes to the financial statements.
30
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Financial Highlights
(For a share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28, | ||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 25.60 | $ | 25.33 | $ | 25.18 | $ | 25.01 | $ | 25.00 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.70 | 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 | 0.70 | 0.98 | 0.50 | 0.62 | 0.06 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.26 | ) | (0.71 | ) | (0.34 | ) | (0.45 | ) | (0.05 | ) | |||||||||||||
From net realized gains | — | — | (0.01 | ) | — | — | |||||||||||||||||
Total distributions | (0.26 | ) | (0.71 | ) | (0.35 | ) | (0.45 | ) | (0.05 | ) | |||||||||||||
Net asset value, end of period | $ | 26.04 | $ | 25.60 | $ | 25.33 | $ | 25.18 | $ | 25.01 | |||||||||||||
Total Return(c) | 2.76 | %** | 3.89 | % | 2.01 | % | 2.48 | % | 0.24 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 5,964,004 | $ | 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 | % | 0.00 | %* | |||||||||||||
Interest expense to average daily net assets | 0.01 | %* | 0.02 | % | — | 0.00 | %(e) | — | |||||||||||||||
Total net expenses to average daily net assets | 0.01 | %* | 0.02 | % | 0.00 | %(f) | 0.00 | %(f) | 0.00 | %* | |||||||||||||
Net investment income to average daily net assets | 5.33 | %* | 3.96 | % | 2.31 | % | 2.51 | % | 2.94 | %* | |||||||||||||
Portfolio turnover rate | 51 | %** | 45 | % | 34 | % | 33 | % | 15 | %** | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 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.
31
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks total return in excess of the JPMorgan U.S. 3 Month Cash Index. The Fund seeks to achieve its investment objective by investing primarily in high quality U.S. and foreign floating rate fixed income securities. The Fund may invest in securities issued by a wide range of private issuers and, to a lesser extent, securities issued by federal, state, local, and foreign governments; asset-backed securities, including, but not limited to, securities backed by pools of residential and commercial mortgages, credit-card receivables, home equity loans, automobile loans, educational loans, corporate and sovereign bonds, and bank loans made to corporations; government securities, corporate debt securities, money market instruments, and commercial paper; reverse repurchase agreements and repurchase agreements; exchange-traded and over-the-counter derivatives, including swap contracts, futures, options on futures, options on swa ps, and other types of options and forward currency contracts. The Fund's fixed income securities primarily have floating interest rates, but may also include all types of interest rate, payment, and reset terms.
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 generally 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
32
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 pursuant to procedures approved by the Trustees.
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 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. As of August 31, 2006, the total value of these securities represented 41.8% 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 including 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 lo ss 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
33
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
values that are unfavorable to the Fund. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
34
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Purc hased options outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. There were no loan agreements outstanding at the end of the period.
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. There were no indexed securities held by the Fund at the end of the period.
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. Interest rate swap agreements involve the
35
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
exchange by one party 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 party 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. Credit default swaps may be used to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where a party 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. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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
36
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no repurchase agreements outstanding at the end of the period.
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 August 31, 2006, the Fund had entered into reverse repur chase agreements having a market value plus accrued interest of $60,495,560, collateralized by securities with a market value of $61,531,230. Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's expenses. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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 August 31, 2006, the Fund had no securities on loan.
Taxes and distributions
The Fund intends to qualify each tax 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.
37
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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.
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 August 31, 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) | ||||||||||||
$ | 5,993,563,782 | $ | 15,188,141 | $ | (11,967,739 | ) | $ | 3,220,402 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, is accrued
38
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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.
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, the Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 (excluding fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 six months ended August 31, 2006 was $26,447 and $14,444, respectively. No remuneration was paid by the Fund to any other officer of the Trust.
4. Purchases and sales of securities
For the six months ended August 31, 2006, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 2,981,484 | $ | 1,615,078 | |||||||
Investments (non-U.S. Government securities) | 2,660,944,642 | 3,223,961,398 |
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
39
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 47.2% 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 August 31, 2006, all 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||
Shares sold | 123,896,632 | $ | 3,202,209,974 | 96,847,329 | $ | 2,480,509,800 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 2,302,682 | 59,432,218 | 4,614,675 | 117,072,626 | |||||||||||||||
Shares repurchased | (72,214,937 | ) | (1,869,137,616 | ) | (63,990,041 | ) | (1,638,966,000 | ) | |||||||||||
Net increase (decrease) | 53,984,377 | $ | 1,392,504,576 | 37,471,963 | $ | 958,616,426 |
40
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Short-Duration Collateral Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees gave substantial consideration to the fact that the Fund does not pay an advisory fee to the Manager under the Fund's investment management agreement. The Trustees also considered the so-called "fallout benefits" to the Manager, such as the reputational value derived from serving as investment
41
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees did not consider possible economies of scale to the Manager because the Manager does not receive an advisory fee from the Fund.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
42
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
1) Actual | 0.01 | % | $ | 1,000.00 | $ | 1,027.60 | $ | 0.05 | |||||||||||
2) Hypothetical | 0.01 | % | $ | 1,000.00 | $ | 1,025.16 | $ | 0.05 |
* Expenses are calculated using the annualized net expense ratio (including interest expense), for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
43
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 98.5 | % | |||||
Short-Term Investments | 12.9 | ||||||
Other | (11.4 | ) | |||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Financial | 27.2 | % | |||||
Retail Stores | 13.0 | ||||||
Technology | 11.3 | ||||||
Construction | 9.8 | ||||||
Services | 8.8 | ||||||
Health Care | 7.6 | ||||||
Consumer Goods | 6.7 | ||||||
Utility | 3.7 | ||||||
Food & Beverage | 2.8 | ||||||
Manufacturing | 2.3 | ||||||
Automotive | 2.1 | ||||||
Machinery | 1.9 | ||||||
Primary Process Industry | 1.4 | ||||||
Transportation | 0.8 | ||||||
Oil & Gas | 0.6 | ||||||
100.0 | % |
1
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 98.5% | |||||||||||
Automotive — 2.1% | |||||||||||
800 | Aftermarket Technology Corp. * | 16,144 | |||||||||
9,200 | American Axle & Manufacturing Holdings, Inc. | 153,548 | |||||||||
12,250 | ArvinMeritor, Inc. | 181,912 | |||||||||
2,700 | BorgWarner, Inc. | 153,117 | |||||||||
16,400 | Goodyear Tire & Rubber Co. (The) * (a) | 223,040 | |||||||||
1,800 | Lear Corp. (a) | 36,612 | |||||||||
4,000 | Navistar International Corp. * | 91,760 | |||||||||
700 | Oshkosh Truck Corp. | 36,190 | |||||||||
5,300 | Superior Industries International, Inc. (a) | 89,623 | |||||||||
3,600 | Tenneco Automotive, Inc. * | 81,900 | |||||||||
7,600 | TRW Automotive Holdings Corp. * | 187,416 | |||||||||
1,251,262 | |||||||||||
Construction — 9.6% | |||||||||||
1,300 | Aames Investment Corp. REIT | 5,213 | |||||||||
4,100 | American Home Mortgage Acceptance Corp. REIT | 129,970 | |||||||||
790 | American Woodmark Corp. (a) | 24,909 | |||||||||
1,000 | Ameron, Inc. | 70,140 | |||||||||
18,900 | Annaly Capital Management, Inc. (a) | 236,439 | |||||||||
13,400 | Anthracite Capital, Inc. REIT | 172,190 | |||||||||
23,000 | Anworth Mortgage Asset Corp. REIT | 180,090 | |||||||||
4,500 | Beazer Homes USA, Inc. | 181,350 | |||||||||
9,751 | Capstead Mortgage Corp. REIT (a) | 80,153 | |||||||||
1,700 | CBL & Associates Properties, Inc. REIT | 69,258 | |||||||||
1,400 | Comfort Systems USA, Inc. | 18,242 | |||||||||
5,200 | Crane Co. | 207,896 | |||||||||
2,200 | Dycom Industries, Inc. * | 44,550 | |||||||||
2,700 | Eagle Materials, Inc. (a) | 96,795 | |||||||||
9,300 | EMCOR Group, Inc. * | 515,592 | |||||||||
300 | Federal Realty Investment Trust | 22,221 | |||||||||
1,700 | Granite Construction, Inc. | 91,205 | |||||||||
4,600 | Hovnanian Enterprises, Inc.-Class A * (a) | 121,946 |
See accompanying notes to the financial statements.
2
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Construction — continued | |||||||||||
7,200 | KB Home | 307,872 | |||||||||
1,140 | Kilroy Realty Corp. REIT | 90,140 | |||||||||
4,100 | Lennox International, Inc. | 96,514 | |||||||||
1,900 | Louisiana-Pacific Corp. | 37,164 | |||||||||
1,200 | LSI Industries, Inc. | 21,996 | |||||||||
3,900 | M/I Homes, Inc. | 126,204 | |||||||||
1,800 | Martin Marietta Materials, Inc. | 148,248 | |||||||||
7,124 | MDC Holdings, Inc. (a) | 304,836 | |||||||||
2,700 | Meritage Homes Corp. * (a) | 110,565 | |||||||||
31,566 | MFA Mortgage Investments, Inc. REIT | 221,909 | |||||||||
1,700 | Monaco Coach Corp. | 17,952 | |||||||||
1,300 | National Health Investors, Inc. REIT | 35,542 | |||||||||
400 | NCI Building Systems, Inc. * | 21,736 | |||||||||
500 | NVR, Inc. * (a) | 256,825 | |||||||||
3,800 | Quanta Services, Inc. * (a) | 67,374 | |||||||||
100 | RAIT Investment Trust REIT | 2,798 | |||||||||
1,600 | Rayonier, Inc. REIT | 63,200 | |||||||||
6,800 | Ryland Group, Inc. (a) | 290,156 | |||||||||
2,900 | Simpson Manufacturing Co., Inc. (a) | 76,415 | |||||||||
7,000 | Standard-Pacific Corp. | 167,510 | |||||||||
2,700 | Technical Olympic USA, Inc. | 32,832 | |||||||||
6,800 | Thor Industries, Inc. | 286,824 | |||||||||
20,700 | Thornburg Mortgage, Inc. REIT (a) | 475,479 | |||||||||
2,000 | Universal Forest Products, Inc. | 97,520 | |||||||||
2,500 | US Concrete, Inc. * | 15,325 | |||||||||
1,100 | Washington Group International, Inc. | 65,131 | |||||||||
2,900 | Winnebago Industries, Inc. (a) | 84,680 | |||||||||
5,790,906 | |||||||||||
Consumer Goods — 6.6% | |||||||||||
7,700 | Blyth, Inc. | 165,396 | |||||||||
1,700 | Brunswick Corp. | 48,790 | |||||||||
5,900 | Columbia Sportswear Co. * (a) | 288,038 | |||||||||
700 | Estee Lauder Cos., Inc (The) - Class A | 25,802 |
See accompanying notes to the financial statements.
3
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Consumer Goods — continued | |||||||||||
6,500 | Ethan Allen Interiors, Inc. (a) | 219,375 | |||||||||
4,800 | Fossil, Inc. * | 90,336 | |||||||||
13,290 | Furniture Brands International, Inc. (a) | 254,503 | |||||||||
13,600 | Jones Apparel Group, Inc. | 425,680 | |||||||||
3,300 | Kellwood Co. | 90,453 | |||||||||
4,400 | K-Swiss, Inc.-Class A | 121,044 | |||||||||
12,300 | La-Z-Boy, Inc. (a) | 171,585 | |||||||||
1,600 | Leggett & Platt, Inc. | 36,880 | |||||||||
20,400 | Liz Claiborne, Inc. | 762,348 | |||||||||
700 | Matthews International Corp.-Class A | 24,920 | |||||||||
3,100 | Multimedia Games, Inc. * (a) | 29,698 | |||||||||
400 | Oakley, Inc. | 6,580 | |||||||||
400 | Oxford Industries, Inc. | 16,432 | |||||||||
1,700 | Polaris Industries, Inc. | 64,770 | |||||||||
900 | Polo Ralph Lauren Corp. | 53,091 | |||||||||
3,700 | Snap-On, Inc. | 161,690 | |||||||||
1,700 | Stanley Furniture Co., Inc. | 42,398 | |||||||||
4,619 | Steven Madden, Ltd. | 170,210 | |||||||||
1,000 | Stride Rite Corp | 13,750 | |||||||||
8,300 | Timberland Co.-Class A * | 235,803 | |||||||||
9,100 | Tupperware Corp. | 163,891 | |||||||||
4,600 | Universal Corp. | 177,698 | |||||||||
1,000 | Vector Group, Ltd. (a) | 17,270 | |||||||||
2,300 | Wolverine World Wide, Inc. | 58,029 | |||||||||
500 | Yankee Candle Co., Inc. | 12,925 | |||||||||
3,949,385 | |||||||||||
Financial — 26.8% | |||||||||||
500 | Advanta Corp.-Class B | 16,930 | |||||||||
500 | AG Edwards, Inc. | 26,410 | |||||||||
400 | Amcore Financial, Inc. | 12,020 | |||||||||
7,000 | American Capital Strategies, Ltd. | 271,110 | |||||||||
12,400 | American Financial Group, Inc. | 579,328 | |||||||||
600 | American Physicians Capital, Inc. * | 29,598 |
See accompanying notes to the financial statements.
4
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
5,100 | AmeriCredit Corp. * | 119,799 | |||||||||
1,400 | AMERIGROUP Corp. * (a) | 44,156 | |||||||||
7,100 | AmerUs Group Co. | 481,380 | |||||||||
400 | Anchor Bancorp Wisconsin, Inc. | 11,688 | |||||||||
1,000 | Argonaut Group, Inc. * | 30,750 | |||||||||
8,900 | Associated Banc Corp. | 280,706 | |||||||||
14,250 | Astoria Financial Corp. | 437,475 | |||||||||
7,300 | Bancorpsouth, Inc. | 204,838 | |||||||||
500 | BankUnited Financial Corp | 12,885 | |||||||||
5,100 | Brown & Brown, Inc. | 152,694 | |||||||||
300 | Capitol Bancorp, Ltd. | 12,651 | |||||||||
400 | Chemical Financial Corp. | 11,808 | |||||||||
1,100 | Chittenden Corp. | 31,735 | |||||||||
�� | 1,900 | City National Corp. | 125,020 | ||||||||
2,400 | Commerce Bancshares, Inc. | 120,288 | |||||||||
10,800 | Commerce Group, Inc. | 321,732 | |||||||||
7,000 | Conseco, Inc. * | 144,900 | |||||||||
3,400 | Corus Bankshares, Inc. (a) | 74,154 | |||||||||
1,500 | Cullen/Frost Bankers, Inc. | 88,440 | |||||||||
5,847 | Delphi Financial Group, Inc.-Class A | 227,331 | |||||||||
800 | Dime Community Bancshares | 11,432 | |||||||||
2,600 | Downey Financial Corp. | 159,614 | |||||||||
5,300 | Erie Indemnity Co.-Class A | 270,512 | |||||||||
1,800 | Fair Isaac Corp. | 63,018 | |||||||||
19,016 | First American Corp. | 772,430 | |||||||||
900 | First Cash Financial Services, Inc. * | 18,747 | |||||||||
500 | First Citizens BancShares, Inc.-Class A | 97,900 | |||||||||
200 | First Community Bancorp | 10,722 | |||||||||
900 | First Horizon National Corp. | 34,362 | |||||||||
1,275 | First Indiana Corp. | 31,174 | |||||||||
1,300 | First Midwest Bancorp, Inc. | 48,555 | |||||||||
1,100 | FirstFed Financial Corp. * (a) | 55,946 | |||||||||
1,500 | FirstMerit Corp. | 34,515 | |||||||||
8,800 | Flagstar Bancorp, Inc. | 127,952 |
See accompanying notes to the financial statements.
5
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
500 | FPIC Insurance Group, Inc. * | 20,620 | |||||||||
8,000 | Fremont General Corp. | 114,240 | |||||||||
600 | Frontier Financial Corp. (a) | 24,534 | |||||||||
1,700 | Fulton Financial Corp | 28,390 | |||||||||
2,000 | GATX Corp. | 74,220 | |||||||||
3,200 | Greater Bay Bancorp | 91,104 | |||||||||
1,000 | Hancock Holding Co. | 51,840 | |||||||||
5,500 | Hanover Insurance Group (The), Inc. | 244,750 | |||||||||
800 | Harleysville Group, Inc. | 28,792 | |||||||||
7,650 | HCC Insurance Holdings, Inc. | 248,548 | |||||||||
400 | Hilb Rogal & Hobbs Co. | 17,308 | |||||||||
1,000 | Horace Mann Educators Corp. | 18,360 | |||||||||
4,911 | IMPAC Mortgage Holdings, Inc. REIT | 44,641 | |||||||||
6,300 | IndyMac Bancorp, Inc. | 246,330 | |||||||||
3,300 | Investment Technology Group, Inc. * | 152,493 | |||||||||
1,800 | Investors Financial Services Corp. | 83,448 | |||||||||
3,400 | Irwin Financial Corp. | 64,736 | |||||||||
700 | ITLA Capital Corp. | 36,715 | |||||||||
8,000 | Janus Capital Group, Inc. | 142,240 | |||||||||
7,700 | Jefferies Group, Inc. | 191,884 | |||||||||
4,073 | Kansas City Life Insurance Co. | 173,876 | |||||||||
4,600 | Knight Capital Group, Inc.-Class A * | 80,316 | |||||||||
5,600 | LandAmerica Financial Group, Inc. | 354,144 | |||||||||
5,400 | Leucadia National Corp. | 138,942 | |||||||||
2,000 | MAF Bancorp, Inc. | 82,540 | |||||||||
2,200 | Mercantile Bankshares | 81,246 | |||||||||
5,600 | Mercury General Corp. | 281,512 | |||||||||
8,700 | MoneyGram International, Inc. | 273,180 | |||||||||
9,600 | Nationwide Financial Services, Inc.-Class A | 464,736 | |||||||||
500 | Navigators Group, Inc. * | 23,040 | |||||||||
500 | NCO Group, Inc. * | 13,100 | |||||||||
10,000 | New York Community Bancorp, Inc. | 164,100 | |||||||||
700 | Old National Bancorp | 13,097 | |||||||||
29,775 | Old Republic International Corp. | 622,297 |
See accompanying notes to the financial statements.
6
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
1,300 | Pacific Capital Bancorp | 36,348 | |||||||||
100 | Park District National Corp | 10,361 | |||||||||
400 | Piper Jaffray Cos., Inc. * | 23,432 | |||||||||
3,800 | PMA Capital Corp.-Class A * | 35,530 | |||||||||
14,510 | PMI Group (The), Inc. | 627,412 | |||||||||
1,600 | Pre-Paid Legal Services, Inc. (a) | 60,096 | |||||||||
9,800 | Protective Life Corp. | 451,094 | |||||||||
7,400 | Radian Group, Inc. | 443,112 | |||||||||
6,050 | Raymond James Financial, Inc. | 167,706 | |||||||||
5,500 | Redwood Trust, Inc. REIT (a) | 267,520 | |||||||||
8,900 | Reinsurance Group of America, Inc. | 459,952 | |||||||||
600 | RLI Corp. | 29,340 | |||||||||
3,200 | Ryder Systems, Inc. | 158,144 | |||||||||
500 | Safety Insurance Group, Inc. | 25,710 | |||||||||
600 | Selective Insurance Group, Inc. | 31,212 | |||||||||
7,900 | StanCorp Financial Group, Inc. | 367,903 | |||||||||
5,900 | Stewart Information Services Corp. | 201,249 | |||||||||
1,300 | Student Loan Corp. | 238,940 | |||||||||
600 | SWS Group, Inc. | 14,760 | |||||||||
9,800 | TCF Financial Corp. | 255,486 | |||||||||
600 | Transatlantic Holdings, Inc. | 36,852 | |||||||||
3,200 | Triad Guaranty, Inc. * | 160,864 | |||||||||
6,300 | Trustmark Corp. | 198,891 | |||||||||
1,900 | United Bankshares, Inc. | 70,813 | |||||||||
3,000 | United Fire & Casualty Co. | 83,940 | |||||||||
4,500 | United Rentals, Inc. * (a) | 97,470 | |||||||||
2,400 | Universal American Financial Corp. * | 36,792 | |||||||||
1,900 | Valley National Bancorp | 48,735 | |||||||||
14,550 | W.R. Berkley Corp. | 509,250 | |||||||||
7,427 | Washington Federal, Inc. | 165,028 | |||||||||
4,100 | Webster Financial Corp. | 193,684 | |||||||||
400 | Westamerica Bancorporation | 19,132 | |||||||||
6,200 | Wilmington Trust Corp. | 273,110 | |||||||||
16,097,892 |
See accompanying notes to the financial statements.
7
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Food & Beverage — 2.8% | |||||||||||
900 | Chiquita Brands International, Inc. | 15,219 | |||||||||
400 | Corn Products International, Inc. | 13,800 | |||||||||
2,100 | Flowers Foods, Inc. | 57,015 | |||||||||
5,000 | Hormel Foods Corp. | 183,250 | |||||||||
1,700 | Lancaster Colony Corp. | 75,038 | |||||||||
9,200 | NBTY, Inc. * | 293,112 | |||||||||
2,850 | Sanderson Farms, Inc. (a) | 89,091 | |||||||||
109 | Seaboard Corp. | 152,600 | |||||||||
8,300 | Smithfield Foods, Inc. * | 249,249 | |||||||||
36,700 | Tyson Foods, Inc.-Class A | 540,591 | |||||||||
1,668,965 | |||||||||||
Health Care — 7.5% | |||||||||||
2,200 | Albany Molecular Research, Inc. * | 21,560 | |||||||||
8,100 | Apria Healthcare Group * | 165,159 | |||||||||
4,400 | BioScrip, Inc. * | 15,972 | |||||||||
2,000 | DENTSPLY International, Inc. | 65,160 | |||||||||
14,800 | Health Net, Inc. * | 618,788 | |||||||||
600 | Henry Schein, Inc. * (a) | 29,922 | |||||||||
2,300 | Idexx Laboratories, Inc. * | 211,623 | |||||||||
400 | Invacare Corp. | 9,284 | |||||||||
800 | Invitrogen Corp. * | 48,680 | |||||||||
1,300 | Kindred Healthcare, Inc. * | 40,482 | |||||||||
53,900 | King Pharmaceuticals, Inc. * | 874,258 | |||||||||
13,600 | Lincare Holdings, Inc. * | 503,608 | |||||||||
1,100 | Odyssey HealthCare, Inc. * | 17,644 | |||||||||
6,600 | Omnicare, Inc. | 299,046 | |||||||||
7,700 | Owens & Minor, Inc. | 247,709 | |||||||||
3,400 | Pediatrix Medical Group, Inc. * | 155,720 | |||||||||
9,500 | Pharmaceutical Product Development, Inc. | 362,140 | |||||||||
1,400 | RehabCare Group, Inc. * | 20,552 | |||||||||
3,100 | Respironics, Inc. * | 114,421 | |||||||||
2,600 | Steris Corp. | 61,828 | |||||||||
2,900 | Techne Corp. * | 147,610 |
See accompanying notes to the financial statements.
8
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Health Care — continued | |||||||||||
10,000 | Tenet Healthcare Corp. * (a) | 78,800 | |||||||||
5,680 | Universal Health Services, Inc.-Class B | 321,602 | |||||||||
4,000 | Watson Pharmaceuticals, Inc. * | 102,560 | |||||||||
4,534,128 | |||||||||||
Machinery — 1.9% | |||||||||||
2,800 | AGCO Corp. * | 69,580 | |||||||||
1,100 | Cummins, Inc. | 126,302 | |||||||||
4,200 | Flowserve Corp. * | 214,788 | |||||||||
800 | Kaydon Corp. | 30,488 | |||||||||
2,800 | Lincoln Electric Holdings, Inc. | 154,084 | |||||||||
500 | NACCO Industries, Inc.-Class A | 66,765 | |||||||||
1,800 | Nordson Corp. | 72,072 | |||||||||
500 | Rofin-Sinar Technologies, Inc. * | 27,380 | |||||||||
2,000 | Stanley Works (The) | 94,460 | |||||||||
1,900 | Tennant Co | 51,414 | |||||||||
4,900 | Terex Corp. * | 215,257 | |||||||||
1,122,590 | |||||||||||
Manufacturing — 2.3% | |||||||||||
3,700 | Barnes Group, Inc. | 60,754 | |||||||||
2,800 | Bemis Co., Inc. | 90,440 | |||||||||
200 | Greif, Inc.-Class A | 14,170 | |||||||||
1,921 | Kaman Corp.-Class A | 34,405 | |||||||||
300 | Kennametal Inc | 15,822 | |||||||||
3,000 | Mueller Industries, Inc. | 114,960 | |||||||||
2,200 | Pactiv Corp. * | 58,806 | |||||||||
6,600 | Reliance Steel & Aluminum Co. | 216,282 | |||||||||
800 | Rock-Tenn Co.-Class A | 15,456 | |||||||||
4,300 | Smurfit-Stone Container Corp. * | 48,977 | |||||||||
2,100 | Sonoco Products Co. | 70,308 | |||||||||
700 | Spartech Corp. | 15,771 | |||||||||
4,800 | SPX Corp. | 253,440 | |||||||||
4,000 | Temple-Inland, Inc. | 178,080 |
See accompanying notes to the financial statements.
9
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Manufacturing — continued | |||||||||||
1,200 | Timken Co. (The) | 38,448 | |||||||||
2,550 | Trinity Industries, Inc. | 85,068 | |||||||||
1,100 | Valmont Industries, Inc. | 57,376 | |||||||||
1,368,563 | |||||||||||
Oil & Gas — 0.6% | |||||||||||
100 | Giant Industries, Inc. * | 8,170 | |||||||||
3,200 | Helmerich & Payne, Inc. | 78,496 | |||||||||
1,900 | Houston Exploration Co. (The) * | 121,885 | |||||||||
3,200 | Stone Energy Corp. * | 141,344 | |||||||||
349,895 | |||||||||||
Primary Process Industry — 1.4% | |||||||||||
2,800 | A. Schulman, Inc. | 66,052 | |||||||||
2,400 | Airgas, Inc. | 85,968 | |||||||||
1,200 | AK Steel Holding Corp. * | 15,132 | |||||||||
1,500 | FMC Corp. | 91,680 | |||||||||
1,700 | Glatfelter (PH) Co | 24,395 | |||||||||
3,600 | HB Fuller Co. | 69,228 | |||||||||
500 | Metal Management, Inc. | 12,790 | |||||||||
700 | Olympic Steel, Inc. | 19,355 | |||||||||
1,600 | PolyOne, Corp. * | 13,872 | |||||||||
600 | Ryerson Tull, Inc. (a) | 12,708 | |||||||||
8,400 | Sensient Technologies Corp. | 169,008 | |||||||||
1,100 | Steel Technologies, Inc. | 24,464 | |||||||||
2,658 | Stepan Co. | 78,358 | |||||||||
2,700 | Valspar Corp | 71,820 | |||||||||
4,400 | Worthington Industries, Inc. | 84,084 | |||||||||
838,914 | |||||||||||
Retail Stores — 12.8% | |||||||||||
3,800 | Abercrombie & Fitch Co.-Class A | 245,214 | |||||||||
2,000 | AnnTaylor Stores Corp. * (a) | 79,600 | |||||||||
500 | Asbury Automotive Group, Inc. | 10,245 |
See accompanying notes to the financial statements.
10
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Retail Stores — continued | |||||||||||
5,900 | Big Lots, Inc. * | 108,265 | |||||||||
11,600 | BJ's Wholesale Club, Inc. * | 305,660 | |||||||||
2,800 | Borders Group, Inc. | 53,564 | |||||||||
4,150 | Brown Shoe Co., Inc. | 132,593 | |||||||||
900 | Buckle, Inc. | 30,510 | |||||||||
5,000 | Casey's General Stores, Inc. | 118,200 | |||||||||
3,750 | Cato Corp.-Class A | 87,113 | |||||||||
2,700 | CDW Corp. | 157,410 | |||||||||
5,600 | Charming Shoppes, Inc. * | 73,696 | |||||||||
7,500 | Circuit City Stores, Inc. (a) | 177,075 | |||||||||
8,000 | Claire's Stores, Inc. | 218,640 | |||||||||
2,400 | Dillard's, Inc.-Class A | 74,832 | |||||||||
22,200 | Dollar Tree Stores, Inc. * (a) | 638,916 | |||||||||
3,200 | Dress Barn, Inc. * | 56,480 | |||||||||
14,500 | Family Dollar Stores, Inc. | 370,765 | |||||||||
1,000 | Foot Locker, Inc. | 24,100 | |||||||||
400 | Great Atlantic & Pacific Tea Co. | 9,172 | |||||||||
7,300 | Group 1 Automotive, Inc. | 330,690 | |||||||||
1,500 | Gymboree Corp. (The) * | 50,325 | |||||||||
5,100 | Ingles Markets, Inc.-Class A | 130,560 | |||||||||
6,200 | Insight Enterprises, Inc. * | 111,662 | |||||||||
4,500 | Lithia Motors, Inc.-Class A | 114,840 | |||||||||
5,700 | Longs Drug Stores Corp. | 258,951 | |||||||||
2,000 | OfficeMax, Inc. | 83,060 | |||||||||
13,000 | O'Reilly Automotive, Inc. * | 385,970 | |||||||||
3,900 | Pacific Sunwear of California, Inc. * (a) | 52,104 | |||||||||
300 | Pantry (The), Inc. * | 14,058 | |||||||||
3,100 | Pathmark Stores, Inc. * | 30,101 | |||||||||
9,700 | Payless ShoeSource, Inc. * (a) | 227,562 | |||||||||
5,200 | Pier 1 Imports, Inc. (a) | 33,228 | |||||||||
6,200 | RadioShack Corp. | 111,972 | |||||||||
10,900 | Rent-A-Center, Inc. * (a) | 295,390 | |||||||||
7,300 | Ross Stores, Inc. | 178,777 | |||||||||
3,700 | Ruddick Corp. | 95,423 |
See accompanying notes to the financial statements.
11
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Retail Stores — continued | |||||||||||
900 | Smart & Final, Inc. * | 14,913 | |||||||||
9,400 | Sonic Automotive, Inc. | 198,810 | |||||||||
30,000 | Supervalu, Inc. | 856,800 | |||||||||
6,500 | Talbots, Inc. | 143,065 | |||||||||
5,000 | Tiffany & Co. | 158,000 | |||||||||
2,800 | Tween Brands, Inc. * | 95,368 | |||||||||
22,600 | United Auto Group, Inc. | 461,492 | |||||||||
900 | Weis Markets, Inc. | 35,559 | |||||||||
6,500 | Williams-Sonoma, Inc. | 191,490 | |||||||||
2,200 | Zale Corp. * (a) | 58,850 | |||||||||
7,691,070 | |||||||||||
Services — 8.6% | |||||||||||
8,500 | Allied Waste Industries, Inc. * (a) | 87,890 | |||||||||
7,875 | Applebee's International, Inc. | 163,406 | |||||||||
4,199 | Aqua America, Inc. | 99,474 | |||||||||
600 | Aramark Corp.-Class B | 19,674 | |||||||||
1,900 | Banta Corp. | 89,395 | |||||||||
10,300 | BearingPoint, Inc. * (a) | 86,108 | |||||||||
600 | Bob Evans Farms, Inc. | 17,004 | |||||||||
9,800 | Brinker International, Inc. | 377,006 | |||||||||
3,200 | Career Education Corp. * | 61,280 | |||||||||
5,700 | CBRL Group, Inc. | 215,688 | |||||||||
500 | CDI Corp. | 10,475 | |||||||||
750 | CEC Entertainment, Inc. * | 23,910 | |||||||||
400 | Copart, Inc. * | 11,228 | |||||||||
900 | Corinthian Colleges, Inc. * | 10,908 | |||||||||
6,200 | Darden Restaurants, Inc. | 219,480 | |||||||||
3,150 | Factset Research Systems, Inc. | 138,915 | |||||||||
900 | Forrester Research, Inc. * | 26,568 | |||||||||
2,000 | FTI Consulting, Inc. * | 44,680 | |||||||||
3,200 | Handleman Co. (a) | 22,304 | |||||||||
1,400 | IHOP Corp. | 65,366 | |||||||||
4,100 | ITT Educational Services, Inc. * | 270,969 |
See accompanying notes to the financial statements.
12
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Services — continued | |||||||||||
5,020 | Jack in the Box, Inc. * (a) | 240,860 | |||||||||
3,100 | Kelly Services, Inc.-Class A | 84,661 | |||||||||
1,000 | Keystone Automotive Industries, Inc. * | 34,390 | |||||||||
1,600 | Krispy Kreme Doughnuts, Inc. * (a) | 13,200 | |||||||||
600 | Lee Enterprises, Inc. | 14,856 | |||||||||
10,900 | Manpower, Inc. | 644,299 | |||||||||
5,700 | MPS Group, Inc. * | 80,142 | |||||||||
2,300 | Nash Finch Co. | 52,555 | |||||||||
4,200 | New York Times Co.-Class A | 94,584 | |||||||||
7,200 | OSI Restaurant Partners, Inc. | 222,984 | |||||||||
1,800 | O'Charley's, Inc. * | 33,282 | |||||||||
6,500 | Papa John's International, Inc. * | 221,000 | |||||||||
10,400 | Performance Food Group Co. * | 255,944 | |||||||||
800 | R.H. Donnelley Corp. * | 43,456 | |||||||||
1,000 | Rare Hospitality International, Inc. * | 28,640 | |||||||||
3,200 | Regis Corp. | 117,408 | |||||||||
3,400 | Ruby Tuesday, Inc. | 87,788 | |||||||||
9,100 | Ryan's Restaurant Group, Inc. * | 143,416 | |||||||||
14,100 | Sabre Holdings Corp.-Class A | 309,072 | |||||||||
3,450 | Sonic Corp. * | 75,659 | |||||||||
7,400 | Spherion Corp. * | 55,278 | |||||||||
6,800 | Valassis Communications, Inc. * | 134,096 | |||||||||
3,100 | World Fuel Services Corp. | 111,724 | |||||||||
1,900 | World Wrestling Entertainment, Inc. | 32,832 | |||||||||
5,193,854 | |||||||||||
Technology — 11.1% | |||||||||||
1,300 | AAR Corp. * (a) | 29,003 | |||||||||
2,500 | Acuity Brands, Inc. | 106,825 | |||||||||
2,000 | Alliant Techsystems, Inc. * (a) | 152,980 | |||||||||
300 | Anixter International, Inc. | 16,347 | |||||||||
2,300 | AO Smith Corp. | 92,253 | |||||||||
10,000 | Applera Corp.-Applied Biosystems Group | 306,500 | |||||||||
600 | Armor Holdings, Inc. * | 31,722 |
See accompanying notes to the financial statements.
13
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
10,404 | Arrow Electronics, Inc. * | 290,272 | |||||||||
13,200 | Avnet, Inc. * | 258,192 | |||||||||
6,200 | AVX Corp. | 102,982 | |||||||||
19,200 | BEA Systems, Inc. * (a) | 263,616 | |||||||||
3,600 | Bell Microproducts, Inc. * | 17,568 | |||||||||
1,600 | Benchmark Electronics, Inc. * | 39,904 | |||||||||
1,300 | Black Box Corp. | 50,102 | |||||||||
6,400 | BMC Software, Inc. * | 170,368 | |||||||||
390 | Brightpoint, Inc. * | 6,490 | |||||||||
3,000 | Ceridian Corp. * | 71,610 | |||||||||
1,900 | Checkpoint Systems, Inc. * | 34,485 | |||||||||
6,100 | Citrix Systems, Inc. * | 187,148 | |||||||||
1,200 | Cohu, Inc. | 20,124 | |||||||||
2,900 | CommScope, Inc. * | 84,709 | |||||||||
6,900 | Compuware Corp. * | 52,440 | |||||||||
16,700 | Convergys Corp. * | 348,529 | |||||||||
3,200 | CSG Systems International, Inc. * | 86,144 | |||||||||
1,300 | Curtiss-Wright Corp. | 40,417 | |||||||||
6,900 | Deluxe Corp. | 123,648 | |||||||||
2,500 | Diebold, Inc. | 104,775 | |||||||||
3,600 | Electronics for Imaging * (a) | 82,944 | |||||||||
4,900 | Energizer Holdings, Inc. * | 327,614 | |||||||||
2,700 | Foundry Networks, Inc. * | 32,859 | |||||||||
600 | Global Imaging Systems, Inc. * | 13,158 | |||||||||
2,300 | Greatbatch, Inc. * | 56,258 | |||||||||
1,800 | Harris Corp. | 79,056 | |||||||||
5,900 | IKON Office Solutions, Inc. | 84,075 | |||||||||
3,300 | Imation Corp. | 130,779 | |||||||||
23,750 | Ingram Micro, Inc.-Class A * | 427,500 | |||||||||
1,000 | Intergraph Corp. * | 37,360 | |||||||||
9,200 | Intersil Corp.-Class A | 233,220 | |||||||||
1,100 | JDA Software Group, Inc. * | 18,249 | |||||||||
2,800 | Lightbridge, Inc. * | 33,320 | |||||||||
3,900 | Maximus, Inc. | 103,818 |
See accompanying notes to the financial statements.
14
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
900 | Mentor Graphics Corp. * | 13,050 | |||||||||
1,600 | Molex, Inc. | 58,352 | |||||||||
5,800 | Novell, Inc. * | 38,686 | |||||||||
1,300 | Park Electrochemical Corp | 33,930 | |||||||||
2,100 | Polycom, Inc. * | 49,959 | |||||||||
4,600 | Pomeroy IT Solutions, Inc. * | 35,880 | |||||||||
7,400 | QLogic Corp. * | 136,012 | |||||||||
2,400 | Reynolds & Reynolds Co. (The)-Class A | 92,064 | |||||||||
500 | ScanSource, Inc. * | 15,520 | |||||||||
400 | Superior Essex, Inc. * | 14,284 | |||||||||
3,300 | SYKES Enterprises, Inc. * | 66,363 | |||||||||
10,200 | Synopsys, Inc. * | 193,392 | |||||||||
11,297 | Tech Data Corp. * | 394,152 | |||||||||
3,100 | Technitrol, Inc. | 87,761 | |||||||||
2,800 | Tektronix, Inc. | 79,352 | |||||||||
2,900 | Teleflex, Inc. | 161,849 | |||||||||
21,200 | Tellabs, Inc. * | 216,028 | |||||||||
1,300 | Thermo Electron Corp. * (a) | 50,960 | |||||||||
300 | Thomas & Betts Corp. * | 13,548 | |||||||||
3,400 | Unisys Corp. * | 18,190 | |||||||||
3,600 | United Stationers, Inc. * | 164,988 | |||||||||
1,000 | Vishay Intertechnology, Inc. * | 14,010 | |||||||||
6,697,693 | |||||||||||
Transportation — 0.7% | |||||||||||
4,000 | Arkansas Best Corp. | 176,600 | |||||||||
800 | EGL, Inc. * (a) | 24,456 | |||||||||
8,300 | ExpressJet Holdings, Inc. * | 58,017 | |||||||||
1,800 | Mesa Air Group, Inc. * | 14,220 | |||||||||
900 | Saia, Inc. * | 27,675 | |||||||||
3,500 | Skywest, Inc. | 84,595 | |||||||||
2,000 | Swift Transportation Co. * | 46,380 | |||||||||
1,000 | US Xpress Enterprises, Inc.-Class A * | 20,830 | |||||||||
452,773 |
See accompanying notes to the financial statements.
15
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
Utility — 3.7% | |||||||||||
1,500 | Allete, Inc. | 68,910 | |||||||||
1,800 | Black Hills Corp. | 62,658 | |||||||||
36,700 | Centerpoint Energy, Inc. | 530,315 | |||||||||
13,700 | CenturyTel, Inc. | 545,534 | |||||||||
12,700 | CMS Energy Corp. * | 185,928 | |||||||||
1,500 | MDU Resources Group, Inc. | 36,750 | |||||||||
15,100 | Pepco Holdings, Inc. | 383,389 | |||||||||
2,700 | Talk America Holdings, Inc. * (a) | 15,660 | |||||||||
16,700 | TECO Energy, Inc. | 263,359 | |||||||||
5,900 | Time Warner Telecom, Inc.-Class A * (a) | 106,023 | |||||||||
2,198,526 | |||||||||||
TOTAL COMMON STOCKS (COST $57,954,846) | 59,206,416 | ||||||||||
SHORT-TERM INVESTMENTS — 12.9% | |||||||||||
887,440 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $887,527 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/2013 and a market value, including accrued interest, of $905,188. | 887,440 | |||||||||
1,293,009 | Credit Suisse First Boston Corp. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $1,293,201 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $1,363,208. (b) | 1,293,009 | |||||||||
2,017,094 | Goldman Sachs Group Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $2,017,394 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $2,079,969. (b) | 2,017,094 | |||||||||
258,602 | Lehman Brothers Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $258,640 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $303,200. (b) | 258,602 | |||||||||
2,017,094 | Merrill Lynch & Co. Tri Party Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $2,017,391 and an effective yield of 5.30%, collateralized by various U.S. government obligations with an aggregate market value of $2,076,730. (b) | 2,017,094 |
See accompanying notes to the financial statements.
16
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — continued | |||||||||||
1,251,430 | Morgan Stanley & Co. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $1,251,616 and an effective yield of 5.36%, collateralized by various corporate debt obligations with an aggregate market value of $1,332,737. (b) | 1,251,430 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $7,724,669) | 7,724,669 | ||||||||||
TOTAL INVESTMENTS — 111.4% (Cost $65,679,515) | 66,931,085 | ||||||||||
Other Assets and Liabilities (net) — (11.4%) | (6,840,597 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 60,090,488 |
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
* 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.
17
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $6,571,294 (cost $65,679,515) (Note 2) | $ | 66,931,085 | |||||
Dividends and interest receivable | 67,466 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 8,804 | ||||||
Total assets | 67,007,355 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 6,837,229 | ||||||
Payable for Fund shares repurchased | 1,640 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 15,868 | ||||||
Shareholder service fee | 7,678 | ||||||
Trustees and Chief Compliance Officer fees | 195 | ||||||
Accrued expenses | 54,257 | ||||||
Total liabilities | 6,916,867 | ||||||
Net assets | $ | 60,090,488 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 56,803,686 | |||||
Accumulated undistributed net investment income | 92,981 | ||||||
Accumulated net realized gain | 1,942,251 | ||||||
Net unrealized appreciation | 1,251,570 | ||||||
$ | 60,090,488 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 60,090,488 | |||||
Shares outstanding: | |||||||
Class III | 6,303,144 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.53 |
See accompanying notes to the financial statements.
18
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 509,577 | |||||
Interest (including securities lending income of $36,658) | 74,528 | ||||||
Total investment income | 584,105 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 95,186 | ||||||
Shareholder service fee – Class III (Note 3) | 46,058 | ||||||
Custodian, fund accounting agent and transfer agent fees | 18,492 | ||||||
Audit and tax fees | 25,608 | ||||||
Legal fees | 3,312 | ||||||
Trustees fees and related expenses (Note 3) | 536 | ||||||
Registration fees | 4,508 | ||||||
Miscellaneous | 642 | ||||||
Total expenses | 194,342 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (52,516 | ) | |||||
Net expenses | 141,826 | ||||||
Net investment income (loss) | 442,279 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 2,160,744 | ||||||
Closed futures contracts | (33,298 | ) | |||||
Net realized gain (loss) | 2,127,446 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (4,857,317 | ) | |||||
Open futures contracts | (15,464 | ) | |||||
Net unrealized gain (loss) | (4,872,781 | ) | |||||
Net realized and unrealized gain (loss) | (2,745,335 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (2,303,056 | ) |
See accompanying notes to the financial statements.
19
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 442,279 | $ | 1,112,296 | |||||||
Net realized gain (loss) | 2,127,446 | 13,142,745 | |||||||||
Change in net unrealized appreciation (depreciation) | (4,872,781 | ) | (7,241,849 | ) | |||||||
Net increase (decrease) in net assets from operations | (2,303,056 | ) | 7,013,192 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (677,116 | ) | (1,236,378 | ) | |||||||
Net realized gains | |||||||||||
Class III | (3,438,905 | ) | (14,949,675 | ) | |||||||
(4,116,021 | ) | (16,186,053 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 13,039,610 | (17,720,121 | ) | ||||||||
Purchase premiums and redemption fees (Notes 2 and 7) | |||||||||||
Class III | 80,655 | 197,785 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions net and net purchase premiums and redemption fees | 13,120,265 | (17,522,336 | ) | ||||||||
Total increase (decrease) in net assets | 6,701,188 | (26,695,197 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 53,389,300 | 80,084,497 | |||||||||
End of period (including accumulated undistributed net investment income of $92,981 and $327,818, respectively) | $ | 60,090,488 | $ | 53,389,300 |
See accompanying notes to the financial statements.
20
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.52 | $ | 12.38 | $ | 15.51 | $ | 9.81 | $ | 14.91 | $ | 13.86 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.07 | † | 0.20 | † | 0.19 | † | 0.17 | 0.18 | 0.23 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (0.38 | ) | 1.11 | 1.32 | 5.78 | (2.74 | ) | 1.58 | |||||||||||||||||||
Total from investment operations | (0.31 | ) | 1.31 | 1.51 | 5.95 | (2.56 | ) | 1.81 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.11 | ) | (0.21 | ) | (0.16 | ) | (0.15 | ) | (0.17 | ) | (0.21 | ) | |||||||||||||||
From net realized gains | (0.57 | ) | (2.96 | ) | (4.48 | ) | (0.10 | ) | (2.37 | ) | (0.55 | ) | |||||||||||||||
Total distributions | (0.68 | ) | (3.17 | ) | (4.64 | ) | (0.25 | ) | (2.54 | ) | (0.76 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.53 | $ | 10.52 | $ | 12.38 | $ | 15.51 | $ | 9.81 | $ | 14.91 | |||||||||||||||
Total Return(a) | (2.95 | )%** | 11.67 | % | 14.98 | % | 61.14 | % | (18.58 | )% | 13.39 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 60,090 | $ | 53,389 | $ | 80,084 | $ | 179,268 | $ | 146,915 | $ | 313,596 | |||||||||||||||
Net expenses to average daily net assets | 0.46 | %* | 0.48 | % | 0.48 | % | 0.48 | % | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 1.44 | %* | 1.71 | % | 1.48 | % | 1.21 | % | 1.21 | % | 1.60 | % | |||||||||||||||
Portfolio turnover rate | 32 | %** | 48 | % | 66 | % | 86 | % | 69 | % | 59 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.17 | %* | 0.19 | % | 0.12 | % | 0.08 | % | 0.08 | % | 0.04 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.04 | $ | 0.09 | $ | 0.04 | $ | 0.08 | $ | 0.01 |
(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 shareholders.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
21
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
1. Organization
GMO U.S. Small/Mid Cap 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 Funds into classes.
The Fund commenced operations following an in-kind purchase of shares by GMO Small/Mid Cap Value Fund (formerly GMO Small Cap Value Fund) ("Predecessor Fund") effected as of the close of business on September 16, 2005. For tax purposes, this transaction met all requirements for a tax-free reorganization under the Internal Revenue Code, and consequently the Fund retained the Predecessor Fund's basis and holding period in each asset contributed in-kind. For accounting purposes, the Fund also recorded a cost for each in-kind asset contributed by the Predecessor Fund equal to such asset's historical cost. For tax and accounting purposes, the Fund is treated as a continuation of the Predecessor Fund's operations. Therefore, the Financial Statements reflect the performance and operational history of the Predecessor Fund prior to September 16, 2005.
The Fund seeks long-term capital growth. The Fund seeks to achieve its objective by outperforming the Russell 2500 Value Index. The Fund typically makes equity investments in U.S. companies that issue stocks included in the Russell 2500 Index, and companies with similar size characteristics.
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 generally 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
22
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 pursuant to procedures approved by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. There were no futures contracts outstanding at the end of the period.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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.
23
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no swap agreements outstanding at the end of the period.
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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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 August 31, 2006, the Fund had loaned securities having a market value of $6,571,294 collateralized by cash in the amount of $6,837,229, which was invested in short-term instruments.
24
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Taxes and distributions
The Fund intends to qualify each tax 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.
As of August 31, 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) | ||||||||||||
$ | 65,799,566 | $ | 5,610,637 | $ | (4,479,118 | ) | $ | 1,131,519 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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
25
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
accretion of discounts. Interest income on inflation indexed securities, if any, 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.
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 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. For the six months ended August 31, 2006 and the year ended February 28, 2006, the Fund received $63,203 and $22,512 in purchase premiums and $17,452 and $175,273 in redemption fees, respectively. The Manager will waive the purchase premium r elating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.31% 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 Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or
26
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 0.31% of the Fund's average daily net assets.
The Fund's portion of the fee paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $260 and $184, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $28,830,992 and $18,476,715, 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 August 31, 2006, 51.1% 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 August 31, 2006, 0.1% of the Fund's shares were held by eight related parties comprised of certain GMO employee accounts, and 50.3% of the Fund's shares were held by accounts for which the Manager has investment discretion.
27
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 and Predecessor Fund Shares were as follows (see Note 1):
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,188,539 | $ | 12,812,830 | 422,099 | $ | 4,921,114 | |||||||||||||
Shares issued to shareholders in reinvestment of distribution | 420,635 | 4,056,940 | 1,457,928 | 15,854,092 | |||||||||||||||
Shares repurchased | (379,252 | ) | (3,830,160 | ) | (3,031,732 | ) | (35,529,983 | ) | |||||||||||
Redemption in kind | — | — | (245,909 | ) | (2,965,344 | ) | |||||||||||||
Purchase premiums and redemption fees | — | 80,655 | — | 197,785 | |||||||||||||||
Net increase (decrease) | 1,229,922 | $ | 13,120,265 | (1,397,614 | ) | $ | (17,522,336 | ) |
28
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO U.S. Small/Mid Cap Value Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
Noting that the Fund is the successor to GMO Small/Mid Cap Value Fund (the "Predecessor Fund"), a former series of the Trust that had an investment objective and policies and restrictions substantially identical to those of the Fund, the Trustees considered investment performance and fee and expense information of the Predecessor Fund for periods ending on or before September 16, 2005. In particular, the Trustees noted that the Fund's advisory fee was 0.02% lower than the Predecessor Fund's advisory fee.
In addition, the Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the
29
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to th e Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax
30
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
31
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | 0.46 | % | $ | 1,000.00 | $ | 970.50 | $ | 2.28 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
32
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 97.4 | % | |||||
Short-Term Investments | 1.7 | ||||||
Forward Currency Contracts | 0.4 | ||||||
Swaps | 0.4 | ||||||
Loan Assignments | 0.2 | ||||||
Loan Participations | 0.2 | ||||||
Call Options Purchased | 0.1 | ||||||
Preferred Stocks | 0.1 | ||||||
Promissory Notes | 0.0 | ||||||
Put Options Purchased | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | 0.0 | ||||||
Futures | (0.3 | ) | |||||
Reverse Repurchase Agreements | (1.0 | ) | |||||
Other | 0.8 | ||||||
100.0 | % | ||||||
Country/Region Summary** | % of Investments | ||||||
United States | 81.2 | % | |||||
Sweden | 21.0 | ||||||
Australia | 19.9 | ||||||
Euro Region*** | 0.9 | ||||||
United Kingdom | (0.9 | ) | |||||
Canada | (8.2 | ) | |||||
Japan | (13.9 | ) | |||||
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 investments and any investment in the underlying fund(s) that are less than 3% of invested assets. The table includes exposure through the use of derivative contracts.
***The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, Netherlands and Spain.
1
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 5.8% | |||||||||||||||
Albania — 0.2% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 15,681,227 | Republic of Albania Par Bond, Zero Coupon, due 08/31/25 (a) (b) | 5,553,017 | ||||||||||||
Austria — 0.9% | |||||||||||||||
Corporate Debt | |||||||||||||||
GBP | 500,000 | Bank Austria Creditanstalt AG, 8.38%, due 11/04/11 | 1,077,635 | ||||||||||||
USD | 19,175,000 | Bank Austria Creditanstalt AG, 144A, 7.25%, due 02/15/17 | 21,764,392 | ||||||||||||
Total Austria | 22,842,027 | ||||||||||||||
Canada — 0.2% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
CAD | 4,000,000 | Government of Canada (Cayman), 7.25%, due 06/01/08 | 3,787,677 | ||||||||||||
United States — 4.5% | |||||||||||||||
Corporate Debt — 1.0% | |||||||||||||||
USD | 10,000,000 | General Electric Capital Corp, Series MTNA, 5.88%, due 02/15/12 | 10,107,300 | ||||||||||||
USD | 5,000,000 | Target Corp, 4.00%, due 06/15/13 | 4,609,150 | ||||||||||||
USD | 5,000,000 | Verizon Global Funding Corp, 4.38%, due 06/01/13 | 4,643,600 | ||||||||||||
USD | 5,000,000 | Wells Fargo & Co, 5.00%, due 11/15/14 | 4,746,950 | ||||||||||||
24,107,000 | |||||||||||||||
U.S. Government — 3.5% | |||||||||||||||
USD | 56,512,800 | U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (c) (d) | 57,245,701 | ||||||||||||
USD | 5,000,000 | U.S. Treasury Note, 4.00%, due 09/30/07 (c) | 4,947,656 | ||||||||||||
USD | 10,100,000 | U.S. Treasury Receipts, 0.00%, due 02/15/10 (b) | 8,410,969 | ||||||||||||
USD | 10,100,000 | U.S. Treasury Receipts, 0.00%, due 02/15/12 (b) | 7,555,450 | ||||||||||||
USD | 10,100,000 | U.S. Treasury Receipts, 0.00%, due 08/15/12 (b) | 7,372,517 | ||||||||||||
85,532,293 | |||||||||||||||
Total United States | 109,639,293 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $138,947,767) | 141,822,014 |
See accompanying notes to the financial statements.
2
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
PREFERRED STOCKS — 0.1% | |||||||||||||||
United States — 0.1% | |||||||||||||||
10,000 | Home Ownership Funding 2 Preferred 144A, 13.338% | 2,126,270 | |||||||||||||
TOTAL PREFERRED STOCKS (COST $2,739,310) | 2,126,270 | ||||||||||||||
MUTUAL FUNDS — 93.2% | |||||||||||||||
Affiliated Issuers — 93.2% | |||||||||||||||
6,582,593 | GMO Emerging Country Debt Fund, Class IV | 73,330,088 | |||||||||||||
66,237,662 | GMO Short-Duration Collateral Fund | 1,724,828,730 | |||||||||||||
93,858 | GMO Special Purpose Holding Fund (b) | 456,150 | |||||||||||||
19,233,979 | GMO World Opportunity Overlay Fund | 489,312,438 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $2,258,190,487) | 2,287,927,406 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.1% | |||||||||||||||
Money Market Funds — 0.1% | |||||||||||||||
1,725,660 | Merrimac Cash Series-Premium Class | 1,725,660 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $1,725,660) | 1,725,660 | ||||||||||||||
TOTAL INVESTMENTS — 99.2% (Cost $2,401,603,224) | 2,433,601,350 | ||||||||||||||
Other Assets and Liabilities (net) — 0.8% | 20,542,760 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 2,454,144,110 |
See accompanying notes to the financial statements.
3
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
10/24/06 | AUD | 407,400,000 | $ | 310,750,461 | $ | 1,114,239 | |||||||||||||
9/19/06 | CHF | 253,200,000 | 206,010,659 | 169,592 | |||||||||||||||
9/26/06 | EUR | 68,600,000 | 88,001,173 | 280,531 | |||||||||||||||
9/12/06 | GBP | 174,200,000 | 331,718,031 | 5,962,754 | |||||||||||||||
10/10/06 | JPY | 17,540,000,000 | 150,131,627 | (3,697,301 | ) | ||||||||||||||
10/17/06 | NOK | 1,127,411,694 | 178,796,548 | (3,555,440 | ) | ||||||||||||||
10/03/06 | NZD | 194,900,000 | 127,505,677 | 5,555,264 | |||||||||||||||
$ | 5,829,639 | ||||||||||||||||||
Sales | |||||||||||||||||||
10/24/06 | AUD | 93,400,000 | $ | 71,242,252 | $ | (262,171 | ) | ||||||||||||
10/31/06 | CAD | 52,800,000 | 47,855,408 | (249,896 | ) | ||||||||||||||
9/19/06 | CHF | 533,600,000 | 434,152,004 | (399,790 | ) | ||||||||||||||
9/26/06 | EUR | 197,500,000 | 253,356,146 | (359,606 | ) | ||||||||||||||
10/17/06 | EUR | 142,900,000 | 183,540,229 | (1,188,240 | ) | ||||||||||||||
9/12/06 | GBP | 10,600,000 | 20,184,909 | (509,713 | ) | ||||||||||||||
10/10/06 | JPY | 61,700,000,000 | 528,114,105 | 5,652,781 | |||||||||||||||
10/03/06 | NZD | 20,900,000 | 13,673,005 | (811,145 | ) | ||||||||||||||
9/05/06 | SEK | 207,831 | 28,679 | 153 | |||||||||||||||
$ | 1,872,373 |
Forward Cross Currency Contracts
Settlement Date | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | ||||||||||||
9/05/06 | EUR | 113,000,000 | SEK | 1,042,829,000 | $ | (867,952 | ) | ||||||||
9/05/06 | SEK | 1,042,621,169 | EUR | 113,000,000 | 896,631 | ||||||||||
10/17/06 | NOK | 665,428,028 | EUR | 83,800,000 | 2,101,984 | ||||||||||
11/07/06 | EUR | 46,800,000 | SEK | 432,607,500 | (198,013 | ) | |||||||||
$ | 1,932,650 |
See accompanying notes to the financial statements.
4
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
2,130 | Australian Government Bond 10 Yr. | September 2006 | $ | 166,679,195 | $ | 1,783,116 | |||||||||||||
3,732 | Australian Government Bond 3 Yr. | September 2006 | 286,564,596 | 640,455 | |||||||||||||||
68 | Euro Bobl | September 2006 | 9,622,206 | 55,796 | |||||||||||||||
71 | Euro Bund | September 2006 | 10,758,034 | 109,104 | |||||||||||||||
5 | Japanese Government Bond 10 Yr. (LIF) | September 2006 | 5,754,504 | (1,387 | ) | ||||||||||||||
1,244 | U.S. Treasury Note 10 Yr. | December 2006 | 133,574,500 | 394,579 | |||||||||||||||
$ | 2,981,663 | ||||||||||||||||||
Sales | |||||||||||||||||||
1,841 | Canadian Government Bond 10 Yr. | December 2006 | $ | 190,112,858 | $ | (1,349,991 | ) | ||||||||||||
248 | Japanese Government Bond 10 Yr. (TSE) | September 2006 | 285,148,766 | (6,157,134 | ) | ||||||||||||||
410 | U.S. Long Bond | December 2006 | 45,535,625 | (212,669 | ) | ||||||||||||||
685 | U.S. Treasury Note 2 Yr. (CBT) | December 2006 | 139,975,469 | (237,076 | ) | ||||||||||||||
2,538 | U.S. Treasury Note 5 Yr. (CBT) | December 2006 | 266,767,594 | (712,317 | ) | ||||||||||||||
119 | UK Gilt Long Bond | December 2006 | 24,962,533 | (77,394 | ) | ||||||||||||||
$ | (8,746,581 | ) |
As of August 31, 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 Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
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. | $ | 18,148 | |||||||||||||||||||||||||||||
3,000,000 | USD | 4/17/2007 | UBS AG | Receive | 0.80 | % | EOP Operating LP | 16,022 | |||||||||||||||||||||||
3,000,000 | USD | 4/17/2007 | UBS AG | Receive | 0.47 | % | Goldman Sachs Group, Inc. | 9,159 | |||||||||||||||||||||||
3,000,000 | USD | 4/17/2007 | Bear Stearns | Receive | 1.28 | % | National Rural Utilities Cooperative Finance Corp. | 27,541 | |||||||||||||||||||||||
10,000,000 | USD | 12/20/2007 | Citigroup | Receive | 2.41 | % | AOL Time Warner, Inc. | 331,149 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2008 | Lehman Brothers | Receive | 0.50 | % | Dominion Resources, Inc. | 31,494 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2008 | Deutsche Bank AG | Receive | 0.48 | % | Household Finance Corp. | 40,517 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2008 | Deutsche Bank AG | Receive | 0.65 | % | Kraft Foods, Inc. | 54,255 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2008 | Deutsche Bank AG | Receive | 0.40 | % | Norfolk Southern Corp. | 29,175 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2008 | Deutsche Bank AG | Receive | 0.40 | % | Washington Mutual, Inc. | 28,515 | |||||||||||||||||||||||
10,000,000 | USD | 9/20/2008 | Deutsche Bank AG | Receive | 0.32 | % | American International Group, Inc. | 55,879 | |||||||||||||||||||||||
10,000,000 | USD | 12/20/2008 | Lehman Brothers | Receive | 0.27 | % | Federal Home Loan Bank System | 56,700 |
See accompanying notes to the financial statements.
6
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Credit Default Swaps — 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 | Receive | 1.13 | % | United | ||||||||||||||||||||||||||||
Chase Bank | Mexican States | $ | 124,610 | ||||||||||||||||||||||||||||||||
5,000,000 | USD | 6/20/2009 | Citigroup | Receive | 0.25 | % | ConocoPhillips Co. | 15,973 | |||||||||||||||||||||||||||
5,000,000 | USD | 6/20/2009 | Barclays Bank PLC | Receive | 0.91 | % | Sprint Capital Corp. | 94,965 | |||||||||||||||||||||||||||
5,000,000 | USD | 6/20/2009 | Lehman Brothers | Receive | 0.67 | % | Wyeth Energy | 80,878 | |||||||||||||||||||||||||||
5,000,000 | USD | 9/20/2009 | UBS AG | Receive | 0.59 | % | Capital One Bank | 68,690 | |||||||||||||||||||||||||||
5,000,000 | USD | 9/20/2009 | Citigroup | Receive | 0.30 | % | Coca-Cola Enterprises, Inc. | 33,322 | |||||||||||||||||||||||||||
5,000,000 | USD | 9/20/2009 | Citigroup | Receive | 0.69 | % | Comcast Cable Communications, Inc. | 79,473 | |||||||||||||||||||||||||||
5,000,000 | USD | 9/20/2009 | UBS AG | Receive | 0.62 | % | Devon Energy Corp. | 67,151 | |||||||||||||||||||||||||||
5,000,000 | USD | 9/20/2009 | Barclays Bank PLC | Receive | 0.54 | % | Duke Energy Corp. | 58,968 | |||||||||||||||||||||||||||
5,000,000 | USD | 9/20/2009 | Citigroup | Receive | 0.25 | % | International Business Machines | 21,867 | |||||||||||||||||||||||||||
5,000,000 | USD | 9/20/2009 | UBS AG | Receive | 0.53 | % | Kinder Morgan Energy Partners LP | 32,355 | |||||||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Deutsche Bank AG | Receive | 0.25 | % | AT&T Wireless Services, Inc. | 14,095 | |||||||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Deutsche Bank AG | Receive | 0.21 | % | Bank of America Corp. | 24,072 | |||||||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Barclays Bank PLC | Receive | 0.30 | % | Boeing Capital Corp. | 34,268 | |||||||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Deutsche Bank AG | Receive | 0.21 | % | Citigroup, Inc. | 24,956 | |||||||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Barclays Bank PLC | Receive | 0.82 | % | Clear Channel Communications, Inc. | 34,099 |
See accompanying notes to the financial statements.
7
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Credit Default Swaps — 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 | $ | 54,791 | |||||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Barclays Bank PLC | Receive | 0.26 | % | Morgan Stanley | 19,658 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Barclays Bank PLC | Receive | 0.39 | % | SBC Communications, Inc. | 24,579 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Deutsche Bank AG | Receive | 0.35 | % | The Kroger Co. | 10,178 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Barclays Bank PLC | Receive | 0.38 | % | Weyerhaueser Co. | 10,645 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | Barclays Bank PLC | Receive | 0.30 | % | Credit Suisse First Boston (USA), Inc. | 32,531 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | Barclays Bank PLC | Receive | 0.31 | % | HSBC Finance Corp. | 39,552 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | UBS AG | Receive | 0.29 | % | JP Morgan Chase Bank | 31,952 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | Barclays Bank PLC | Receive | 0.31 | % | Lehman Brothers Holdings, Inc. | 25,542 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | Barclays Bank PLC | Receive | 0.29 | % | Merrill Lynch & Co., Inc. | 20,844 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | Barclays Bank PLC | Receive | 0.27 | % | Merrill Lynch & Co., Inc. | 24,513 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | Lehman Brothers | Receive | 0.40 | % | PSEG Energy LLC | 23,682 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | Lehman Brothers | Receive | 0.20 | % | Royal Bank of Scotland PLC | 20,338 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | UBS AG | Receive | 0.36 | % | The Bear Stearns Companies, Inc. | 34,668 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | UBS AG | Receive | 0.34 | % | The Goldman Sachs Group, Inc. | 31,051 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | UBS AG | Receive | 0.52 | % | TXU Electric Delivery Co. | (43,440 | ) |
See accompanying notes to the financial statements.
8
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Credit Default Swaps — 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. | $ | 16,377 | |||||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | Barclays Bank PLC | Receive | 0.20 | % | Bank of America Corp. | 15,859 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | Barclays Bank PLC | Receive | 0.19 | % | Citigroup, Inc. | 15,937 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | Deutsche Bank AG | Receive | 0.75 | % | Enterprise Products Partners LP | 58,771 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | Citigroup | Receive | 0.39 | % | Exelon Generation Co. LLC | 23,216 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | Barclays Bank PLC | Receive | 0.45 | % | First Energy Corp. | 22,772 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | Barclays Bank PLC | Receive | 0.28 | % | JP Morgan Chase Bank | 22,979 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | UBS AG | Receive | 0.47 | % | Progress Energy, Inc. | 46,114 | |||||||||||||||||||||||
5,000,000 | USD | 3/20/2011 | Barclays Bank PLC | Receive | 0.25 | % | Bell South | (6,284 | ) | ||||||||||||||||||||||
5,000,000 | USD | 3/20/2011 | Barclays Bank PLC | Receive | 0.25 | % | HSBC Finance Corp. | 26,933 | |||||||||||||||||||||||
2,000,000 | USD | 6/20/2011 | UBS AG | Receive | 0.32 | % | Boston Properties Limited Partnership | (5,665 | ) | ||||||||||||||||||||||
4,000,000 | USD | 6/20/2011 | Bank of America, N.A. | Receive | 0.12 | % | Citigroup, Inc. | 6,401 | |||||||||||||||||||||||
3,000,000 | USD | 6/20/2011 | Bank of America, N.A. | Receive | 0.14 | % | Credit Suisse First Boston (USA), Inc. | (851 | ) | ||||||||||||||||||||||
5,000,000 | USD | 6/20/2011 | Citigroup | Receive | 0.37 | % | Deutsche Telecom International Finance B.V. | 2,147 | |||||||||||||||||||||||
2,000,000 | USD | 6/20/2011 | UBS AG | Receive | 0.26 | % | ERP Operating LP | 1,163 |
See accompanying notes to the financial statements.
9
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
4,000,000 | USD | 6/20/2011 | Barclays | ||||||||||||||||||||||||||||
Bank PLC | Receive | 0.20 | % | Morgan Stanley | $ | 1,454 | |||||||||||||||||||||||||
2,000,000 | USD | 6/20/2011 | Barclays Bank PLC | Receive | 0.30 | % | Prologis | (879 | ) | ||||||||||||||||||||||
5,000,000 | USD | 6/20/2011 | Citigroup | Receive | 0.49 | % | Telecom Italia SpA | 5,959 | |||||||||||||||||||||||
3,000,000 | USD | 6/20/2011 | Barclays Bank PLC | Receive | 0.08 | % | US Bancorp | (6,876 | ) | ||||||||||||||||||||||
5,000,000 | USD | 3/20/2013 | Barclays Bank PLC | Receive | 0.25 | % | Goldman Sachs Group, Inc. | 1,619 | |||||||||||||||||||||||
15,376,000 | USD | 3/20/2015 | JP Morgan Chase Bank | Receive | 0.70 | % | Reference security within CDX Index | 103,538 | |||||||||||||||||||||||
24,800,000 | USD | 3/20/2015 | JP Morgan Chase Bank | Receive | 0.70 | % | Reference security within CDX Index | 166,996 | |||||||||||||||||||||||
9,920,000 | USD | 3/20/2015 | JP Morgan Chase Bank | Receive | 0.70 | % | Reference security within CDX Index | 66,799 | |||||||||||||||||||||||
25,000,000 | USD | 6/20/2015 | JP Morgan Chase Bank | Receive | 0.65 | % | Reference security within CDX Index | 96,165 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2015 | Lehman Brothers | Receive | 0.65 | % | Reference security within CDX Index | 19,233 | |||||||||||||||||||||||
25,000,000 | USD | 6/20/2015 | Lehman Brothers | Receive | 0.65 | % | Reference security within CDX Index | 96,165 | |||||||||||||||||||||||
20,000,000 | USD | 12/20/2015 | Deutsche Bank AG | Receive | 0.70 | % | Reference security within CDX Index | 169,994 | |||||||||||||||||||||||
15,000,000 | USD | 12/20/2015 | Lehman Brothers | Receive | 0.70 | % | Reference security within CDX Index | 127,495 |
See accompanying notes to the financial statements.
10
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
10,000,000 | USD | 12/20/2015 | Lehman Brothers | Receive | 0.70 | % | Reference | ||||||||||||||||||||||||
security within | |||||||||||||||||||||||||||||||
CDX Index | $ | 84,997 | |||||||||||||||||||||||||||||
25,000,000 | USD | 12/20/2015 | Lehman Brothers | Receive | 0.70 | % | Reference security within CDX Index | 212,492 | |||||||||||||||||||||||
$ | 3,260,400 |
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
26,000,000 | SEK | 9/20/2008 | Deutsche | 3 month SEK | |||||||||||||||||||||||||||
Bank AG | Receive | 3.20 | % | STIBOR | $ | (29,671 | ) | ||||||||||||||||||||||||
438,000,000 | SEK | 9/20/2008 | JP Morgan Chase Bank | Receive | 3.20 | % | 3 month SEK STIBOR | (499,839 | ) | ||||||||||||||||||||||
10,100,000 | USD | 2/15/2010 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | (978,042 | ) | ||||||||||||||||||||||
817,000,000 | SEK | 9/20/2011 | Deutsche Bank AG | Receive | 3.60 | % | 3 month SEK STIBOR | (1,620,422 | ) | ||||||||||||||||||||||
516,000,000 | SEK | 9/20/2011 | JP Morgan Chase Bank | Receive | 3.60 | % | 3 month SEK STIBOR | (1,023,425 | ) | ||||||||||||||||||||||
10,100,000 | USD | 2/15/2012 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | (923,163 | ) | ||||||||||||||||||||||
10,100,000 | USD | 8/15/2012 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | (915,908 | ) | ||||||||||||||||||||||
141,000,000 | SEK | 9/20/2013 | Deutsche Bank AG | Receive | 3.70 | % | 3 month SEK STIBOR | (382,080 | ) | ||||||||||||||||||||||
331,000,000 | SEK | 9/20/2013 | JP Morgan Chase Bank | Receive | 3.70 | % | 3 month SEK STIBOR | (896,940 | ) | ||||||||||||||||||||||
8,500,000 | USD | 10/24/2013 | JP Morgan Chase Bank | (Pay) | 4.70 | % | 3 month LIBOR | 300,845 |
See accompanying notes to the financial statements.
11
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Interest Rate Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
551,000,000 | SEK | 9/20/2016 | Deutsche | 3 month SEK | |||||||||||||||||||||||||||
Bank AG | Receive | 3.75 | % | STIBOR | $ | (2,266,413 | ) | ||||||||||||||||||||||||
300,000,000 | SEK | 9/20/2016 | JP Morgan Chase Bank | Receive | 3.75 | % | 3 month SEK STIBOR | (1,233,982 | ) | ||||||||||||||||||||||
81,000,000 | SEK | 9/20/2016 | Merrill Lynch | Receive | 3.75 | % | 3 month SEK STIBOR | (333,175 | ) | ||||||||||||||||||||||
15,680,000 | USD | 8/31/2025 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | (1,038,804 | ) | ||||||||||||||||||||||
$ | (11,841,019 | ) |
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
15,000,000 | USD | 9/29/2006 | JP Morgan | 1 month LIBOR | Return on Lehman | ||||||||||||||||||||||
Chase Bank | –0.01% | Aggregate Total | |||||||||||||||||||||||||
Return Index | $ | 161,697 | |||||||||||||||||||||||||
30,000,000 | USD | 10/31/2006 | JP Morgan Chase Bank | 1 month LIBOR – 0.01% | Return on Lehman Aggregate Total Return Index | 323,393 | |||||||||||||||||||||
62,000,000 | USD | 10/31/2006 | JP Morgan Chase Bank | 1 month LIBOR – 0.01% | Return on Lehman Aggregate Total Return Index | 0 | |||||||||||||||||||||
400,000,000 | USD | 10/31/2006 | UBS AG | 1 month LIBOR – 0.03% | Return on Lehman Mortgage Total Return Index | 4,050,625 | |||||||||||||||||||||
350,000,000 | USD | 1/31/2007 | Lehman Brothers | 1 month LIBOR – 0.04% | Return on Lehman Brothers U.S. Government Index | 3,377,377 | |||||||||||||||||||||
85,000,000 | USD | 4/30/2007 | Lehman Brothers | 1 month LIBOR – 0.05% | Return on Lehman Brothers U.S. Government Index | 820,928 |
See accompanying notes to the financial statements.
12
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Total Return Swaps — continued
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
155,000,000 | USD | 5/31/2007 | UBS AG | 1 month LIBOR | Return on Lehman | ||||||||||||||||||||||
– 0.025 | % | Mortgage Total | |||||||||||||||||||||||||
Return Index | $ | 1,568,972 | |||||||||||||||||||||||||
245,000,000 | USD | 6/30/2007 | UBS AG | 1 month LIBOR – 0.03% | Return on Lehman Mortgage Total Return Index | 2,481,008 | |||||||||||||||||||||
225,000,000 | USD | 7/31/2007 | Lehman Brothers | 1 month LIBOR – 0.05% | Return on Lehman Brothers U.S. Government Index | 2,173,046 | |||||||||||||||||||||
250,000,000 | USD | 8/19/2011 | Morgan Stanley | 3 month LIBOR – 0.01% | Return on Lehman Aggregate Total Return Index | 1,052,791 | |||||||||||||||||||||
$ | 16,009,837 |
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.
LIBOR - London Interbank Offered Rate
STIBOR - Stockholm Interbank Offered Rate
(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) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts and collateral on open swap contracts (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).
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - B ritish 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.
13
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value, (cost $143,412,737) (Note 2) | $ | 145,673,944 | |||||
Investments in affiliated issuers, at value (cost $2,258,190,487) (Notes 2 and 8) | 2,287,927,406 | ||||||
Receivable for investments sold | 44,978,906 | ||||||
Receivable for fund shares sold | 2,000,000 | ||||||
Interest receivable | 768,803 | ||||||
Unrealized appreciation on open forward currency and cross currency contracts (Note 2) | 21,733,929 | ||||||
Interest receivable for open swap contracts | 1,904,689 | ||||||
Receivable for open swap contracts (Note 2) | 19,635,077 | ||||||
Receivable for closed swap contracts (Note 2) | 1,747,285 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 130,630 | ||||||
Total assets | 2,526,500,669 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 45,845,313 | ||||||
Foreign cash due to custodian | 506,173 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 526,499 | ||||||
Shareholder service fee | 217,869 | ||||||
Trustees and Chief Compliance Officer fees | 5,309 | ||||||
Unrealized depreciation on open forward currency and cross currency contracts (Note 2) | 12,099,267 | ||||||
Payable for open swap contracts (Note 2) | 12,205,859 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 747,300 | ||||||
Accrued expenses | 202,970 | ||||||
Total liabilities | 72,356,559 | ||||||
Net assets | $ | 2,454,144,110 |
See accompanying notes to the financial statements.
14
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 2,426,413,137 | |||||
Distributions in excess of net investment income | (6,048,626 | ) | |||||
Accumulated net realized loss | (16,260,270 | ) | |||||
Net unrealized appreciation | 50,039,869 | ||||||
$ | 2,454,144,110 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 170,521,754 | |||||
Class IV shares | $ | 2,283,622,356 | |||||
Shares outstanding: | |||||||
Class III | 16,176,370 | ||||||
Class IV | 216,404,522 | ||||||
Net asset value per share: | |||||||
Class III | $ | 10.54 | |||||
Class IV | $ | 10.55 |
See accompanying notes to the financial statements.
15
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 23,743,891 | |||||
Interest (including securities lending income of $327) | 4,395,196 | ||||||
Dividends | 87,714 | ||||||
Total investment income | 28,226,801 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 3,632,230 | ||||||
Shareholder service fee – Class III (Note 3) | 137,105 | ||||||
Shareholder service fee – Class IV (Note 3) | 1,361,488 | ||||||
Custodian, fund accounting agent and transfer agent fees | 484,840 | ||||||
Audit and tax fees | 33,948 | ||||||
Legal fees | 30,268 | ||||||
Trustees fees and related expenses (Note 3) | 23,315 | ||||||
Registration fees | 6,624 | ||||||
Miscellaneous | 21,435 | ||||||
Total expenses | 5,731,253 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (566,802 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (179,699 | ) | |||||
Shareholder service fee waived – (Note 3) | (43,295 | ) | |||||
Net expenses | 4,941,457 | ||||||
Net investment income (loss) | 23,285,344 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 22,244,318 | ||||||
Investments in affiliated issuers | (4,693,765 | ) | |||||
Realized gains distributions from affiliated issuers (Note 8) | 6,286,111 | ||||||
Closed futures contracts | 4,314,521 | ||||||
Closed swap contracts | (24,647,229 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 9,705,288 | ||||||
Net realized gain (loss) | 13,209,244 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 12,558,668 | ||||||
Open futures contracts | (7,579,441 | ) | |||||
Open swap contracts | 10,198,109 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 5,927,649 | ||||||
Net unrealized gain (loss) | 21,104,985 | ||||||
Net realized and unrealized gain (loss) | 34,314,229 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 57,599,573 |
See accompanying notes to the financial statements.
16
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 23,285,344 | $ | 56,368,216 | |||||||
Net realized gain (loss) | 13,209,244 | (16,074,682 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 21,104,985 | 18,252,176 | |||||||||
Net increase (decrease) in net assets from operations | 57,599,573 | 58,545,710 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (8,334,939 | ) | ||||||||
Class IV | — | (78,000,540 | ) | ||||||||
Total distributions from net investment income | — | (86,335,479 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 17,617,006 | (1,076,194,776 | ) | ||||||||
Class IV | (387,559,406 | ) | 2,654,220,272 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (369,942,400 | ) | 1,578,025,496 | ||||||||
Total increase (decrease) in net assets | (312,342,827 | ) | 1,550,235,727 | ||||||||
Net assets: | |||||||||||
Beginning of period | 2,766,486,937 | 1,216,251,210 | |||||||||
End of period (including distributions in excess of net investment income of $6,048,626 and $29,333,970, respectively) | $ | 2,454,144,110 | $ | 2,766,486,937 |
See accompanying notes to the financial statements.
17
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.32 | $ | 10.35 | $ | 10.40 | $ | 9.95 | $ | 10.39 | $ | 10.17 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.09 | 0.15 | 0.18 | 0.25 | 0.20 | 0.77 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.13 | 0.17 | 0.24 | 0.91 | 0.44 | 0.07 | |||||||||||||||||||||
Total from investment operations | 0.22 | 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 | ) | 0.00 | (b) | |||||||||||||||||
Total distributions | — | (0.35 | ) | (0.47 | ) | (0.71 | ) | (1.08 | ) | (0.62 | ) | ||||||||||||||||
Net asset value, end of period | $ | 10.54 | $ | 10.32 | $ | 10.35 | $ | 10.40 | $ | 9.95 | $ | 10.39 | |||||||||||||||
Total Return(c) | 2.13 | %** | 3.10 | % | 4.01 | % | 11.99 | % | 6.45 | % | 8.53 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 170,522 | $ | 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 | % | 0.39 | % | 0.38 | % | 0.38 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 1.69 | %* | 1.40 | % | 1.77 | % | 2.43 | % | 1.91 | % | 7.38 | % | |||||||||||||||
Portfolio turnover rate | 61 | %** | 62 | % | 108 | % | 114 | % | 108 | % | 113 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 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 the underlying fund(s) (See Note 3).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
18
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2006 (Unaudited) | Period from July 26, 2005 (commencement of operations) through February 28, 2006 | ||||||||||
Net asset value, beginning of period | $ | 10.33 | $ | 10.46 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)(a)† | 0.08 | 0.23 | |||||||||
Net realized and unrealized gain (loss) | 0.14 | (0.01 | )(b) | ||||||||
Total from investment operations | 0.22 | 0.22 | |||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | — | (0.35 | ) | ||||||||
Total distributions | — | (0.35 | ) | ||||||||
Net asset value, end of period | $ | 10.55 | $ | 10.33 | |||||||
Total Return(c) | 2.13 | %** | 2.06 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 2,283,622 | $ | 2,618,011 | |||||||
Net expenses to average daily net assets(d) | 0.34 | %* | 0.34 | %* | |||||||
Net investment income to average daily net assets(a) | 1.60 | %* | 2.16 | %(e) | |||||||
Portfolio turnover rate | 61 | %** | 62 | %†† | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 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 returns would have been lower had certain expenses not been reimbursed during periods shown.
(d) Net expenses exclude expenses incurred indirectly through investment in the 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.
19
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks total return in excess of the Lehman Brothers U.S. Aggregate Index. The Fund typically invests in fixed income securities included in the Lehman Brothers U.S. Aggregate Index and in securities with similar characteristics. The Fund seeks additional returns by investing in global interest rate, currency, and emerging country debt markets. The Fund may invest in or use U.S. and foreign investment-grade bonds; shares of GMO Short-Duration Collateral Fund; shares of GMO World Opportunity Overlay Fund; futures contracts, currency forwards, swap contracts, and other types of derivatives; sovereign debt of emerging countries, primarily through investment in shares of GMO Emerging Country Debt Fund ("ECDF") (limited to 5% of the Fund's total assets); and credit default swaps.
As of August 31, 2006, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different level of shareholder service fees.
The financial statements of the series 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 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
20
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
quotations are readily available are generally 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 pursuant to procedures approved by the Trustees.
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 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 maker may differ from the value that would be realized if the securities were sold and the differences could be material. As of August 31, 2006, the total value of these securities represented 37.4% 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 April of 2006, SPHF entered into a settlement agreement with a defendant in the lawsuit and the Fund received $3,258,666 in conjunction with the settlement. 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.
21
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Forward currency contracts
The Fund may enter into forward currency contracts including 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 lo ss 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. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may write call and put options. 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
22
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 closin g transaction because of an illiquid market. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
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. Indexed securities held by the Fund at the end of the period are listed in the Fund's Schedule of Investments.
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. Interest rate swap agreements involve the exchange by one party 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
23
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 party 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. Credit default swaps may be used to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where a party 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. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. There were no repurchase agreements o utstanding at the end of the period.
24
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no reverse repurchase agreements outstanding at the end of the period.
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. There were no delayed delivery commitments outstanding at the end of the period.
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 August 31, 2006, the Fund had no securities on loan.
Taxes and distributions
The Fund intends to qualify each tax 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.
25
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP.
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 August 31, 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) | ||||||||||||
$ | 2,403,434,655 | $ | 32,927,285 | $ | (2,760,590 | ) | $ | 30,166,695 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
26
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 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. 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 the 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 U.S. 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 Manager will waive the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.10% for Class IV shares; provided, however, that the amount of this waiver will not exceed the respective Class' shareholder service fee.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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, "Excluded Fund Fees and Expenses")) exceed 0.25% of the Fund's average daily
27
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
net assets. In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2007 to the extent that the sum of (a) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses) and (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in ECDF (excluding ECDF's fees and expenses of the independent trustees of the Trust, fees expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's CCO (excluding any employee benefits), and investment-related expenses such as brokerage commissions, hedging transaction fees, securities lending fees and expenses, interest expense and transfer taxes), exceeds 0.25% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.25% 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 six months ended August 31, 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 | ||||||||||||
0.015 | % | 0.003 | % | 0.018 | % | 0.036 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $16,323 and $8,188, respectively. No remuneration was paid by the Fund to any other officer of the Trust.
4. Purchases and sales of securities
For the six months ended August 31, 2006, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 631,100,190 | $ | 665,893,945 | |||||||
Investments (non-U.S. Government securities) | 1,188,459,046 | 1,609,523,523 |
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
28
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 64.3% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. 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 August 31, 2006, less than 0.01% of the Fund's shares were held by five related parties comprised of certain GMO employee accounts, and 93.6% 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 6,754,302 | $ | 68,904,696 | 65,768,202 | $ | 689,623,823 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 589,802 | 6,119,804 | |||||||||||||||
Shares repurchased | (4,961,631 | ) | (51,287,690 | ) | (169,430,468 | ) | (1,771,938,403 | ) | |||||||||||
Net increase (decrease) | 1,792,671 | $ | 17,617,006 | (103,072,464 | ) | $ | (1,076,194,776 | ) | |||||||||||
Six Months Ended August 31, 2006 (Unaudited) | Period from July 26, 2005 (commencement of operations) Through February 28, 2006 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 42,109,999 | $ | 433,103,642 | 247,726,958 | $ | 2,595,011,214 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 7,535,843 | 78,000,540 | |||||||||||||||
Shares repurchased | (79,148,084 | ) | (820,663,048 | ) | (1,820,194 | ) | (18,791,482 | ) | |||||||||||
Net increase (decrease) | (37,038,085 | ) | $ | (387,559,406 | ) | 253,442,607 | $ | 2,654,220,272 |
29
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the securities of affiliated issuers during the six months ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | $ | 83,157,963 | $ | 14,170,287 | $ | 22,500,000 | $ | 990,322 | $ | 2,479,965 | $ | 73,330,088 | |||||||||||||||
GMO Short-Duration Collateral Fund | 2,001,262,353 | 440,553,569 | 750,600,000 | 22,753,569 | — | 1,724,828,730 | |||||||||||||||||||||
GMO Special Purpose Holding Fund | 772,451 | — | — | — | 3,806,146 | 456,150 | |||||||||||||||||||||
GMO World Opportunity Overlay Fund | 554,275,256 | 86,000,000 | 156,160,000 | — | — | 489,312,438 | |||||||||||||||||||||
Totals | $ | 2,639,468,023 | $ | 540,723,856 | $ | 929,260,000 | $ | 23,743,891 | $ | 6,286,111 | $ | 2,287,927,406 |
30
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Core Plus Bond Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to
31
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manag er to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests, noting in particular that, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for certain of the fees and expenses (including advisory fees) that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's
32
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
33
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | $ | 1,021.30 | $ | 2.19 | |||||||||||
2) Hypothetical | 0.43 | % | $ | 1,000.00 | $ | 1,023.04 | $ | 2.19 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.38 | % | $ | 1,000.00 | $ | 1,021.30 | $ | 1.94 | |||||||||||
2) Hypothetical | 0.38 | % | $ | 1,000.00 | $ | 1,023.29 | $ | 1.94 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
34
GMO Global Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 96.5 | % | |||||
Short-Term Investments | 3.0 | ||||||
Swaps | 0.5 | ||||||
Loan Assignments | 0.2 | ||||||
Loan Participations | 0.2 | ||||||
Call Options Purchased | 0.1 | ||||||
Futures | 0.1 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Promissory Notes | 0.0 | ||||||
Put Options Purchased | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | 0.0 | ||||||
Reverse Repurchase Agreements | (1.0 | ) | |||||
Other | 0.3 | ||||||
100.0 | % | ||||||
Country Summary** | % of Investments | ||||||
Euro Region*** | 41.9 | % | |||||
Sweden | 22.1 | ||||||
Australia | 20.2 | ||||||
Japan | 17.6 | ||||||
United Kingdom | 5.8 | ||||||
Denmark | 0.4 | ||||||
United States | (2.0 | ) | |||||
Canada | (6.0 | ) | |||||
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 the underlying fund(s). The table excludes short-term investments and any investment in the underlying fund(s) that are less than 3% of invested assets. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, Netherlands and Spain.
1
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 9.2% | |||||||||||
Australia — 0.7% | |||||||||||
Asset-Backed Securities | |||||||||||
USD | 1,319,788 | Medallion Trust, Series 03-1G, Class A, Variable Rate, 3 mo. LIBOR + .19%, 5.61%, due 12/21/33 | 1,322,613 | ||||||||
Austria — 1.6% | |||||||||||
Corporate Debt | |||||||||||
USD | 2,500,000 | Bank Austria Creditanstalt AG, 144A, 7.25%, due 02/15/17 | 2,837,600 | ||||||||
Canada — 1.2% | |||||||||||
Foreign Government Obligations | |||||||||||
GBP | 1,000,000 | Province of Quebec, 8.63%, due 11/04/11 | 2,187,449 | ||||||||
United Kingdom — 2.9% | |||||||||||
Asset-Backed Securities | |||||||||||
GBP | 979,859 | RMAC, Series 03-NS1X Class A2A, 144A, AMBAC, Variable Rate, 3 mo. LIBOR + .45%, 5.17%, due 06/12/35 | 1,873,742 | ||||||||
GBP | 1,745,826 | RMAC, Series 03-NS2A Class A2A, 144A, AMBAC, Variable Rate, 3 mo. LIBOR + .40%, 5.12%, due 09/12/35 | 3,332,117 | ||||||||
Total United Kingdom | 5,205,859 | ||||||||||
United States — 2.8% | |||||||||||
U.S. Government | |||||||||||
USD | 3,711,360 | U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (a) (b) | 3,834,299 | ||||||||
USD | 1,205,900 | U.S. Treasury Inflation Indexed Note, 4.25%, due 01/15/10(a) (c) | 1,281,645 | ||||||||
Total United States | 5,115,944 | ||||||||||
TOTAL DEBT OBLIGATIONS (COST $15,171,965) | 16,669,465 |
See accompanying notes to the financial statements.
2
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
MUTUAL FUNDS — 89.0% | |||||||||||
Affiliated Issuers — 89.0% | |||||||||||
502,361 | GMO Emerging Country Debt Fund, Class III | 5,596,298 | |||||||||
4,585,952 | GMO Short-Duration Collateral Fund | 119,418,198 | |||||||||
45,838 | GMO Special Purpose Holding Fund (d) | 222,774 | |||||||||
1,426,301 | GMO World Opportunity Overlay Fund | 36,285,085 | |||||||||
TOTAL MUTUAL FUNDS (COST $157,480,461) | 161,522,355 | ||||||||||
SHORT-TERM INVESTMENTS — 1.3% | |||||||||||
Money Market Funds — 1.3% | |||||||||||
2,448,423 | Merrimac Cash Series-Premium Class | 2,448,423 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $2,448,423) | 2,448,423 | ||||||||||
TOTAL INVESTMENTS — 99.5% (Cost $175,100,849) | 180,640,243 | ||||||||||
Other Assets and Liabilities (net) — 0.5% | 804,595 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 181,444,838 |
See accompanying notes to the financial statements.
3
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
10/24/06 | AUD | 29,200,000 | $ | 22,272,738 | $ | 77,902 | |||||||||||||
10/31/06 | CAD | 1,700,000 | 1,540,799 | 8,467 | |||||||||||||||
9/19/06 | CHF | 16,700,000 | 13,587,591 | 16,026 | |||||||||||||||
9/26/06 | EUR | 54,900,000 | 70,426,594 | (33,816 | ) | ||||||||||||||
9/12/06 | GBP | 14,000,000 | 26,659,314 | 452,301 | |||||||||||||||
10/10/06 | JPY | 3,040,000,000 | 26,020,533 | (339,544 | ) | ||||||||||||||
10/03/06 | NZD | 14,100,000 | 9,224,372 | 384,670 | |||||||||||||||
9/05/06 | SEK | 40,868 | 5,639 | (30 | ) | ||||||||||||||
$ | 565,976 | ||||||||||||||||||
Sales | |||||||||||||||||||
10/24/06 | AUD | 4,900,000 | $ | 3,737,549 | $ | (16,431 | ) | ||||||||||||
10/31/06 | CAD | 1,300,000 | 1,178,258 | (5,566 | ) | ||||||||||||||
9/19/06 | CHF | 35,500,000 | 28,883,801 | (11,804 | ) | ||||||||||||||
9/26/06 | EUR | 9,500,000 | 12,186,751 | (42,832 | ) | ||||||||||||||
10/10/06 | JPY | 260,000,000 | 2,225,440 | 43,307 | |||||||||||||||
10/03/06 | NZD | 1,000,000 | 654,211 | (38,811 | ) | ||||||||||||||
$ | (72,137 | ) |
Forward Cross Currency Contracts
Settlement Date | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | ||||||||||||
9/05/06 | EUR | 7,600,000 | SEK | 70,141,700 | (57,751 | ) | |||||||||
9/05/06 | SEK | 70,182,568 | EUR | 7,600,000 | 52,111 | ||||||||||
10/17/06 | EUR | 8,500,000 | NOK | 67,060,878 | (282,164 | ) | |||||||||
10/17/06 | NOK | 35,220,764 | EUR | 4,400,000 | 65,672 | ||||||||||
11/07/06 | EUR | 4,200,000 | SEK | 38,823,750 | (17,770 | ) | |||||||||
$ | (239,902 | ) |
See accompanying notes to the financial statements.
4
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
160 | Australian Government Bond | ||||||||||||||||||
10 Yr. | September 2006 | $ | 12,520,502 | $ | 123,586 | ||||||||||||||
280 | Australian Government Bond 3 Yr. | September 2006 | 21,500,023 | 43,675 | |||||||||||||||
94 | Euro BOBL | September 2006 | 13,301,284 | 88,644 | |||||||||||||||
123 | Euro Bund | September 2006 | 18,637,158 | 267,556 | |||||||||||||||
1 | Japanese Government Bond 10 Yr. (LIF) | September 2006 | 1,150,901 | (277 | ) | ||||||||||||||
5 | Japanese Government Bond 10 Yr. (TSE) | September 2006 | 5,748,967 | 44,645 | |||||||||||||||
25 | UK Gilt Long Bond | December 2006 | 5,244,230 | 13,632 | |||||||||||||||
$ | 581,461 | ||||||||||||||||||
Sales | |||||||||||||||||||
115 | Canadian Government Bond | ||||||||||||||||||
10 Yr. | December 2006 | $ | 11,875,600 | $ | (84,353 | ) | |||||||||||||
58 | U.S. Long Bond | December 2006 | 6,441,625 | (33,734 | ) | ||||||||||||||
102 | U.S. Treasury Note 10 Yr. | December 2006 | 10,952,250 | (34,256 | ) | ||||||||||||||
151 | U.S. Treasury Note 2 Yr. | December 2006 | 30,855,906 | (50,543 | ) | ||||||||||||||
32 | U.S. Treasury Note 5 Yr. | December 2006 | 3,363,500 | (8,372 | ) | ||||||||||||||
$ | (211,258 | ) |
As of August 31, 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)
August 31, 2006 (Unaudited)
Swap Agreements
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
52,000,000 | SEK | 9/20/2008 | JP Morgan | Receive | 3.20 | % | 3 month | ||||||||||||||||||||||||
Chase Bank | SEK STIBOR | $ | (59,342 | ) | |||||||||||||||||||||||||||
33,000,000 | SEK | 9/20/2011 | Citigroup | Receive | 3.60 | % | 3 month SEK STIBOR | (65,452 | ) | ||||||||||||||||||||||
36,000,000 | SEK | 9/20/2011 | Deutsche Bank AG | Receive | 3.60 | % | 3 month SEK STIBOR | (71,402 | ) | ||||||||||||||||||||||
32,000,000 | SEK | 9/20/2011 | JP Morgan Chase Bank | Receive | 3.60 | % | 3 month SEK STIBOR | (63,468 | ) | ||||||||||||||||||||||
46,000,000 | SEK | 9/20/2013 | Deutsche Bank AG | Receive | 3.70 | % | 3 month SEK STIBOR | (124,650 | ) | ||||||||||||||||||||||
15,000,000 | SEK | 9/20/2013 | JP Morgan Chase Bank | Receive | 3.70 | % | 3 month SEK STIBOR | (40,647 | ) | ||||||||||||||||||||||
31,000,000 | SEK | 9/20/2016 | Deutsche Bank AG | Receive | 3.75 | % | 3 month SEK STIBOR | (127,511 | ) | ||||||||||||||||||||||
20,000,000 | SEK | 9/20/2016 | JP Morgan Chase Bank | Receive | 3.75 | % | 3 month SEK STIBOR | (82,265 | ) | ||||||||||||||||||||||
3,000,000 | EUR | 3/21/2030 | UBS Warburg | Receive | 5.90 | % | 3 Month Floating Rate EUR LIBOR | 947,169 | |||||||||||||||||||||||
$ | 312,432 |
See accompanying notes to the financial statements.
6
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
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 | $ | 347,774 |
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 August 31, 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 (Note 2).
(c) All or a portion of this security has been segregated to cover collateral requirements on open swap contracts (Note 2).
(d) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - B ritish 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.
7
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value, (cost $17,620,388) (Note 2) | $ | 19,117,888 | |||||
Investments in affiliated issuers, at value (cost $157,480,461) (Notes 2 and 8) | 161,522,355 | ||||||
Interest receivable | 205,532 | ||||||
Unrealized appreciation on open forward currency and cross currency contracts (Note 2) | 1,100,456 | ||||||
Interest receivable for open swap contracts | 66,240 | ||||||
Receivable for open swap contracts (Note 2) | 1,294,943 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 8,099 | ||||||
Total assets | 183,315,513 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 200,000 | ||||||
Foreign cash due to custodian (cost $31,316) | 31,136 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 29,067 | ||||||
Shareholder service fee | 22,948 | ||||||
Trustees and Chief Compliance Officer fees | 343 | ||||||
Unrealized depreciation on open forward currency and cross currency contracts (Note 2) | 846,519 | ||||||
Payable for open swap contracts (Note 2) | 634,737 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 39,526 | ||||||
Accrued expenses | 66,399 | ||||||
Total liabilities | 1,870,675 | ||||||
Net assets | $ | 181,444,838 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 190,074,818 | |||||
Distributions in excess of net investment income | (3,285,041 | ) | |||||
Accumulated net realized loss | (12,083,975 | ) | |||||
Net unrealized appreciation | 6,739,036 | ||||||
$ | 181,444,838 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 181,444,838 | |||||
Shares outstanding: | |||||||
Class III | 20,297,285 | ||||||
Net asset value per share: | |||||||
Class III | $ | 8.94 |
See accompanying notes to the financial statements.
8
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 1,243,893 | |||||
Interest | 793,008 | ||||||
Total investment income | 2,036,901 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 165,078 | ||||||
Shareholder service fee – Class III (Note 3) | 130,325 | ||||||
Custodian, fund accounting agent and transfer agent fees | 47,564 | ||||||
Audit and tax fees | 31,556 | ||||||
Legal fees | 2,392 | ||||||
Trustees fees and related expenses (Note 3) | 1,447 | ||||||
Registration fees | 3,312 | ||||||
Miscellaneous | 1,288 | ||||||
Total expenses | 382,962 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (32,786 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (10,907 | ) | |||||
Shareholder service fee waived (Note 3) | (3,940 | ) | |||||
Net expenses | 335,329 | ||||||
Net investment income (loss) | 1,701,572 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (326,002 | ) | |||||
Investments in affiliated issuers | 383,702 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 2,002,875 | ||||||
Closed futures contracts | 456,019 | ||||||
Closed swap contracts | (1,351,884 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 3,206,247 | ||||||
Net realized gain (loss) | 4,370,957 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 1,714,528 | ||||||
Open futures contracts | 450,620 | ||||||
Open swap contracts | (396,302 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 58,651 | ||||||
Net unrealized gain (loss) | 1,827,497 | ||||||
Net realized and unrealized gain (loss) | 6,198,454 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 7,900,026 |
See accompanying notes to the financial statements.
9
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,701,572 | $ | 3,557,478 | |||||||
Net realized gain (loss) | 4,370,957 | (9,035,948 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 1,827,497 | (1,980,112 | ) | ||||||||
Net increase (decrease) in net assets from operations | 7,900,026 | (7,458,582 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (3,512,926 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 5,220,586 | 8,545,306 | |||||||||
Total increase (decrease) in net assets | 13,120,612 | (2,426,202 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 168,324,226 | 170,750,428 | |||||||||
End of period (including distributions in excess of net investment income of $3,285,041 and $4,986,613, respectively) | $ | 181,444,838 | $ | 168,324,226 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.53 | $ | 9.11 | $ | 8.73 | $ | 9.20 | $ | 9.33 | $ | 10.04 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.09 | 0.18 | 0.21 | 0.12 | 0.09 | 0.52 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.32 | (0.57 | ) | 0.63 | 1.42 | 1.49 | (0.65 | ) | |||||||||||||||||||
Total from investment operations | 0.41 | (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 | $ | 8.94 | $ | 8.53 | $ | 9.11 | $ | 8.73 | $ | 9.20 | $ | 9.33 | |||||||||||||||
Total Return(b) | 4.81 | %** | (4.33 | )% | 9.52 | % | 20.21 | % | 17.76 | % | (1.34 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 181,445 | $ | 168,324 | $ | 170,750 | $ | 138,684 | $ | 235,842 | $ | 273,074 | |||||||||||||||
Net expenses to average daily net assets(c) | 0.39 | %* | 0.37 | % | 0.33 | % | 0.32 | % | 0.33 | % | 0.32 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 1.96 | %* | 2.12 | % | 2.40 | % | 1.44 | % | 1.10 | % | 5.36 | % | |||||||||||||||
Portfolio turnover rate | 13 | %** | 20 | % | 38 | % | 45 | % | 50 | % | 28 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 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 the underlying fund(s) (See Note 3).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
11
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks total return in excess of the JPMorgan Global Government Bond Index. The Fund typically invests in fixed income securities included in the JPMorgan Global Government Bond Index and in securities with similar characteristics. The Fund seeks additional returns by investing in global interest rate, currency, and emerging country debt markets. The Fund may invest in or use investment-grade bonds denominated in various currencies; shares of GMO Short-Duration Collateral Fund; shares of GMO World Opportunity Overlay Fund; futures contracts, currency forwards, swap contracts, and other types of derivatives; and sovereign debt of emerging countries, primarily through investment in shares of GMO Emerging Country Debt Fund (limited to 5% of the Fund's total assets).
The financial statements of the series 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 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 generally 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
12
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 pursuant to procedures approved by the Trustees.
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 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 maker may differ from the value that would be realized if the securities were sold and the differences could be material. As of August 31, 2006, the total value of these securities represented 35.6% 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 April of 2006, SPHF entered into a settlement agreement with a defendant in the lawsuit and the Fund indirectly received $1,591,463 in conjuction with the settlement. The outcome of the lawsuits against the 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 including 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
13
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 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. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may write call and put options. 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
14
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
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. Indexed securities held by the Fund at the end of the period are listed in the Fund's Schedule of Investments.
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. Interest rate swap agreements involve the exchange by one party 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
15
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
rate obligation, the party 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. Credit default swaps may be used to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where a party 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. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. There were no repurchase agreements o utstanding at the end of the period.
16
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no reverse repurchase agreements outstanding at the end of the period.
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 six months ended A ugust 31, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each tax 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.
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,
17
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 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) | ||||||||||||
$ | 176,120,287 | $ | 4,539,632 | $ | (19,676 | ) | $ | 4,519,956 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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
18
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 the 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 U.S. 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 Manager will waive the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by the Fund exceeds 0.15%; provided, however, that the amount of this waiver will not exceed 0.15%.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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, "Excluded Fund Fees and Expenses")) exceed 0.25% of the Fund's average daily net assets. In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2007 to the extent that the sum of (a) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses) and (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in ECDF (excluding ECDF's fees and expenses of the independent trustees of the Trust, fees expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's CCO (excluding any employee benefits), and investment-related expenses such as brokerage commissions, hedging transaction fees,
19
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
securities lending fees and expenses, interest expense and transfer taxes), exceeds 0.25% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.25% 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 six months ended August 31, 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 | % | 0.018 | % | 0.039 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $987 and $460, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $30,987,927 and $21,167,159 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 August 31, 2006, 72.8% 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)
August 31, 2006 (Unaudited)
As of August 31, 2006, 0.2% of the Fund's shares were held by three related parties comprised of certain GMO employee accounts, and 6.3% 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,878,994 | $ | 16,489,250 | 701,206 | $ | 6,078,711 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 407,835 | 3,466,595 | |||||||||||||||
Shares repurchased | (1,309,683 | ) | (11,268,664 | ) | (115,877 | ) | (1,000,000 | ) | |||||||||||
Net increase (decrease) | 569,311 | $ | 5,220,586 | 993,164 | $ | 8,545,306 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of affiliated issuers during the six months ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gain Distributions | Value, end of period | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class III | $ | 5,052,494 | $ | 601,069 | $ | — | $ | 57,034 | $ | 144,035 | $ | 5,596,298 | |||||||||||||||
GMO Short-Duration Collateral Fund | 106,481,153 | 24,586,858 | 13,500,000 | 1,186,859 | — | 119,418,198 | |||||||||||||||||||||
GMO Special Purpose Holding Fund | 377,249 | — | — | — | 1,858,840 | 222,774 | |||||||||||||||||||||
GMO World Opportunity Overlay Fund | 34,414,166 | 5,800,000 | 4,200,000 | — | — | 36,285,085 | |||||||||||||||||||||
Totals | $ | 146,325,062 | $ | 30,987,927 | $ | 17,700,000 | $ | 1,243,893 | $ | 2,002,875 | $ | 161,522,355 |
21
GMO Global Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Global Bond Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to
22
GMO Global Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manag er to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests, noting in particular that, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for certain of the fees and expenses (including advisory fees) that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax
23
GMO Global Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
24
GMO Global Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | $ | 1,048.10 | $ | 2.22 | ||||||||||
2 | ) Hypothetical | 0.43 | % | $ | 1,000.00 | $ | 1,023.04 | $ | 2.19 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
25
GMO U.S. Growth Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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. Growth Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 99.0 | % | |||||
Short-Term Investments | 3.7 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | (2.7 | ) | |||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Health Care | 22.3 | % | |||||
Technology | 18.8 | ||||||
Retail Stores | 15.8 | ||||||
Financial | 14.6 | ||||||
Services | 4.6 | ||||||
Transportation | 4.4 | ||||||
Machinery | 3.8 | ||||||
Oil & Gas | 3.7 | ||||||
Consumer Goods | 2.7 | ||||||
Food & Beverage | 2.5 | ||||||
Manufacturing | 2.2 | ||||||
Utility | 1.3 | ||||||
Construction | 1.2 | ||||||
Primary Process Industry | 1.1 | ||||||
Automotive | 0.8 | ||||||
Metals & Mining | 0.2 | ||||||
100.0 | % |
1
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 99.0% | |||||||||||
Automotive — 0.8% | |||||||||||
23,400 | Harley-Davidson, Inc. (a) | 1,369,134 | |||||||||
27,200 | Johnson Controls, Inc. | 1,956,496 | |||||||||
15,750 | Paccar, Inc. | 861,052 | |||||||||
4,186,682 | |||||||||||
Construction — 1.2% | |||||||||||
8,400 | Centex Corp. | 427,980 | |||||||||
8,500 | Crane Co. | 339,830 | |||||||||
9,600 | Fluor Corp. | 829,632 | |||||||||
2,800 | KB Home | 119,728 | |||||||||
10,700 | Lennar Corp.-Class A | 479,788 | |||||||||
18,700 | Martin Marietta Materials, Inc. | 1,540,132 | |||||||||
16,800 | Masco Corp. | 460,488 | |||||||||
900 | NVR, Inc. * | 462,285 | |||||||||
10,000 | Ryland Group, Inc. (a) | 426,700 | |||||||||
22,000 | Thor Industries, Inc. (a) | 927,960 | |||||||||
6,014,523 | |||||||||||
Consumer Goods — 2.7% | |||||||||||
64,484 | Altria Group, Inc. | 5,386,349 | |||||||||
22,300 | Colgate-Palmolive Co. | 1,334,878 | |||||||||
3,800 | Columbia Sportswear Co. * (a) | 185,516 | |||||||||
6,900 | Harman International Industries, Inc. | 559,728 | |||||||||
5,300 | HNI Corp. | 211,470 | |||||||||
65,300 | International Game Technology | 2,525,804 | |||||||||
4,500 | Liz Claiborne, Inc. | 168,165 | |||||||||
11,600 | Mohawk Industries, Inc. * (a) | 822,208 | |||||||||
31,300 | Newell Rubbermaid, Inc. | 844,787 | |||||||||
6,600 | Timberland Co.-Class A * | 187,506 | |||||||||
5,700 | UST, Inc. (a) | 301,302 | |||||||||
15,678 | Whirlpool Corp. | 1,268,507 | |||||||||
13,796,220 |
See accompanying notes to the financial statements.
2
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — 14.5% | |||||||||||
105,200 | Aflac, Inc. | 4,741,364 | |||||||||
9,400 | AMBAC Financial Group, Inc. | 813,946 | |||||||||
202,300 | American International Group, Inc. | 12,910,786 | |||||||||
55,100 | AON Corp. | 1,904,807 | |||||||||
10,700 | Bear Stearns Cos. (The), Inc. | 1,394,745 | |||||||||
22,100 | Brown & Brown, Inc. | 661,674 | |||||||||
229,100 | Charles Schwab Corp. (The) | 3,736,621 | |||||||||
2,400 | Chicago Mercantile Exchange | 1,056,000 | |||||||||
20,600 | Chubb Corp. | 1,033,296 | |||||||||
108,200 | E*Trade Financial Corp. * | 2,552,438 | |||||||||
2,900 | Equifax, Inc. | 92,191 | |||||||||
18,600 | Fair Isaac Corp. | 651,186 | |||||||||
29,800 | Federated Investors, Inc.-Class B | 997,704 | |||||||||
1,500 | Franklin Resources, Inc. | 147,615 | |||||||||
2,900 | Golden West Financial Corp. | 218,921 | |||||||||
46,900 | Goldman Sachs Group, Inc. | 6,971,685 | |||||||||
10,500 | Investment Technology Group, Inc. * | 485,205 | |||||||||
12,600 | Jefferies Group, Inc. | 313,992 | |||||||||
126,000 | JPMorgan Chase & Co. | 5,753,160 | |||||||||
42,900 | Lehman Brothers Holdings, Inc. | 2,737,449 | |||||||||
7,900 | Lincoln National Corp. | 479,530 | |||||||||
50,700 | Loews Corp. | 1,950,936 | |||||||||
6,900 | MBIA, Inc. (a) | 425,247 | |||||||||
52,200 | Mellon Financial Corp. | 1,943,406 | |||||||||
58,100 | Merrill Lynch & Co., Inc. | 4,272,093 | |||||||||
21,700 | MoneyGram International, Inc. | 681,380 | |||||||||
31,400 | Morgan Stanley | 2,065,806 | |||||||||
17,200 | PMI Group (The), Inc. | 743,728 | |||||||||
155,900 | Progressive Corp. (The) | 3,833,581 | |||||||||
6,100 | Radian Group, Inc. | 365,268 | |||||||||
9,200 | Raymond James Financial, Inc. | 255,024 | |||||||||
11,700 | Ryder Systems, Inc. | 578,214 | |||||||||
55,100 | St. Paul Travelers Cos. (The), Inc. | 2,418,890 | |||||||||
34,800 | State Street Corp. | 2,150,640 |
See accompanying notes to the financial statements.
3
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
98,700 | TD Ameritrade Holding Corp. | 1,729,224 | |||||||||
5,400 | Torchmark Corp. | 335,934 | |||||||||
43,350 | W.R. Berkley Corp. | 1,517,250 | |||||||||
74,920,936 | |||||||||||
Food & Beverage — 2.5% | |||||||||||
27,300 | Anheuser-Busch Cos., Inc. | 1,348,074 | |||||||||
84,800 | Archer-Daniels-Midland Co. | 3,491,216 | |||||||||
2,300 | Brown-Forman Corp.-Class B | 177,054 | |||||||||
147,900 | Coca-Cola Co. (The) | 6,627,399 | |||||||||
15,100 | Dean Foods Co. * | 598,262 | |||||||||
2,900 | HJ Heinz Co. | 121,336 | |||||||||
3,500 | Pepsi Bottling Group, Inc. | 122,535 | |||||||||
30,800 | Sara Lee Corp. | 512,204 | |||||||||
12,998,080 | |||||||||||
Health Care — 22.1% | |||||||||||
19,600 | Abbott Laboratories | 954,520 | |||||||||
34,800 | Allergan, Inc. | 3,986,688 | |||||||||
37,800 | AmerisourceBergen Corp. | 1,669,248 | |||||||||
37,700 | Amgen, Inc. * | 2,560,961 | |||||||||
23,200 | Barr Pharmaceuticals, Inc. * | 1,310,800 | |||||||||
15,800 | Baxter International, Inc. | 701,204 | |||||||||
12,600 | Biogen Idec, Inc. * | 556,164 | |||||||||
77,800 | Bristol-Myers Squibb Co. | 1,692,150 | |||||||||
46,800 | Cardinal Health, Inc. | 3,155,256 | |||||||||
30,300 | Caremark Rx, Inc. | 1,755,582 | |||||||||
28,700 | Celgene Corp. * | 1,167,803 | |||||||||
14,500 | Cerner Corp. * (a) | 667,870 | |||||||||
1,700 | Coventry Health Care, Inc. * | 92,208 | |||||||||
22,300 | Endo Pharmaceuticals Holdings, Inc. * | 736,569 | |||||||||
87,700 | Express Scripts, Inc. * | 7,373,816 | |||||||||
138,900 | Forest Laboratories, Inc. * | 6,942,222 | |||||||||
106,600 | Genentech, Inc. * | 8,796,632 |
See accompanying notes to the financial statements.
4
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Health Care — continued | |||||||||||
21,700 | Gilead Sciences, Inc. * | 1,375,780 | |||||||||
20,400 | Health Management Associates, Inc.-Class A | 426,564 | |||||||||
48,400 | Health Net, Inc. * | 2,023,604 | |||||||||
7,800 | Henry Schein, Inc. * (a) | 388,986 | |||||||||
8,000 | Humana, Inc. * | 487,440 | |||||||||
3,600 | Idexx Laboratories, Inc. * | 331,236 | |||||||||
58,864 | Johnson & Johnson | 3,806,146 | |||||||||
41,100 | King Pharmaceuticals, Inc. * | 666,642 | |||||||||
41,200 | Lincare Holdings, Inc. * | 1,525,636 | |||||||||
64,400 | McKesson Corp. | 3,271,520 | |||||||||
23,500 | Medtronic, Inc. | 1,102,150 | |||||||||
11,500 | Mentor Corp. (a) | 558,210 | |||||||||
423,800 | Merck & Co., Inc. | 17,185,090 | |||||||||
13,700 | Omnicare, Inc. | 620,747 | |||||||||
573,176 | Pfizer, Inc. | 15,796,731 | |||||||||
29,300 | Pharmaceutical Product Development, Inc. | 1,116,916 | |||||||||
19,600 | Quest Diagnostics, Inc. | 1,259,888 | |||||||||
24,300 | Respironics, Inc. * | 896,913 | |||||||||
19,700 | Stryker Corp. | 946,191 | |||||||||
11,200 | Techne Corp. * | 570,080 | |||||||||
224,100 | UnitedHealth Group, Inc. | 11,641,995 | |||||||||
40,500 | Varian Medical Systems, Inc. * | 2,158,650 | |||||||||
36,700 | Wyeth | 1,787,290 | |||||||||
114,064,098 | |||||||||||
Machinery — 3.8% | |||||||||||
62,500 | Baker Hughes, Inc. | 4,448,750 | |||||||||
40,600 | BJ Services Co. | 1,392,986 | |||||||||
14,900 | Cameron International Corp. * | 713,859 | |||||||||
96,300 | Caterpillar, Inc. | 6,389,505 | |||||||||
10,700 | Cummins, Inc. | 1,228,574 | |||||||||
17,500 | Deere & Co. | 1,366,750 | |||||||||
12,800 | Flowserve Corp. * | 654,592 | |||||||||
11,200 | FMC Technologies, Inc. * | 658,784 |
See accompanying notes to the financial statements.
5
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Machinery — continued | |||||||||||
8,400 | Lincoln Electric Holdings, Inc. | 462,252 | |||||||||
12,900 | Parker-Hannifin Corp. | 955,245 | |||||||||
32,900 | Terex Corp. * | 1,445,297 | |||||||||
19,716,594 | |||||||||||
Manufacturing — 2.2% | |||||||||||
16,400 | American Standard Cos., Inc. | 685,028 | |||||||||
77,800 | General Electric Co. | 2,649,868 | |||||||||
62,000 | Illinois Tool Works, Inc. | 2,721,800 | |||||||||
16,300 | ITT Industries, Inc. | 797,885 | |||||||||
32,800 | Reliance Steel & Aluminum Co. | 1,074,856 | |||||||||
5,900 | Textron, Inc. | 494,774 | |||||||||
45,000 | United Technologies Corp. | 2,821,950 | |||||||||
11,246,161 | |||||||||||
Metals & Mining — 0.2% | |||||||||||
39,400 | Alcoa, Inc. | 1,126,446 | |||||||||
Oil & Gas — 3.6% | |||||||||||
36,000 | Anadarko Petroleum Corp. | 1,688,760 | |||||||||
22,529 | ConocoPhillips | 1,429,014 | |||||||||
2,200 | Devon Energy Corp. | 137,478 | |||||||||
155,500 | Exxon Mobil Corp. | 10,522,685 | |||||||||
22,800 | Marathon Oil Corp. | 1,903,800 | |||||||||
24,800 | Occidental Petroleum Corp. | 1,264,552 | |||||||||
26,200 | Sunoco, Inc. | 1,884,042 | |||||||||
18,830,331 | |||||||||||
Primary Process Industry — 1.0% | |||||||||||
30,300 | E.I. du Pont de Nemours & Co. | 1,211,091 | |||||||||
9,400 | Millipore Corp. * (a) | 603,292 | |||||||||
73,700 | Nucor Corp. | 3,601,719 | |||||||||
5,416,102 |
See accompanying notes to the financial statements.
6
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Retail Stores — 15.7% | |||||||||||
3,300 | Abercrombie & Fitch Co.-Class A | 212,949 | |||||||||
22,500 | Advance Auto Parts, Inc. | 677,700 | |||||||||
14,700 | AnnTaylor Stores Corp. * (a) | 585,060 | |||||||||
61,700 | AutoNation, Inc. * | 1,198,831 | |||||||||
15,700 | AutoZone, Inc. * | 1,417,710 | |||||||||
66,500 | Bed Bath & Beyond, Inc. * | 2,243,045 | |||||||||
41,800 | Best Buy Co., Inc. (a) | 1,964,600 | |||||||||
9,700 | BJ's Wholesale Club, Inc. * | 255,595 | |||||||||
12,100 | CDW Corp. | 705,430 | |||||||||
34,200 | Chico's FAS, Inc. * | 630,648 | |||||||||
43,300 | Circuit City Stores, Inc. | 1,022,313 | |||||||||
45,100 | Claire's Stores, Inc. | 1,232,583 | |||||||||
59,600 | Costco Wholesale Corp. | 2,788,684 | |||||||||
60,900 | Dollar General Corp. | 783,174 | |||||||||
28,300 | Dollar Tree Stores, Inc. * (a) | 814,474 | |||||||||
45,100 | Fastenal Co. | 1,654,268 | |||||||||
527,400 | Home Depot, Inc. | 18,084,546 | |||||||||
134,600 | Kroger Co. | 3,204,826 | |||||||||
11,300 | Limited Brands, Inc. | 290,749 | |||||||||
426,268 | Lowe's Cos., Inc. | 11,534,812 | |||||||||
9,900 | Men's Wearhouse, Inc. | 350,955 | |||||||||
43,100 | Nordstrom, Inc. | 1,609,785 | |||||||||
108,200 | Office Depot, Inc. * | 3,986,088 | |||||||||
36,000 | O'Reilly Automotive, Inc. * | 1,068,840 | |||||||||
11,500 | Rent-A-Center, Inc. * | 311,650 | |||||||||
89,500 | Staples, Inc. | 2,019,120 | |||||||||
27,700 | Supervalu, Inc. | 791,112 | |||||||||
36,000 | Tiffany & Co. | 1,137,600 | |||||||||
43,660 | TJX Cos., Inc. | 1,167,905 | |||||||||
122,600 | Walgreen Co. | 6,063,796 | |||||||||
249,700 | Wal-Mart Stores, Inc. | 11,166,584 | |||||||||
80,975,432 |
See accompanying notes to the financial statements.
7
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Services — 4.5% | |||||||||||
25,900 | Allied Waste Industries, Inc. * (a) | 267,806 | |||||||||
32,900 | Applebee's International, Inc. | 682,675 | |||||||||
20,900 | Brinker International, Inc. | 804,023 | |||||||||
22,300 | Darden Restaurants, Inc. | 789,420 | |||||||||
4,200 | Factset Research Systems, Inc. | 185,220 | |||||||||
4,200 | Iron Mountain, Inc. * (a) | 172,158 | |||||||||
9,300 | ITT Educational Services, Inc. * | 614,637 | |||||||||
14,100 | Manpower, Inc. | 833,451 | |||||||||
19,100 | Monster Worldwide, Inc. * | 778,134 | |||||||||
89,000 | Moody's Corp. | 5,445,020 | |||||||||
31,600 | Robert Half International, Inc. | 977,704 | |||||||||
14,250 | Sonic Corp. * | 312,503 | |||||||||
257,600 | Starbucks Corp. * | 7,988,176 | |||||||||
24,100 | Sysco Corp. | 756,499 | |||||||||
17,900 | Univision Communications, Inc.-Class A * | 618,624 | |||||||||
37,500 | Waste Management, Inc. | 1,285,500 | |||||||||
8,100 | Weight Watchers International, Inc. | 343,926 | |||||||||
10,200 | Wendy's International, Inc. | 651,780 | |||||||||
23,507,256 | |||||||||||
Technology — 18.6% | |||||||||||
28,200 | ADTRAN, Inc. | 701,334 | |||||||||
17,500 | Affiliated Computer Services, Inc.-Class A * (a) | 898,450 | |||||||||
126,400 | Agilent Technologies, Inc. * | 4,065,024 | |||||||||
49,900 | Applera Corp.-Applied Biosystems Group | 1,529,435 | |||||||||
73,100 | Applied Materials, Inc. | 1,233,928 | |||||||||
17,700 | AVX Corp. | 293,997 | |||||||||
117,600 | BEA Systems, Inc. * | 1,614,648 | |||||||||
54,100 | BMC Software, Inc. * | 1,440,142 | |||||||||
33,700 | Boeing Co. | 2,524,130 | |||||||||
25,700 | Broadcom Corp.-Class A * | 756,608 | |||||||||
26,500 | Ceridian Corp. * | 632,555 | |||||||||
51,600 | Citrix Systems, Inc. * | 1,583,088 | |||||||||
3,900 | Cognizant Technologies Solutions Corp. * | 272,649 |
See accompanying notes to the financial statements.
8
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
3,000 | Computer Sciences Corp. * | 142,140 | |||||||||
184,800 | Corning, Inc. * | 4,109,952 | |||||||||
38,200 | Danaher Corp. | 2,532,278 | |||||||||
189,600 | Dell, Inc. * (a) | 4,275,480 | |||||||||
15,500 | DST Systems, Inc. * (a) | 914,965 | |||||||||
69,800 | Emerson Electric Co. | 5,734,070 | |||||||||
2,700 | Energizer Holdings, Inc. * | 180,522 | |||||||||
50,900 | First Data Corp. | 2,187,173 | |||||||||
12,900 | Fiserv, Inc. * | 569,793 | |||||||||
15,000 | General Dynamics Corp. | 1,013,250 | |||||||||
16,500 | Global Payments, Inc. | 627,825 | |||||||||
26,200 | Goodrich Corp. | 1,020,490 | |||||||||
10,800 | Google, Inc.-Class A * | 4,088,124 | |||||||||
16,100 | Harris Corp. | 707,112 | |||||||||
202,300 | Hewlett-Packard Co. | 7,396,088 | |||||||||
173,708 | Intel Corp. | 3,394,254 | |||||||||
29,000 | International Business Machines Corp. | 2,348,130 | |||||||||
21,800 | Intersil Corp.-Class A | 552,630 | |||||||||
4,100 | Lam Research Corp. * | 175,439 | |||||||||
17,200 | Lexmark International, Inc. * | 964,404 | |||||||||
32,100 | Microchip Technology, Inc. | 1,096,536 | |||||||||
33,000 | Micron Technology, Inc. * | 570,240 | |||||||||
32,700 | Microsoft Corp. | 840,063 | |||||||||
271,300 | Motorola, Inc. | 6,342,994 | |||||||||
66,000 | National Semiconductor Corp. | 1,603,140 | |||||||||
11,300 | Network Appliance, Inc. * | 386,912 | |||||||||
27,100 | Northrop Grumman Corp. | 1,810,551 | |||||||||
75,000 | Nvidia Corp. * | 2,183,250 | |||||||||
44,400 | Paychex, Inc. | 1,594,404 | |||||||||
11,600 | Pitney Bowes, Inc. | 505,644 | |||||||||
299,600 | Qualcomm, Inc. | 11,285,932 | |||||||||
33,600 | Rockwell Automation, Inc. | 1,894,368 | |||||||||
7,000 | Tektronix, Inc. | 198,380 | |||||||||
26,600 | Tellabs, Inc. * | 271,054 |
See accompanying notes to the financial statements.
9
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
135,400 | Texas Instruments, Inc. | 4,412,686 | |||||||||
16,700 | Total System Services, Inc. | 372,243 | |||||||||
9,200 | WESCO International, Inc. * | 538,200 | |||||||||
96,386,704 | |||||||||||
Transportation — 4.3% | |||||||||||
57,200 | Burlington Northern Santa Fe Corp. | 3,829,540 | |||||||||
74,800 | CH Robinson Worldwide, Inc. | 3,427,336 | |||||||||
25,600 | CSX Corp. | 773,632 | |||||||||
85,300 | Expeditors International of Washington, Inc. | 3,400,911 | |||||||||
75,400 | FedEx Corp. | 7,617,662 | |||||||||
8,700 | Landstar System, Inc. | 371,490 | |||||||||
36,600 | Norfolk Southern Corp. | 1,563,918 | |||||||||
16,900 | Union Pacific Corp. | 1,357,915 | |||||||||
22,342,404 | |||||||||||
Utility — 1.3% | |||||||||||
14,800 | AT&T, Inc. | 460,724 | |||||||||
122,900 | BellSouth Corp. | 5,004,488 | |||||||||
101,000 | Qwest Communications International, Inc. * | 889,810 | |||||||||
2,000 | TXU Corp. | 132,420 | |||||||||
6,487,442 | |||||||||||
TOTAL COMMON STOCKS (COST $513,963,698) | 512,015,411 | ||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Utility — 0.0% | |||||||||||
3,093 | Lucent Technologies, Inc. Warrants, Expires 12/10/07 * | 727 | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $0) | 727 |
See accompanying notes to the financial statements.
10
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 3.7% | |||||||||||
3,777,941 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $3,778,314 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/13, and a market value, including accrued interest, of $3,853,500. | 3,777,941 | |||||||||
2,909,301 | Credit Suisse First Boston Corp. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $2,909,733 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $3,067,251. (b) | 2,909,301 | |||||||||
4,538,510 | Goldman Sachs Group Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $4,539,184 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $4,679,980. (b) | 4,538,510 | |||||||||
581,860 | Lehman Brothers Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $581,946 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $682,207. (b) | 581,860 | |||||||||
4,538,510 | Merrill Lynch & Co. Tri Party Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $4,539,178 and an effective yield of 5.30%, collateralized by various U.S. government obligations with an aggregate market value of $4,672,692. (b) | 4,538,510 | |||||||||
2,815,748 | Morgan Stanley & Co. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $2,816,167 and an effective yield of 5.36%, collateralized by various corporate debt obligations with an aggregate market value of $2,998,691. (b) | 2,815,748 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $19,161,870) | 19,161,870 | ||||||||||
TOTAL INVESTMENTS — 102.7% (Cost $533,125,568) | 531,178,008 | ||||||||||
Other Assets and Liabilities (net) — (2.7%) | (14,075,368 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 517,102,640 |
See accompanying notes to the financial statements.
11
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
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.
12
GMO U.S. Growth Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $14,801,787 (cost $533,125,568) (Note 2) | $ | 531,178,008 | |||||
Cash | 2,055 | ||||||
Receivable for Fund shares sold | 171,783 | ||||||
Dividends and interest receivable | 808,244 | ||||||
Receivable for collateral on closed futures contracts (Note 2) | 823,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 20,646 | ||||||
Miscellaneous receivable | 3,512 | ||||||
Total assets | 533,007,248 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 15,383,929 | ||||||
Payable for Fund shares repurchased | 143,351 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 136,915 | ||||||
Shareholder service fee | 35,711 | ||||||
Administration fee – Class M | 40,717 | ||||||
Trustees and Chief Compliance Officer fees | 1,493 | ||||||
Payable for 12b-1 fee – Class M | 101,452 | ||||||
Accrued expenses | 61,040 | ||||||
Total liabilities | 15,904,608 | ||||||
Net assets | $ | 517,102,640 |
See accompanying notes to the financial statements.
13
GMO U.S. Growth Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 541,241,897 | |||||
Accumulated undistributed net investment income | 701,773 | ||||||
Distributions in excess of net realized gains | (22,893,470 | ) | |||||
Net unrealized depreciation | (1,947,560 | ) | |||||
$ | 517,102,640 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 274,012,708 | |||||
Class M shares | $ | 243,089,932 | |||||
Shares outstanding: | |||||||
Class III | 16,283,297 | ||||||
Class M | 14,506,736 | ||||||
Net asset value per share: | |||||||
Class III | $ | 16.83 | |||||
Class M | $ | 16.76 |
See accompanying notes to the financial statements.
14
GMO U.S. Growth Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 3,828,043 | |||||
Interest (including securities lending income of $8,537) | 305,148 | ||||||
Total investment income | 4,133,191 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 871,097 | ||||||
Shareholder service fee – Class III (Note 3) | 235,404 | ||||||
12b-1 fee – Class M (Note 3) | 310,157 | ||||||
Administration fee – Class M (Note 3) | 248,126 | ||||||
Custodian, fund accounting agent and transfer agent fees | 60,628 | ||||||
Audit and tax fees | 24,791 | ||||||
Legal fees | 5,980 | ||||||
Trustees fees and related expenses (Note 3) | 5,120 | ||||||
Registration fees | 26,588 | ||||||
Miscellaneous | 4,875 | ||||||
Total expenses | 1,792,766 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (122,447 | ) | |||||
Net expenses | 1,670,319 | ||||||
Net investment income (loss) | 2,462,872 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 8,250,954 | ||||||
Closed futures contracts | 193,185 | ||||||
Net realized gain (loss) | 8,444,139 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (42,734,798 | ) | |||||
Open futures contracts | (74,307 | ) | |||||
Net unrealized gain (loss) | (42,809,105 | ) | |||||
Net realized and unrealized gain (loss) | (34,364,966 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (31,902,094 | ) |
See accompanying notes to the financial statements.
15
GMO U.S. Growth Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 2,462,872 | $ | 4,388,394 | |||||||
Net realized gain (loss) | 8,444,139 | 29,928,176 | |||||||||
Change in net unrealized appreciation (depreciation) | (42,809,105 | ) | (2,554,324 | ) | |||||||
Net increase (decrease) in net assets from operations | (31,902,094 | ) | 31,762,246 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (1,363,591 | ) | (3,064,829 | ) | |||||||
Class M | (740,665 | ) | (1,454,543 | ) | |||||||
Total distributions from net investment income | (2,104,256 | ) | (4,519,372 | ) | |||||||
Net realized gains | |||||||||||
Class III | (5,350,817 | ) | (17,977,682 | ) | |||||||
Class M | (4,569,235 | ) | (13,471,603 | ) | |||||||
Total distributions from net realized gains | (9,920,052 | ) | (31,449,285 | ) | |||||||
(12,024,308 | ) | (35,968,657 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (43,327,539 | ) | (12,985,527 | ) | |||||||
Class M | 8,821,126 | (13,998,923 | ) | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (34,506,413 | ) | (26,984,450 | ) | |||||||
Total increase (decrease) in net assets | (78,432,815 | ) | (31,190,861 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 595,535,455 | 626,726,316 | |||||||||
End of period (including accumulated undistributed net investment income of $701,773 and $343,157, respectively) | $ | 517,102,640 | $ | 595,535,455 |
See accompanying notes to the financial statements.
16
GMO U.S. Growth Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 18.17 | $ | 18.26 | $ | 19.03 | $ | 14.29 | $ | 18.23 | $ | 21.19 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss) | 0.09 | † | 0.15 | † | 0.16 | † | 0.10 | 0.10 | 0.10 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (1.03 | ) | 0.86 | (0.02 | )(a) | 5.14 | (3.94 | ) | (2.97 | ) | |||||||||||||||||
Total from investment operations | (0.94 | ) | 1.01 | 0.14 | 5.24 | (3.84 | ) | (2.87 | ) | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.08 | ) | (0.16 | ) | (0.14 | ) | (0.14 | ) | (0.10 | ) | (0.09 | ) | |||||||||||||||
From net realized gains | (0.32 | ) | (0.94 | ) | (0.77 | ) | (0.36 | ) | — | — | |||||||||||||||||
Total distributions | (0.40 | ) | (1.10 | ) | (0.91 | ) | (0.50 | ) | (0.10 | ) | (0.09 | ) | |||||||||||||||
Net asset value, end of period | $ | 16.83 | $ | 18.17 | $ | 18.26 | $ | 19.03 | $ | 14.29 | $ | 18.23 | |||||||||||||||
Total Return(b) | (5.17 | )%** | 5.64 | % | 0.94 | % | 36.93 | % | (21.13 | )% | (13.57 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 274,013 | $ | 342,203 | $ | 357,499 | $ | 437,200 | $ | 302,051 | $ | 116,306 | |||||||||||||||
Net expenses to average daily net assets | 0.46 | %* | 0.48 | % | 0.48 | % | 0.48 | % | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 1.02 | %* | 0.84 | % | 0.89 | % | 0.62 | % | 0.72 | % | 0.54 | % | |||||||||||||||
Portfolio turnover rate | 57 | %** | 94 | % | 136 | % | 97 | % | 72 | % | 101 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* | 0.04 | % | 0.04 | % | 0.05 | % | 0.09 | % | 0.07 | % |
(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) 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.
17
GMO U.S. Growth Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class M share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 18.10 | $ | 18.19 | $ | 18.97 | $ | 14.25 | $ | 15.27 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss) | 0.06 | † | 0.10 | † | 0.11 | † | 0.09 | 0.04 | |||||||||||||||
Net realized and unrealized gain (loss) | (1.03 | ) | 0.85 | (0.02 | )(b) | 5.09 | (1.01 | ) | |||||||||||||||
Total from investment operations | (0.97 | ) | 0.95 | 0.09 | 5.18 | (0.97 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.05 | ) | (0.10 | ) | (0.10 | ) | (0.10 | ) | (0.05 | ) | |||||||||||||
From net realized gains | (0.32 | ) | (0.94 | ) | (0.77 | ) | (0.36 | ) | — | ||||||||||||||
Total distributions | (0.37 | ) | (1.04 | ) | (0.87 | ) | (0.46 | ) | (0.05 | ) | |||||||||||||
Net asset value, end of period | $ | 16.76 | $ | 18.10 | $ | 18.19 | $ | 18.97 | $ | 14.25 | |||||||||||||
Total Return(c) | (5.33 | )%** | 5.33 | % | 0.65 | % | 36.58 | % | (6.31 | )%** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 243,090 | $ | 253,332 | $ | 269,227 | $ | 199,865 | $ | 20,306 | |||||||||||||
Net expenses to average daily net assets | 0.76 | %* | 0.77 | % | 0.78 | % | 0.78 | % | 0.78 | %* | |||||||||||||
Net investment income to average daily net assets | 0.70 | %* | 0.54 | % | 0.61 | % | 0.29 | % | 0.51 | %* | |||||||||||||
Portfolio turnover rate | 57 | %** | 94 | % | 136 | % | 97 | % | 72 | %*** | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* | 0.04 | % | 0.04 | % | 0.05 | % | 0.09 | %* |
(a) Period from September 11, 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) 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 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.
*** Calculation represents portfolio turnover of the Fund for the year ended February 28, 2003.
See accompanying notes to the financial statements.
18
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
1. Organization
GMO U.S. Growth 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 Funds into classes.
The Fund commenced operations following an in-kind purchase of shares by GMO Growth Fund ("Predecessor Fund") effected as of the close of business on September 16, 2005. For tax purposes, this transaction met all requirements for a tax-free reorganization under the Internal Revenue Code, and consequently the Fund retained the Predecessor Fund's basis and holding period in each asset contributed in-kind. For accounting purposes, the Fund also recorded a cost for each in-kind asset contributed by the Predecessor Fund equal to such asset's historical cost. For tax and accounting purposes, the Fund is treated as a continuation of the Predecessor Fund's operations. Therefore, the Financial Statements reflect the performance and operational history of the Predecessor Fund prior to September 16, 2005.
The Fund seeks long-term capital growth. The Fund seeks to achieve its objective by outperforming the Russell 1000 Growth Index. The Fund typically makes equity investments in U.S. companies that issue stocks included in the Russell 1000 Index, and companies with similar size characteristics.
Throughout the six months ended August 31, 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 principal economic difference between the classes of shares is the type and level of fees.
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
19
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are generally 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 pursuant to procedures approved by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. There were no futures contracts outstanding at the end of the period.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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
20
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no swap agreements outstanding at the end of the period.
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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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 August 31, 2006, the Fund had loaned securities
21
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
having a market value of $14,801,787 collateralized by cash in the amount of $15,383,929, which was invested in short-term instruments.
Taxes and distributions
The Fund intends to qualify each tax 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.
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 $11,596,373, $9,328,913 and $782,016 expiring in 2010, 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 August 31, 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) | ||||||||||||
$ | 541,528,727 | $ | 16,476,783 | $ | (26,827,502 | ) | $ | (10,350,719 | ) |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At
22
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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 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.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.31% 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 the annual rate of 0.20% of the 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 up to 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. The Trustees currently limit payments on Class M shares to 0.25% of the Funds average daily net asset value attributable to its Class M shares. This fee may be spent on
23
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees (Class III only), 12b-1 and administration fees (Class M only), fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 0.31% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $3,004 and $1,748, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $311,195,709 and $342,066,280, 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 August 31, 2006, 45.7% 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 August 31, 2006, less than 0.01% of the Fund's shares were held by one related party comprised of a certain GMO employee account, and 5.7% of the Fund's shares were held by accounts for which the Manager has investment discretion.
24
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 and Predecessor Fund shares were as follows (See Note 1):
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 286,780 | $ | 4,943,662 | 2,712,137 | $ | 49,338,593 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 399,468 | 6,671,230 | 1,160,254 | 20,977,507 | |||||||||||||||
Shares repurchased | (3,238,089 | ) | (54,942,431 | ) | (3,792,164 | ) | (68,380,886 | ) | |||||||||||
Redemption in-kind | — | — | (824,369 | ) | (14,920,741 | ) | |||||||||||||
Net increase (decrease) | (2,551,841 | ) | $ | (43,327,539 | ) | (744,142 | ) | $ | (12,985,527 | ) | |||||||||
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 2,268,076 | $ | 39,030,389 | 4,531,049 | $ | 81,556,256 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 320,548 | 5,309,900 | 828,043 | 14,926,145 | |||||||||||||||
Shares repurchased | (2,081,175 | ) | (35,519,163 | ) | (6,152,442 | ) | (110,299,943 | ) | |||||||||||
Redemption in-kind | — | — | (10,066 | ) | (181,381 | ) | |||||||||||||
Net increase (decrease) | 507,449 | $ | 8,821,126 | (803,416 | ) | $ | (13,998,923 | ) |
25
GMO U.S. Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO U.S. Growth Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
Noting that the Fund is the successor to GMO Growth Fund (the "Predecessor Fund"), a former series of the Trust that had an investment objective and policies and restrictions substantially identical to those of the Fund, the Trustees considered investment performance and fee and expense information of the Predecessor Fund for periods ending on or before September 16, 2005. In particular, the Trustees noted that the Fund's advisory fee was 0.02% lower than the Predecessor Fund's advisory fee.
In addition, the Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the
26
GMO U.S. Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to th e Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax
27
GMO U.S. Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
28
GMO U.S. Growth Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | 0.46 | % | $ | 1,000.00 | $ | 948.30 | $ | 2.26 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 0.76 | % | $ | 1,000.00 | $ | 946.70 | $ | 3.73 | |||||||||||
2) Hypothetical | 0.76 | % | $ | 1,000.00 | $ | 1,021.37 | $ | 3.87 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
29
GMO U.S. Value Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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. Value Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.5 | % | |||||
Short-Term Investments | 7.3 | ||||||
Rights and Warrants | 0.0 | ||||||
Futures | 0.0 | ||||||
Other | (3.8 | ) | |||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments* | ||||||
Financial Services | 26.8 | % | |||||
Health Care | 20.4 | ||||||
Consumer Discretionary | 14.0 | ||||||
Utilities | 10.2 | ||||||
Consumer Staples | 7.2 | ||||||
Integrated Oils | 7.2 | ||||||
Technology | 3.8 | ||||||
Other | 3.7 | ||||||
Producer Durables | 2.9 | ||||||
Auto & Transportation | 1.6 | ||||||
Other Energy | 1.4 | ||||||
Materials & Processing | 0.8 | ||||||
100.0 | % |
* The table excludes short-term investments.
1
GMO U.S. Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 96.5% | |||||||||||
Auto & Transportation — 1.5% | |||||||||||
2,300 | FedEx Corp. | 232,369 | |||||||||
8,500 | Harley-Davidson, Inc. (a) | 497,335 | |||||||||
729,704 | |||||||||||
Consumer Discretionary — 13.5% | |||||||||||
3,900 | Applebee's International, Inc. | 80,925 | |||||||||
8,100 | Bed Bath & Beyond, Inc. * | 273,213 | |||||||||
5,800 | Best Buy Co., Inc. | 272,600 | |||||||||
28,800 | Cendant Corp. * | 55,584 | |||||||||
5,500 | Dollar General Corp. | 70,730 | |||||||||
39,600 | Home Depot, Inc. | 1,357,884 | |||||||||
8,700 | Jones Apparel Group, Inc. | 272,310 | |||||||||
4,200 | Kimberly-Clark Corp. | 266,700 | |||||||||
11,800 | Liz Claiborne, Inc. | 440,966 | |||||||||
46,400 | Lowe's Cos., Inc. | 1,255,584 | |||||||||
2,200 | Omnicom Group | 192,324 | |||||||||
6,600 | Starbucks Corp. * | 204,666 | |||||||||
30,600 | Wal-Mart Stores, Inc. | 1,368,432 | |||||||||
1,300 | Weight Watchers International, Inc. | 55,198 | |||||||||
5,760 | Wyndham Worldwide Corp. * | 168,538 | |||||||||
6,335,654 | |||||||||||
Consumer Staples — 7.0% | |||||||||||
11,600 | Altria Group, Inc. | 968,948 | |||||||||
7,400 | Dean Foods Co. * | 293,188 | |||||||||
24,400 | Kroger Co. | 580,964 | |||||||||
12,700 | Safeway, Inc. | 392,811 | |||||||||
17,200 | Sara Lee Corp. | 286,036 | |||||||||
8,500 | Supervalu, Inc. | 242,760 | |||||||||
10,200 | Walgreen Co. | 504,492 | |||||||||
3,269,199 |
See accompanying notes to the financial statements.
2
GMO U.S. Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Financial Services — 25.9% | |||||||||||
12,600 | Aflac, Inc. | 567,882 | |||||||||
7,300 | Allstate Corp. (The) | 422,962 | |||||||||
6,200 | AMBAC Financial Group, Inc. | 536,858 | |||||||||
16,800 | American International Group, Inc. | 1,072,176 | |||||||||
18,931 | Bank of America Corp. | 974,378 | |||||||||
4,100 | Chubb Corp. | 205,656 | |||||||||
46,800 | Citigroup, Inc. | 2,309,580 | |||||||||
10,200 | CNA Financial Corp. * | 353,634 | |||||||||
5,800 | Comerica, Inc. | 332,050 | |||||||||
16,900 | Fannie Mae | 889,785 | |||||||||
15,300 | First Data Corp. | 657,441 | |||||||||
1,400 | Hartford Financial Services Group, Inc. | 120,204 | |||||||||
1,300 | IndyMac Bancorp, Inc. | 50,830 | |||||||||
2,700 | Marsh & McLennan Cos., Inc. | 70,632 | |||||||||
4,100 | Morgan Stanley | 269,739 | |||||||||
23,400 | National City Corp. | 809,172 | |||||||||
2,200 | New York Community Bancorp, Inc. | 36,102 | |||||||||
25,375 | Old Republic International Corp. | 530,337 | |||||||||
12,800 | Progressive Corp. (The) | 314,752 | |||||||||
6,800 | Protective Life Corp. | 313,004 | |||||||||
6,100 | Radian Group, Inc. | 365,268 | |||||||||
3,800 | TD Banknorth, Inc. | 112,480 | |||||||||
5,400 | US Bancorp | 173,178 | |||||||||
15,985 | Washington Mutual, Inc. | 669,612 | |||||||||
12,157,712 | |||||||||||
Health Care — 19.7% | |||||||||||
11,400 | AmerisourceBergen Corp. | 503,424 | |||||||||
15,400 | Bristol-Myers Squibb Co. | 334,950 | |||||||||
11,500 | Cardinal Health, Inc. | 775,330 | |||||||||
2,000 | Express Scripts, Inc. * | 168,160 | |||||||||
10,900 | Forest Laboratories, Inc. * | 544,782 | |||||||||
5,600 | Health Net, Inc. * | 234,136 | |||||||||
11,300 | Johnson & Johnson | 730,658 |
See accompanying notes to the financial statements.
3
GMO U.S. Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Health Care — continued | |||||||||||
2,000 | McKesson Corp. | 101,600 | |||||||||
43,500 | Merck & Co., Inc. | 1,763,925 | |||||||||
88,600 | Pfizer, Inc. | 2,441,816 | |||||||||
7,400 | Pharmaceutical Product Development, Inc. | 282,088 | |||||||||
26,400 | UnitedHealth Group, Inc. | 1,371,480 | |||||||||
9,252,349 | |||||||||||
Integrated Oils — 6.9% | |||||||||||
6,200 | Chevron Corp. | 399,280 | |||||||||
11,100 | ConocoPhillips | 704,073 | |||||||||
22,500 | Exxon Mobil Corp. | 1,522,575 | |||||||||
12,200 | Occidental Petroleum Corp. | 622,078 | |||||||||
3,248,006 | |||||||||||
Materials & Processing — 0.8% | |||||||||||
3,600 | Ashland, Inc. | 227,304 | |||||||||
7,200 | Realogy Corp. * (a) | 154,080 | |||||||||
381,384 | |||||||||||
Other — 3.6% | |||||||||||
38,700 | General Electric Co. | 1,318,122 | |||||||||
5,100 | Johnson Controls, Inc. | 366,843 | |||||||||
1,684,965 | |||||||||||
Other Energy — 1.4% | |||||||||||
13,600 | Anadarko Petroleum Corp. | 637,976 | |||||||||
Producer Durables — 2.8% | |||||||||||
4,800 | Centex Corp. | 244,560 | |||||||||
3,400 | Danaher Corp. | 225,386 | |||||||||
6,600 | KB Home | 282,216 | |||||||||
7,600 | Lexmark International, Inc. * (a) | 426,132 | |||||||||
5,000 | Pulte Homes, Inc. | 148,350 | |||||||||
1,326,644 |
See accompanying notes to the financial statements.
4
GMO U.S. Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
Technology — 3.6% | |||||||||||
42,500 | Dell, Inc. * (a) | 958,375 | |||||||||
15,200 | Ingram Micro, Inc.-Class A * | 273,600 | |||||||||
18,000 | Microsoft Corp. | 462,420 | |||||||||
1,694,395 | |||||||||||
Utilities — 9.8% | |||||||||||
2,000 | American Electric Power Co., Inc. | 72,960 | |||||||||
55,800 | AT&T, Inc. | 1,737,054 | |||||||||
15,400 | BellSouth Corp. | 627,088 | |||||||||
1,400 | Sempra Energy | 69,608 | |||||||||
59,900 | Verizon Communications, Inc. | 2,107,282 | |||||||||
4,613,992 | |||||||||||
TOTAL COMMON STOCKS (COST $43,737,869) | 45,331,980 | ||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Technology — 0.0% | |||||||||||
1,219 | Raytheon Co. Warrants, Expires 06/16/11 | 17,005 | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $0) | 17,005 | ||||||||||
SHORT-TERM INVESTMENTS — 7.3% | |||||||||||
1,582,860 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $1,583,016 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/13, and a market value, including accrued interest, of $1,614,517. | 1,582,860 | |||||||||
347,741 | Credit Suisse First Boston Corp. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $347,793 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $366,620. (b) | 347,741 |
See accompanying notes to the financial statements.
5
GMO U.S. Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — continued | |||||||||||
542,476 | Goldman Sachs Group Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $542,557 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $559,386. (b) | 542,476 | |||||||||
69,548 | Lehman Brothers Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $69,558 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $81,542. (b) | 69,548 | |||||||||
542,476 | Merrill Lynch & Co. Tri Party Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $542,556 and an effective yield of 5.30%, collateralized by various U.S. government obligations with an aggregate market value of $558,514. (b) | 542,476 | |||||||||
336,559 | Morgan Stanley & Co. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $336,609 and an effective yield of 5.36%, collateralized by various corporate debt obligations with an aggregate market value of $358,426. (b) | 336,559 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $3,421,660) | 3,421,660 | ||||||||||
TOTAL INVESTMENTS — 103.8% (Cost $47,159,529) | 48,770,645 | ||||||||||
Other Assets and Liabilities (net) — (3.8%) | (1,799,867 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 46,970,778 |
See accompanying notes to the financial statements.
6
GMO U.S. Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
2 | S&P 500 | September 2006 | $ | 652,800 | $ | 10,486 |
As of August 31, 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).
See accompanying notes to the financial statements.
7
GMO U.S. Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $1,749,223 (cost $47,159,529) (Note 2) | $ | 48,770,645 | |||||
Dividends and interest receivable | 95,650 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 31,500 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 250 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 10,850 | ||||||
Total assets | 48,908,895 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 1,838,800 | ||||||
Payable for Fund shares repurchased | 12,818 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 17,332 | ||||||
Shareholder service fee | 3,605 | ||||||
Administration fee – Class M | 3,072 | ||||||
Trustees and Chief Compliance Officer fees | 108 | ||||||
Payable for 12b-1 fee – Class M | 7,629 | ||||||
Accrued expenses | 54,753 | ||||||
Total liabilities | 1,938,117 | ||||||
Net assets | $ | 46,970,778 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 57,739,814 | |||||
Accumulated undistributed net investment income | 153,219 | ||||||
Accumulated net realized loss | (12,543,857 | ) | |||||
Net unrealized appreciation | 1,621,602 | ||||||
$ | 46,970,778 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 28,686,220 | |||||
Class M shares | $ | 18,284,558 | |||||
Shares outstanding: | |||||||
Class III | 2,812,445 | ||||||
Class M | 1,798,795 | ||||||
Net asset value per share: | |||||||
Class III | $ | 10.20 | |||||
Class M | $ | 10.16 |
See accompanying notes to the financial statements.
8
GMO U.S. Value Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 522,115 | |||||
Interest (including securities lending income of $1,503) | 29,696 | ||||||
Total investment income | 551,811 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 107,393 | ||||||
Shareholder service fee – Class III (Note 3) | 22,542 | ||||||
12b-1 fee – Class M (Note 3) | 23,449 | ||||||
Administration fee – Class M (Note 3) | 18,759 | ||||||
Custodian, fund accounting agent and transfer agent fees | 18,952 | ||||||
Audit and tax fees | 24,858 | ||||||
Legal fees | 460 | ||||||
Trustees fees and related expenses (Note 3) | 428 | ||||||
Registration fees | 16,928 | ||||||
Miscellaneous | 553 | ||||||
Total expenses | 234,322 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (61,641 | ) | |||||
Net expenses | 172,681 | ||||||
Net investment income (loss) | 379,130 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 1,342,718 | ||||||
Closed futures contracts | (29,858 | ) | |||||
Net realized gain (loss) | 1,312,860 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (1,413,505 | ) | |||||
Open futures contracts | 921 | ||||||
Net unrealized gain (loss) | (1,412,584 | ) | |||||
Net realized and unrealized gain (loss) | (99,724 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | 279,406 |
See accompanying notes to the financial statements.
9
GMO U.S. Value Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 379,130 | $ | 599,924 | |||||||
Net realized gain (loss) | 1,312,860 | 3,426,360 | |||||||||
Change in net unrealized appreciation (depreciation) | (1,412,584 | ) | (1,435,286 | ) | |||||||
Net increase (decrease) in net assets from operations | 279,406 | 2,590,998 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (158,717 | ) | (384,323 | ) | |||||||
Class M | (67,194 | ) | (265,107 | ) | |||||||
Total distributions from net investment income | (225,911 | ) | (649,430 | ) | |||||||
Net realized gains | |||||||||||
Class III | (233,582 | ) | — | ||||||||
Class M | (139,829 | ) | — | ||||||||
Total distributions from net realized gains | (373,411 | ) | — | ||||||||
(599,322 | ) | — | |||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (2,060,617 | ) | (11,641,367 | ) | |||||||
Class M | (857,887 | ) | 1,823,899 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (2,918,504 | ) | (9,817,468 | ) | |||||||
Total increase (decrease) in net assets | (3,238,420 | ) | (7,875,900 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 50,209,198 | 58,085,098 | |||||||||
End of period (including accumulated undistributed net investment income of $153,219 and $0, respectively) | $ | 46,970,778 | $ | 50,209,198 |
See accompanying notes to the financial statements.
10
GMO U.S. Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.25 | $ | 9.89 | $ | 9.28 | $ | 6.73 | $ | 8.82 | $ | 9.57 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss) | 0.08 | † | 0.14 | † | 0.16 | † | 0.13 | 0.14 | 0.18 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.00 | (b) | 0.38 | 0.62 | 2.59 | (2.10 | ) | (0.51 | ) | ||||||||||||||||||
Total from investment operations | 0.08 | 0.52 | 0.78 | 2.72 | (1.96 | ) | (0.33 | ) | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.05 | ) | (0.16 | ) | (0.17 | ) | (0.17 | ) | (0.13 | ) | (0.17 | ) | |||||||||||||||
From net realized gains | (0.08 | ) | — | — | — | — | (0.25 | ) | |||||||||||||||||||
Total distributions | (0.13 | ) | (0.16 | ) | (0.17 | ) | (0.17 | ) | (0.13 | ) | (0.42 | ) | |||||||||||||||
Net asset value, end of period | $ | 10.20 | $ | 10.25 | $ | 9.89 | $ | 9.28 | $ | 6.73 | $ | 8.82 | |||||||||||||||
Total Return(a) | 0.83 | %** | 5.36 | % | 8.46 | % | 40.69 | % | (22.29 | )% | (3.64 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 28,686 | $ | 30,961 | $ | 41,306 | $ | 46,904 | $ | 163,463 | $ | 232,289 | |||||||||||||||
Net expenses to average daily net assets | 0.59 | %* | 0.61 | % | 0.61 | % | 0.61 | % | 0.61 | % | 0.61 | % | |||||||||||||||
Net investment income to average daily net assets | 1.67 | %* | 1.43 | % | 1.71 | % | 1.74 | % | 1.79 | % | 1.89 | % | |||||||||||||||
Portfolio turnover rate | 39 | %** | 103 | % | 110 | % | 127 | % | 100 | % | 95 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.25 | %* | 0.31 | % | 0.18 | % | 0.20 | % | 0.07 | % | 0.06 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(b) The net realized and unrealized gain (loss) was less than $0.01 per share.
† Claculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
11
GMO U.S. Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class M share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002(a) | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.21 | $ | 9.87 | $ | 9.26 | $ | 6.72 | $ | 8.82 | $ | 9.06 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss) | 0.07 | † | 0.10 | † | 0.13 | † | 0.11 | 0.12 | 0.01 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.00 | (d) | 0.38 | 0.62 | 2.57 | (2.10 | ) | (0.25 | ) | ||||||||||||||||||
Total from investment operations | 0.07 | 0.48 | 0.75 | 2.68 | (1.98 | ) | (0.24 | ) | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.04 | ) | (0.14 | ) | (0.14 | ) | (0.14 | ) | (0.12 | ) | — | ||||||||||||||||
From net realized gains | (0.08 | ) | — | — | — | — | — | ||||||||||||||||||||
Total distributions | (0.12 | ) | (0.14 | ) | (0.14 | ) | (0.14 | ) | (0.12 | ) | — | ||||||||||||||||
Net asset value, end of period | $ | 10.16 | $ | 10.21 | $ | 9.87 | $ | 9.26 | $ | 6.72 | $ | 8.82 | |||||||||||||||
Total Return(b) | 0.67 | %** | 4.95 | % | 8.21 | % | 40.23 | % | (22.56 | )% | (2.65 | )%** | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 18,285 | $ | 19,248 | $ | 16,779 | $ | 10,916 | $ | 6,444 | $ | 486 | |||||||||||||||
Net expenses to average daily net assets | 0.89 | %* | 0.90 | % | 0.91 | % | 0.91 | % | 0.92 | % | 0.91 | %* | |||||||||||||||
Net investment income to average daily net assets | 1.37 | %* | 1.04 | % | 1.42 | % | 1.42 | % | 1.46 | % | 1.52 | %* | |||||||||||||||
Portfolio turnover rate | 39 | %** | 103 | % | 110 | % | 127 | % | 100 | % | 95 | %(c) | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.25 | %* | 0.31 | % | 0.18 | % | 0.20 | % | 0.07 | % | 0.06 | %* |
(a) Period from January 10, 2002 (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.
(c) Calculation represents the portfolio turnover rate of the Fund for the year ended February 28, 2002.
(d) The net realized and unrealized gain (loss) was less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
12
GMO U.S. Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
1. Organization
GMO U.S. 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, 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 Funds into classes.
The Fund commenced operations following an in-kind purchase of shares by GMO Value Fund ("Predecessor Fund") effected as of the close of business on September 16, 2005. For tax purposes, this transaction met all requirements for a tax-free transaction under the Internal Revenue Code, and consequently the Fund retained the Predecessor Fund's basis and holding period in each asset contributed in-kind. For accounting purposes, the Fund also recorded a cost for each in-kind asset contributed by the Predecessor Fund equal to such asset's historical cost. For tax and accounting purposes, the Fund is treated as a continuation of the Predecessor Fund's operations. Therefore, the Financial Statements reflect the performance and operational history of the Predecessor Fund prior to September 16, 2005.
The Fund seeks long-term capital growth. The Fund seeks to achieve its objective by outperforming the Russell 1000 Value Index. The Fund typically makes equity investments in companies that issue stocks included in the Russell 1000 Index, and companies with similar size characteristics. The Fund typically holds fewer than 100 stocks.
Throughout the six months ended August 31, 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 principal economic difference between the classes of shares is the type and level of fees.
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
13
GMO U.S. Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are generally 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 pursuant to procedures approved by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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
14
GMO U.S. Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no swap agreements outstanding at the end of the period.
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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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 August 31, 2006, the Fund had loaned securities
15
GMO U.S. Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
having a market value of $1,749,223 collateralized by cash in the amount of $1,838,800 which was invested in short-term investments.
Taxes and distributions
The Fund intends to qualify each tax 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.
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 $9,707,565 and $3,753,821 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 August 31, 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) | ||||||||||||
$ | 47,559,408 | $ | 2,861,813 | $ | (1,650,576 | ) | $ | 1,211,237 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At
16
GMO U.S. Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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 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.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.44% 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 the annual rate of 0.20% of the 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 up to 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
17
GMO U.S. Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
attributable to its Class M shares. This fee may be spent on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees (Class III only), 12b-1 and administration fees (Class M only), fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 0.44% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the period six months ended August 31, 2006 was $244 and $184, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $18,354,462 and $21,219,407, 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 August 31, 2006, 86.1% 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 August 31, 2006, less than 0.1% of the Fund's shares were held by two related parties comprised of certain GMO employee accounts, and 6.7% of the Fund's shares were held by accounts for which the Manager has investment discretion.
18
GMO U.S. Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 and Predecessor Fund shares were as follows (See Note 1):
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 3,101 | $ | 32,221 | 2,313,185 | $ | 22,759,724 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 7,006 | 69,433 | 15,036 | 149,075 | |||||||||||||||
Shares repurchased | (219,398 | ) | (2,162,271 | ) | (3,318,698 | ) | (32,905,506 | ) | |||||||||||
Redemption in-kind | — | — | (162,809 | ) | (1,644,660 | ) | |||||||||||||
Net increase (decrease) | (209,291 | ) | $ | (2,060,617 | ) | (1,153,286 | ) | $ | (11,641,367 | ) | |||||||||
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 149,430 | $ | 1,492,730 | 433,456 | $ | 4,287,346 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 20,975 | 207,023 | 26,686 | 265,107 | |||||||||||||||
Shares repurchased | (256,863 | ) | (2,557,640 | ) | (275,166 | ) | (2,728,554 | ) | |||||||||||
Net increase (decrease) | (86,458 | ) | $ | (857,887 | ) | 184,976 | $ | 1,823,899 |
19
GMO U.S. Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO U.S. Value Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
Noting that the Fund is the successor to GMO Value Fund (the "Predecessor Fund"), a former series of the Trust that had an investment objective and policies and restrictions substantially identical to those of the Fund, the Trustees considered investment performance and fee and expense information of the Predecessor Fund for periods ending on or before September 16, 2005. In particular, the Trustees noted that the Fund's advisory fee was 0.02% lower than the Predecessor Fund's advisory fee.
In addition, the Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the
20
GMO U.S. Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to th e Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax
21
GMO U.S. Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
22
GMO U.S. Value Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | 0.59 | % | $ | 1,000.00 | $ | 1,008.30 | $ | 2.99 | |||||||||||
2) Hypothetical | 0.59 | % | $ | 1,000.00 | $ | 1,022.23 | $ | 3.01 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 0.89 | % | $ | 1,000.00 | $ | 1,006.70 | $ | 4.50 | |||||||||||
2) Hypothetical | 0.89 | % | $ | 1,000.00 | $ | 1,020.72 | $ | 4.53 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
23
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Semiannual Report
August 31, 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)
Consolidated Investments Concentration Summary (a)
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Debt Obligations | 95.5 | % | |||||
Other | 4.5 | ||||||
100.0 | % |
(a) GMO SPV I, LLC is a 75.0% owned subsidiary of GMO Special Purpose Holding Fund.
1
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Description | Value ($) | ||||||
DEBT OBLIGATIONS — 95.5% (a) | |||||||
Asset-Backed Securities — 95.5% | |||||||
Health Care Receivables — 95.5% | |||||||
Interest related to the Bankruptcy Estate of NPF VI Inc. Series 02-1 Class A (b)(c) | 544,500 | ||||||
Interest related to the Bankruptcy Estate of NPF XII Inc. Series 00-3 Class A (b)(c) | 572,000 | ||||||
Interest related to the Bankruptcy Estate of NPF XII Inc. Series 02-1 Class A (b)(c) | 1,456,000 | ||||||
2,572,500 | |||||||
Total Asset-Backed Securities | 2,572,500 | ||||||
TOTAL DEBT OBLIGATIONS (COST $0) | 2,572,500 | ||||||
TOTAL INVESTMENTS — 95.5% (Cost $0) | 2,572,500 |
Other Assets and Liabilities (net) — 4.5% | 120,395 | ||||||
TOTAL NET ASSETS — 100.0% | $ | 2,692,895 |
Notes to Schedule of Investments:
(a) Owned by GMO SPV I, LLC. GMO SPV I, LLC is a 75.0% subsidiary of GMO Special Purpose Holding Fund.
(b) Security in default.
(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).
See accompanying notes to the financial statements.
2
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
GMO Special Purpose Holding Fund | GMO SPV I, LLC | Minortiy Interest | Eliminations | Consolidated Totals | |||||||||||||||||||
Assets: | |||||||||||||||||||||||
Investments in unaffiliated issuers, at value (cost $0) (Note 2) | $ | — | $ | 2,572,500 | $ | — | $ | — | $ | 2,572,500 | |||||||||||||
Investments in affiliated issuers, at value (cost $0) (Note 2) | 2,294,001 | — | — | (2,294,001 | ) | — | |||||||||||||||||
Cash | 464,937 | 596,393 | — | — | 1,061,330 | ||||||||||||||||||
Interest receivable | 1,417 | 1,825 | — | — | 3,242 | ||||||||||||||||||
Receivable for expenses reimbursed by Manager (Note 3) | 5,704 | 2,788 | — | — | 8,492 | ||||||||||||||||||
Total assets | 2,766,059 | 3,173,506 | — | (2,294,001 | ) | 3,645,564 | |||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Payable to affiliate for (Note 3): | |||||||||||||||||||||||
Trustees and Chief Compliance Officer fees | 246 | — | — | — | 246 | ||||||||||||||||||
Accrued expenses | 72,918 | 114,005 | — | — | 186,923 | ||||||||||||||||||
Minority interest | — | — | 765,500 | — | 765,500 | ||||||||||||||||||
Total liabilities | 73,164 | 114,005 | 765,500 | — | 952,669 | ||||||||||||||||||
Net assets | $ | 2,692,895 | $ | 3,059,501 | $ | (765,500 | ) | $ | (2,294,001 | ) | $ | 2,692,895 | |||||||||||
Shareholders capital | |||||||||||||||||||||||
Net capital(1) | $ | 398,894 | $ | 487,001 | $ | (121,850 | ) | $ | (365,151 | ) | $ | 398,894 | |||||||||||
Net unrealized appreciation (depreciation) | 2,294,001 | 2,572,500 | (643,650 | ) | (1,928,850 | ) | 2,294,001 | ||||||||||||||||
$ | 2,692,895 | $ | 3,059,501 | $ | (765,500 | ) | $ | (2,294,001 | ) | $ | 2,692,895 | ||||||||||||
Shares outstanding | 554,071 | 554,071 | |||||||||||||||||||||
Net asset value per share | $ | 4.86 | $ | 4.86 |
(1) Net capital includes cumulative net investment gains/(losses) and net realized gains/(losses).
See accompanying notes to the financial statements.
3
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
GMO Special Purpose Holding Fund | GMO SPV I, LLC | Minority Interest | Eliminations | Consolidated Totals | |||||||||||||||||||
Investment Income: | |||||||||||||||||||||||
Interest | $ | 10,683 | $ | 26,394 | $ | — | $ | — | $ | 37,077 | |||||||||||||
Total income | 10,683 | 26,394 | — | — | 37,077 | ||||||||||||||||||
Expenses: | |||||||||||||||||||||||
Custodian and transfer agent fees | 460 | 13,892 | — | — | 14,352 | ||||||||||||||||||
Audit and tax fees | 27,048 | 4,232 | — | — | 31,280 | ||||||||||||||||||
Legal fees | 1,748 | 34,258 | — | — | 36,006 | ||||||||||||||||||
Trustees fees and related expenses (Note 3) | 1,504 | — | — | — | 1,504 | ||||||||||||||||||
Miscellaneous | 1,012 | 200 | — | — | 1,212 | ||||||||||||||||||
Total expenses | 31,772 | 52,582 | — | — | 84,354 | ||||||||||||||||||
Fees and expenses reimbursed by Manager (Note 3) | (30,268 | ) | (29,122 | ) | — | — | (59,390 | ) | |||||||||||||||
Net expenses | 1,504 | 23,460 | — | — | 24,964 | ||||||||||||||||||
Net income (loss) | 9,179 | 2,934 | — | — | 12,113 | ||||||||||||||||||
Minority Interest | — | — | (734 | ) | — | (734 | ) | ||||||||||||||||
Net investment income (loss) after minority interest | 9,179 | 2,934 | (734 | ) | — | 11,379 | |||||||||||||||||
Realized and unrealized gain (loss): | |||||||||||||||||||||||
Net realized gain (loss) on: | |||||||||||||||||||||||
Investments in unaffiliated issuers | — | 28,869,763 | — | 28,869,763 | |||||||||||||||||||
Investments in affiliated issuers | — | — | — | — | — | ||||||||||||||||||
Realized gains distributions from affiliated issuers | 22,468,789 | — | — | (22,468,789 | ) | — | |||||||||||||||||
Net realized gain (loss) | 22,468,789 | 28,869,763 | — | (22,468,789 | ) | 28,869,763 | |||||||||||||||||
Change in net unrealized appreciation (depreciation) on: | |||||||||||||||||||||||
Investments | (1,868,819 | ) | (1,381,500 | ) | — | 1,868,819 | (1,381,500 | ) | |||||||||||||||
Net unrealized gain (loss) | (1,868,819 | ) | (1,381,500 | ) | — | 1,868,819 | (1,381,500 | ) | |||||||||||||||
Net realized and unrealized gain (loss) | 20,599,970 | 27,488,263 | — | (20,599,970 | ) | 27,488,263 | |||||||||||||||||
Minority interest in realized and unrealized gain (loss) | — | — | (6,890,493 | ) | — | (6,890,493 | ) | ||||||||||||||||
Net increase (decrease) in net assets resulting from operations | $ | 20,609,149 | $ | 27,491,197 | $ | (6,891,227 | ) | $ | (20,599,970 | ) | $ | 20,609,149 |
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
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations (after minority interest): | |||||||||||
Net investment income (loss) | $ | 12,113 | $ | (63,588 | ) | ||||||
Net realized gain (loss) | 28,869,763 | 6,496,465 | |||||||||
Change in net unrealized appreciation (depreciation) | (1,381,500 | ) | 87,940 | ||||||||
Minority Interest | (6,891,227 | ) | (1,822,255 | ) | |||||||
Net increase (decrease) in net assets from operations | 20,609,149 | 4,698,562 | |||||||||
Distributions to shareholders from: | |||||||||||
Cash distributions | (22,468,789 | ) | (8,740,567 | ) | |||||||
(22,468,789 | ) | (8,740,567 | ) | ||||||||
Fund share transactions: (Note 7) | |||||||||||
Proceeds from sale of shares | 35,150 | — | |||||||||
Cost of shares repurchased | (35,150 | ) | — | ||||||||
Net increase (decrease) in Fund share transactions | — | — | |||||||||
Total increase (decrease) in net assets | (1,859,640 | ) | (4,042,005 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 4,552,535 | 8,594,540 | |||||||||
End of period | $ | 2,692,895 | $ | 4,552,535 |
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)
Six Months Ended August 31, 2006 | Year Ended | Year Ended | Period from December 1, 2003 through | ||||||||||||||||
(Unaudited) | February 28, 2006 | February 28, 2005 | February 29, 2004(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 8.22 | $ | 15.51 | $ | 24.11 | $ | 23.89 | |||||||||||
Income from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.02 | (0.08 | ) | 0.41 | 0.13 | ||||||||||||||
Net realized and unrealized gain (loss) | 37.17 | 8.57 | 9.08 | 0.09 | |||||||||||||||
Total from investment operations | 37.19 | 8.49 | 9.49 | 0.22 | |||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | — | — | (0.74 | ) | — | ||||||||||||||
From net realized gains | — | — | — | — | |||||||||||||||
From cash distributions | (40.55 | ) | (15.78 | ) | (17.29 | ) | — | ||||||||||||
From return of capital | — | — | (0.06 | ) | — | ||||||||||||||
Total distributions | (40.55 | ) | (15.78 | ) | (18.09 | ) | — | ||||||||||||
Net asset value, end of period | $ | 4.86 | $ | 8.22 | $ | 15.51 | $ | 24.11 | |||||||||||
Total Return(c) | 880.87 | %** | 124.75 | % | 36.35 | % | 0.92 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 2,693 | $ | 4,553 | $ | 8,595 | $ | 225,727 | |||||||||||
Net operating expenses to average daily net assets | 0.94 | %* | 1.26 | % | (0.01 | )% | 0.08 | %* | |||||||||||
Interest expense to average daily net assets | — | — | — | 0.04 | %(e)* | ||||||||||||||
Total net expenses to average daily net assets | 0.94 | %* | 1.26 | % | (0.01 | )% | 0.12 | %* | |||||||||||
Net investment income to average daily net assets | 0.56 | %* | (0.65 | )% | 1.83 | % | 0.49 | %* | |||||||||||
Portfolio turnover rate | 0 | %** | 0 | % | 0 | % | 4 | %** | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 2.56 | %* | 1.39 | % | 0.67 | % | 0.11 | %* |
Year Ended | Period from March 1, 2002 through | Year Ended February 28, | |||||||||||||||||
November 30, 2003 | November 30, 2002(b) | 2002 | 2001 | ||||||||||||||||
Net asset value, beginning of period | $ | 23.77 | $ | 25.66 | $ | 26.14 | $ | 25.29 | |||||||||||
Income from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.75 | 0.73 | 1.29 | 1.83 | |||||||||||||||
Net realized and unrealized gain (loss) | (0.63 | ) | (2.39 | ) | (0.33 | ) | 0.07 | ||||||||||||
Total from investment operations | 0.12 | (1.66 | ) | 0.96 | 1.90 | ||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
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 | $ | 23.89 | $ | 23.77 | $ | 25.66 | $ | 26.14 | |||||||||||
Total Return(c) | 0.50 | % | (6.53 | )%** | 3.69 | % | 7.61 | % | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 224,113 | $ | 281,715 | $ | 1,440,711 | $ | 1,520,173 | |||||||||||
Net operating expenses to average daily net assets | 0.13 | % | 0.01 | %* | — | (d) | — | (d) | |||||||||||
Interest expense to average daily net assets | — | (e)(f) | 0.03 | %(e) | 0.05 | %(e) | 0.20 | %(e) | |||||||||||
Total net expenses to average daily net assets | 0.13 | % | 0.04 | %* | 0.05 | % | 0.20 | % | |||||||||||
Net investment income to average daily net assets | 3.11 | % | 3.76 | %* | 4.91 | % | 7.05 | % | |||||||||||
Portfolio turnover rate | 80 | % | 39 | %** | 29 | % | 39 | % | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.10 | % | 0.02 | %* | 0.02 | % | 0.02 | % |
(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 returns would have been lower had certain expenses not been reimbursed during the periods 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%.
† Calculated 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)
See accompanying notes to the financial statements.
7
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks total return. The Fund's investments consist primarily of: (i) units of GMO SPV I, LLC, a special purpose vehicle that holds an interest in liquidating trusts related to certain defaulted asset-backed securities (the "NPF Securities") issued by NPF VI, Inc. and NPF XII, Inc., (ii) claims against various parties arising out of the Fund's purchase of the NPF securities, and (iii) cash and cash items.
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.
8
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 April of 2006, SPHF entered into a settlement agreement with one defendant in the lawsuit and the Fund received $19,236,857 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.
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
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 generally 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 pursuant to procedures approved by the Trustees.
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).
9
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no repurchase agreements o utstanding at the end of the period.
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 semiannually, 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 capital 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 Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 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) | ||||||||||||
$ | 0 | $ | 2,572,500 | $ | — | $ | 2,572,500 |
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.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
11
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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, the Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 (excluding expenses indirectly incurred by investment in underlying Funds, fees and expenses of the independent trustees of the Trust, fees and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 six months ended August 31, 2006 was $1,504 and $0, respectively. No remuneration was paid by the Fund to any other officer of the Trust.
4. Purchases and sales of securities
There were no purchases or sales of securities, excluding short-term investments, for the six months ended August 31, 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.
12
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
6. Principal shareholders
At August 31, 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 August 31, 2006, all 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Shares sold | 7,543 | — | |||||||||
Shares repurchased | (7,543 | ) | — | ||||||||
Net decrease | — | — | |||||||||
Fund shares: | |||||||||||
Beginning of period | 554,071 | 554,071 | |||||||||
End of period | 554,071 | 554,071 |
13
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Special Purpose Holding Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance, including its performance relative to its performance benchmark. The Trustees reviewed the Fund's performance over various periods, including one- and five-year periods and for the life of the Fund. The Trustees noted that, because of the limited nature of the Fund's investment program, no comparable accounts managed by the Manager or other funds managed by other managers existed to which the Fund could be compared for purposes of evaluating the Fund's performance. In addition, the Trustees reviewed factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees gave substantial consideration to the fact that the Fund does not pay an advisory fee to the Manager under the Fund's investment management agreement. The Trustees also considered the so-called "fallout benefits" to the Manager, such as the reputational value derived from serving as investment
14
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees did not consider possible economies of scale to the Manager because the Manager does not receive an advisory fee from the Fund.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
15
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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* | ||||||||||||||||
1) Actual | 0.94 | % | $ | 1,000.00 | $ | 9,808.70 | $ | 25.61 | |||||||||||
2) Hypothetical | 0.94 | % | $ | 1,000.00 | $ | 1,020.47 | $ | 4.79 |
* Expenses are calculated using the annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
16
GMO International Small Companies Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 94.5 | % | |||||
Short-Term Investments | 17.6 | ||||||
Preferred Stocks | 2.3 | ||||||
Rights and Warrants | 0.0 | ||||||
Futures | 0.1 | ||||||
Forward Currency Contracts | (0.1 | ) | |||||
Other | (14.4 | ) | |||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
Japan | 21.7 | % | |||||
United Kingdom | 21.2 | ||||||
Germany | 9.2 | ||||||
Netherlands | 5.0 | ||||||
Canada | 4.9 | ||||||
France | 4.2 | ||||||
Sweden | 4.1 | ||||||
Italy | 3.8 | ||||||
Switzerland | 3.6 | ||||||
Australia | 3.5 | ||||||
South Korea | 1.9 | ||||||
Singapore | 1.9 | ||||||
Taiwan | 1.8 | ||||||
Ireland | 1.7 | ||||||
Finland | 1.6 | ||||||
Austria | 1.4 | ||||||
Belgium | 1.3 | ||||||
Brazil | 1.0 | ||||||
South Africa | 0.9 | ||||||
Spain | 0.9 | ||||||
Hong Kong | 0.8 | ||||||
China | 0.7 | ||||||
Mexico | 0.6 | ||||||
Russia | 0.5 | ||||||
Greece | 0.4 | ||||||
Denmark | 0.4 | ||||||
Poland | 0.2 | ||||||
Norway | 0.2 | ||||||
Portugal | 0.1 | ||||||
Thailand | 0.1 | ||||||
Israel | 0.1 | ||||||
Turkey | 0.1 | ||||||
Lichtenstein | 0.1 | ||||||
Philippines | 0.1 | ||||||
Malaysia | 0.0 | ||||||
Indonesia | 0.0 | ||||||
100.0 | % |
1
GMO International Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Industry Sector Summary | % of Equity Investments | ||||||
Industrials | 21.5 | % | |||||
Consumer Discretionary | 19.8 | ||||||
Financials | 18.2 | ||||||
Materials | 14.5 | ||||||
Information Technology | 7.1 | ||||||
Consumer Staples | 6.0 | ||||||
Energy | 5.0 | ||||||
Health Care | 4.1 | ||||||
Telecommunication Services | 1.9 | ||||||
Utilities | 1.9 | ||||||
100.0 | % |
2
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 94.5% | |||||||||||
Australia — 3.4% | |||||||||||
129,720 | Allco Finance Group Ltd (a) | 1,126,307 | |||||||||
61,009 | Bendigo Bank Ltd | 644,891 | |||||||||
344,582 | BlueScope Steel Ltd | 1,783,344 | |||||||||
390,066 | Boral Ltd | 2,020,558 | |||||||||
1,285,421 | Commonwealth Property Office Fund | 1,392,437 | |||||||||
939,440 | CSR Ltd | 2,254,643 | |||||||||
2,895,911 | DB RREEF Trust | 3,457,385 | |||||||||
193,932 | Downer Edi Ltd | 833,173 | |||||||||
1,836,163 | Investa Property Group | 3,319,444 | |||||||||
208,131 | Kagara Zinc Ltd * | 824,097 | |||||||||
906,845 | Mirvac Group Ltd | 3,162,359 | |||||||||
1,353,921 | Oxiana Ltd | 2,930,489 | |||||||||
196,323 | Worleyparsons Ltd | 2,702,264 | |||||||||
325,207 | Zinifex Ltd | 2,935,698 | |||||||||
29,387,089 | |||||||||||
Austria — 1.4% | |||||||||||
76,675 | Austrian Airlines * (a) | 638,116 | |||||||||
18,160 | Boehler Uddeholm (Bearer) | 977,119 | |||||||||
35,820 | Flughafen Wien AG | 2,903,809 | |||||||||
111,549 | Immofinanz Immobilien Anlagen AG * | 1,292,673 | |||||||||
9,616 | Mayr-Melnhof Karton AG (Bearer) | 1,687,883 | |||||||||
63,248 | RHI AG * (a) | 2,172,703 | |||||||||
57,860 | Voestalpine AG | 2,192,227 | |||||||||
11,864,530 | |||||||||||
Belgium — 1.3% | |||||||||||
25,508 | CMB Cie Maritime Belge | 864,894 | |||||||||
4,721 | Cofinimmo SA | 824,813 | |||||||||
28,089 | Euronav SA | 975,461 | |||||||||
52,346 | Option NV * (a) | 1,370,615 |
See accompanying notes to the financial statements.
3
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Belgium — continued | |||||||||||
50,136 | Tessenderlo Chemie | 1,832,435 | |||||||||
36,623 | Umicore | 5,329,545 | |||||||||
11,197,763 | |||||||||||
Brazil — 0.2% | |||||||||||
2,603,916 | Companhia Saneamento Basico SAO PA | 285,435 | |||||||||
14,800 | Companhia Siderurgica Nacional SA | 432,127 | |||||||||
13,573,600 | Electrobras (Centro) | 296,289 | |||||||||
10,800 | Unibanco-Uniao de Bancos Brasileiros SA GDR | 781,380 | |||||||||
1,795,231 | |||||||||||
Canada — 4.7% | |||||||||||
45,900 | Agnico-Eagle Mines Ltd | 1,743,311 | |||||||||
24,100 | Algoma Steel Inc * | 803,479 | |||||||||
74,400 | AUR Resources Inc | 1,255,370 | |||||||||
40,700 | Baytex Trust | 985,372 | |||||||||
82,300 | Biovail Corp | 1,341,759 | |||||||||
8,800 | Canadian Pacific Railway Ltd | 432,317 | |||||||||
26,500 | Canadian Utilities Class A | 958,057 | |||||||||
39,600 | Centerra Gold Inc * | 392,668 | |||||||||
86,600 | Ensign Resource Service Group | 1,790,292 | |||||||||
61,100 | First Quantum Minerals Ltd | 3,322,274 | |||||||||
56,700 | Gammon Lake Resources * | 725,871 | |||||||||
27,900 | Gildan Activewear Inc Class A * | 1,401,689 | |||||||||
12,900 | Glamis Gold Ltd * | 591,722 | |||||||||
64,000 | GMP Capital Trust | 1,339,872 | |||||||||
130,200 | Hudbay Minerals Inc * (a) | 1,768,119 | |||||||||
9,700 | ING Canada Inc | 493,556 | |||||||||
54,100 | Inmet Mining Corp | 2,275,988 | |||||||||
4,700 | IPSO Inc | 433,048 | |||||||||
56,900 | Keyera Facilities Income Fund | 1,155,194 | |||||||||
28,900 | Meridian Gold Inc * | 854,737 | |||||||||
53,000 | Methanex Corp | 1,263,983 | |||||||||
64,366 | Onex Corp | 1,434,885 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Canada — continued | |||||||||||
8,800 | Pan Ocean Energy Corp * | 464,402 | |||||||||
17,600 | Paramount Resources Ltd * | 547,761 | |||||||||
173,171 | Quebecor Inc Class B | 4,386,852 | |||||||||
126,456 | Quebecor World Inc | 1,409,516 | |||||||||
10,000 | Ritchie Brothers Auctioneers | 490,365 | |||||||||
73,900 | Russel Metals Inc | 1,855,356 | |||||||||
47,004 | Sobeys Inc | 1,667,445 | |||||||||
57,100 | Total Energy Trust Ltd | 852,393 | |||||||||
64,900 | Trican Well Service Ltd | 1,322,896 | |||||||||
21,600 | Vermilion Trust | 684,368 | |||||||||
93,700 | Yamana Gold Inc * | 959,634 | |||||||||
41,404,551 | |||||||||||
China — 0.6% | |||||||||||
554,000 | Aluminum Corp of China Ltd | 387,916 | |||||||||
820,000 | Bank of Communications Co Ltd | 515,981 | |||||||||
618,000 | China Life Insurance Co Ltd Class H | 1,097,282 | |||||||||
2,782,992 | China Petroleum & Chemical Corp Class H | 1,647,520 | |||||||||
522,000 | China Shenhua Energy Co Ltd Class H | 922,555 | |||||||||
22,000 | China Telecom Corp Ltd ADR (a) | 742,500 | |||||||||
115,500 | China Telecom Corp Ltd Class H | 38,902 | |||||||||
803,600 | Denway Motors Ltd | 256,034 | |||||||||
5,608,690 | |||||||||||
Denmark — 0.4% | |||||||||||
22,448 | AS Dampskibsselskabet (a) | 1,170,643 | |||||||||
15,775 | Topdanmark A/S * | 2,259,709 | |||||||||
3,430,352 | |||||||||||
Finland — 1.6% | |||||||||||
93,502 | Amer Group Class A (a) | 2,077,639 | |||||||||
34,900 | Cargotec Corp Class B | 1,514,905 | |||||||||
58,176 | Elcoteq Network Corp (a) | 1,055,473 | |||||||||
50,400 | KCI Konecranes OYJ | 1,001,190 |
See accompanying notes to the financial statements.
5
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Finland — continued | |||||||||||
85,003 | Kemira Oyj (a) | 1,377,289 | |||||||||
25,479 | Kesko Oyj Class B | 1,079,165 | |||||||||
204,629 | OKO Bank (a) | 3,323,775 | |||||||||
26,600 | Outokumpu Oyj | 676,804 | |||||||||
4,739 | Rautaruukki Oyj | 138,523 | |||||||||
64,700 | YIT Oyj | 1,405,390 | |||||||||
13,650,153 | |||||||||||
France — 4.0% | |||||||||||
86,792 | Air France | 2,369,213 | |||||||||
50,190 | Cap Gemini SA | 2,752,600 | |||||||||
27,776 | Casino Guichard-Perrachon SA | 2,384,302 | |||||||||
3,709 | Ciments Francais | 577,092 | |||||||||
8,506 | Geophysique Cie Generale * | 1,369,709 | |||||||||
14,054 | Iliad SA (a) | 1,169,450 | |||||||||
90,967 | Michelin SA Class B | 6,178,202 | |||||||||
44,787 | Nexans SA | 3,722,029 | |||||||||
155,406 | Publicis Groupe | 6,138,781 | |||||||||
32,871 | Remy Cointreau SA | 1,731,282 | |||||||||
694,220 | SCOR SA | 1,662,111 | |||||||||
12,849 | Technip SA | 740,962 | |||||||||
3,110 | Vallourec SA | 696,585 | |||||||||
59,821 | Zodiac SA (a) | 3,635,533 | |||||||||
35,127,851 | |||||||||||
Germany — 8.1% | |||||||||||
57,508 | Altana AG | 3,395,324 | |||||||||
29,514 | Balda AG | 301,561 | |||||||||
52,918 | Bankgesellschaft Berlin AG * | 321,414 | |||||||||
48,270 | Bilfinger & Berger AG | 2,651,580 | |||||||||
16,143 | Celesio AG | 824,201 | |||||||||
404,305 | Depfa Bank Plc | 7,546,227 | |||||||||
114,593 | Hannover Rueckversicherungs AG (Registered) * (a) | 4,419,167 | |||||||||
30,773 | Heidelberger Druckmaschinen | 1,232,491 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Germany — continued | |||||||||||
11,293 | Hypo Real Estate Holding AG | 701,108 | |||||||||
25,947 | IKB Deutsche Industriebank AG (a) | 950,572 | |||||||||
69,718 | IWKA AG * (a) | 1,321,942 | |||||||||
141,392 | KarstadtQuelle AG * (a) | 3,143,869 | |||||||||
52,724 | Lanxess AG * | 2,166,588 | |||||||||
7,467 | MAN AG | 571,336 | |||||||||
39,904 | Merck KGaA | 3,956,328 | |||||||||
38,804 | Mobilcom AG * (a) | 820,963 | |||||||||
42,532 | Norddeutsche Affinerie AG (a) | 1,005,829 | |||||||||
5,937 | Puma AG Rudolf Dassler Sport | 2,067,224 | |||||||||
33,045 | Rheinmetall AG | 2,215,473 | |||||||||
32,719 | Rhoen-Klinikum AG | 1,337,053 | |||||||||
123,211 | Salzgitter AG | 11,037,217 | |||||||||
34,859 | SGL Carbon AG * | 651,222 | |||||||||
28,196 | Solarworld AG (a) | 1,655,401 | |||||||||
251,616 | Suedzucker AG | 6,263,703 | |||||||||
335,528 | TUI AG (a) | 6,582,386 | |||||||||
136,244 | United Internet AG (Registered) | 1,829,745 | |||||||||
12,230 | Wincor Nixdorf AG | 1,707,781 | |||||||||
70,677,705 | |||||||||||
Greece — 0.4% | |||||||||||
65,697 | Hellenic Exchanges SA | 1,060,437 | |||||||||
172,137 | Hellenic Technodomiki Tev SA | 1,832,742 | |||||||||
141,580 | Technical Olympic SA | 565,069 | |||||||||
3,458,248 | |||||||||||
Hong Kong — 0.8% | |||||||||||
291,500 | Asia Satellite Telecommunications Holdings Ltd | 500,605 | |||||||||
240,400 | Dah Sing Financial Services | 2,062,211 | |||||||||
89,000 | Guoco Group | 1,087,131 | |||||||||
925,000 | Hang Lung Group Co Ltd | 2,502,962 | |||||||||
242,000 | Orient Overseas International Ltd | 977,459 | |||||||||
7,130,368 |
See accompanying notes to the financial statements.
7
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Indonesia — 0.0% | |||||||||||
245,315 | Astra International Tbk PT | 299,253 | |||||||||
Ireland — 1.7% | |||||||||||
91,122 | C&C Group Plc | 1,017,853 | |||||||||
319,437 | DCC Plc | 8,022,709 | |||||||||
1,692,479 | Fyffes Plc | 3,555,827 | |||||||||
85,895 | Kerry Group Plc | 1,914,057 | |||||||||
14,510,446 | |||||||||||
Israel — 0.1% | |||||||||||
122,300 | Bank Hapoalim B.M. | 537,809 | |||||||||
100,300 | Bank Leumi Le | 357,510 | |||||||||
21,800 | Check Point Software Technologies Ltd * | 405,262 | |||||||||
1,300,581 | |||||||||||
Italy — 3.0% | |||||||||||
1,787,653 | AEM SPA (a) | 4,683,336 | |||||||||
102,245 | Azimut Holding SPA | 1,138,837 | |||||||||
18,806 | Banca Italease | 899,986 | |||||||||
39,767 | Banca Popolare di Lodi * (a) | 502,189 | |||||||||
52,997 | Benetton Group SPA | 793,093 | |||||||||
151,925 | Buzzi Unicem SPA (a) | 3,411,277 | |||||||||
181,040 | Cementir SPA | 1,395,347 | |||||||||
86,211 | ERG SPA | 1,898,722 | |||||||||
37,664 | Esprinet SpA | 642,984 | |||||||||
13,288 | Fondiaria - Sai SPA - Di RISP | 426,141 | |||||||||
102,000 | Fornara & Co SPA * (b) (c) | — | |||||||||
213,400 | Grassetto SPA * (b) (c) | 2,734 | |||||||||
100,049 | IFIL SPA | 609,575 | |||||||||
497,335 | Impregilo SPA * | 1,838,718 | |||||||||
66,603 | Italcementi SPA - Di RISP | 1,051,673 | |||||||||
41,063 | Italmobiliare SPA - RNC | 3,008,554 | |||||||||
277,957 | Milano Assicurazioni SPA | 2,021,677 | |||||||||
196,258 | Risanamento SPA | 1,520,861 | |||||||||
25,845,704 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — 21.0% | |||||||||||
132,100 | Aderans Co Ltd | 3,414,891 | |||||||||
47,300 | Alfresa Holdings Corp | 3,179,055 | |||||||||
82,000 | Alps Electric Co Ltd | 916,039 | |||||||||
59,000 | Amano Corp (a) | 817,571 | |||||||||
114,900 | AOC Holdings Inc | 2,180,114 | |||||||||
23,500 | Autobacs Seven Co Ltd | 968,514 | |||||||||
39,000 | Avex Group Holding Inc (a) | 852,962 | |||||||||
127,000 | Bosch Automotive Systems Corp (a) | 648,017 | |||||||||
112,000 | Brother Industries Ltd | 1,273,964 | |||||||||
212,000 | Calsonic Kansei Corp | 1,254,470 | |||||||||
128,000 | Central Glass Co Ltd | 711,883 | |||||||||
68,000 | Chiba Kogyo Bank Ltd * | 1,139,702 | |||||||||
70,000 | CKD Corporation (a) | 932,207 | |||||||||
78,900 | Coca-Cola West Japan Co Ltd | 1,534,166 | |||||||||
507,000 | Cosmo Oil Co Ltd | 2,222,682 | |||||||||
310 | Creed Corp (a) | 1,072,662 | |||||||||
15,400 | CSK Corp | 658,829 | |||||||||
152,600 | Daiei Inc * (a) | 2,926,997 | |||||||||
34,000 | Daiichikosho Co Ltd | 394,734 | |||||||||
590,000 | Daikyo Inc * (a) | 3,018,261 | |||||||||
192,000 | Daio Paper Corp (a) | 1,788,523 | |||||||||
12,900 | Disco Corp | 742,806 | |||||||||
35,000 | Edion Corp | 620,194 | |||||||||
24,000 | Exedy Corp | 669,012 | |||||||||
40,000 | Fujikura Ltd | 470,508 | |||||||||
100,200 | Futaba Industrial Co Ltd (a) | 2,197,422 | |||||||||
201,000 | Godo Steel (a) | 1,141,964 | |||||||||
941 | Goodwill Group (The) Inc (a) | 663,355 | |||||||||
57,100 | H.I.S. Co Ltd (a) | 1,486,308 | |||||||||
9,240 | Hakuhodo Dy Holdings Inc | 617,210 | |||||||||
82,000 | Hankyu Department Stores Inc (a) | 650,098 | |||||||||
225,000 | Hanwa Co Ltd | 854,425 | |||||||||
1,485,900 | Haseko Corp * (a) | 5,292,684 | |||||||||
27,000 | Hisamitsu Pharmaceutical Co Inc (a) | 757,809 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
1,685,000 | Hitachi Zosen Corp * (a) | 1,869,152 | |||||||||
129,700 | Hosiden Corp (a) | 1,349,822 | |||||||||
51,000 | Intec Corp (a) | 665,914 | |||||||||
9,819 | Invoice Inc (a) | 337,675 | |||||||||
40,100 | Ito En Ltd (a) | 1,332,393 | |||||||||
625,000 | Iwatani International Corp (a) | 1,854,830 | |||||||||
15,000 | Izumi Co Ltd (a) | 554,063 | |||||||||
257,000 | JACCS Co Ltd (a) | 2,808,425 | |||||||||
54,000 | Japan Securities Finance Co | 671,658 | |||||||||
385,000 | Japan Steel Works Ltd (The) (a) | 2,715,026 | |||||||||
219,000 | Juki Corp | 1,192,891 | |||||||||
43,000 | Kaga Electronics Co Ltd | 867,838 | |||||||||
58,000 | Kanto Tsukuba Bank Ltd * (a) | 454,186 | |||||||||
68,000 | Katokichi Co Ltd | 583,104 | |||||||||
328,000 | Kawasaki Kisen Kaisha Ltd (a) | 2,125,963 | |||||||||
252,000 | Kayaba Industry Co (a) | 1,110,279 | |||||||||
82,000 | Kitz Corp | 687,940 | |||||||||
400,000 | Kiyo Holdings Inc * (a) | 678,462 | |||||||||
51,000 | Kohnan Shoji Co Ltd (a) | 525,964 | |||||||||
85,000 | Kojima Co Ltd (a) | 1,086,181 | |||||||||
127,200 | Konami Corp | 3,229,740 | |||||||||
475,000 | Kurabo Industries Ltd | 1,332,158 | |||||||||
292,000 | Kyokuyo Co Ltd | 703,871 | |||||||||
104,000 | Kyudenko Corp (a) | 564,292 | |||||||||
27,400 | Lintec Corp | 671,413 | |||||||||
365,000 | Maeda Corp (a) | 1,687,882 | |||||||||
90,000 | Makino Milling Machine Co Ltd | 808,638 | |||||||||
287,000 | Maruha Group Inc (a) | 772,708 | |||||||||
90,000 | Marusan Securities Co Ltd (a) | 1,348,095 | |||||||||
62,000 | Matsuzakaya Co Ltd (a) | 440,079 | |||||||||
31,500 | Mediceo Paltac Holdings Co Ltd | 585,563 | |||||||||
58,000 | Mitsubishi Rayon Co Ltd | 398,062 | |||||||||
251,000 | Mizuho Investors Securities (a) | 605,295 | |||||||||
36,000 | Mori Seiki Co | 707,173 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
205,000 | Nagase & Co | 2,556,395 | |||||||||
205,000 | Nichiro Corp (a) | 413,043 | |||||||||
64,000 | Nidec Sankyo Corp | 855,684 | |||||||||
54,000 | Nihon Unisys Ltd | 957,771 | |||||||||
200,000 | Nippon Carbon (a) | 748,045 | |||||||||
191,000 | Nippon Corp | 1,635,813 | |||||||||
1,426,000 | Nippon Light Metal (a) | 3,651,199 | |||||||||
69,000 | Nippon Meat Packers Inc | 770,360 | |||||||||
236,000 | Nippon Sheet Glass (a) | 1,136,270 | |||||||||
193,000 | Nippon Soda Co Ltd * | 972,492 | |||||||||
22,000 | Nippon System Development Co Ltd (a) | 838,018 | |||||||||
61,000 | Nipro Corp | 1,167,585 | |||||||||
55,000 | Nishimatsuya Chain Co Ltd | 1,055,465 | |||||||||
101,000 | Nissan Chemical Industries Ltd | 1,304,177 | |||||||||
440,000 | Nissan Diesel Motor Co (a) | 1,780,667 | |||||||||
460,000 | Nissan Shatai Co Ltd | 2,566,005 | |||||||||
158,500 | Nisshin Seifun Group Inc | 1,691,293 | |||||||||
36,000 | Nissin Kogyo Co Ltd | 756,338 | |||||||||
97,000 | NOF Corp | 591,067 | |||||||||
212,000 | Okasan Securities Co Ltd | 2,175,707 | |||||||||
18,600 | Okinawa Electric Power Co | 1,102,157 | |||||||||
150,000 | Pacific Metals Co Ltd | 1,129,769 | |||||||||
26,000 | Park24 Co Ltd (a) | 793,688 | |||||||||
900,000 | Penta Ocean Construction Co Ltd * (a) | 1,218,870 | |||||||||
144,900 | Q.P. Corp | 1,330,617 | |||||||||
159,000 | Ryobi Ltd | 1,175,110 | |||||||||
11,800 | Ryohin Keikaku Co Ltd | 855,980 | |||||||||
121,600 | Ryosan Co | 3,176,064 | |||||||||
67,000 | Sanki Engineering | 421,410 | |||||||||
458,000 | Sankyo-Tateyama Holdings Inc | 978,103 | |||||||||
548,000 | Sankyu Inc (a) | 3,003,511 | |||||||||
145,000 | Sanyo Securities Co Ltd * (b) (c) | 1,235 | |||||||||
96,000 | Sanyo Shokai Ltd | 624,078 | |||||||||
220,000 | Seino Holdings Co Ltd | 2,515,364 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
152,000 | Shinko Electric Co (a) | 582,563 | |||||||||
39,800 | Shoei Co Ltd | 1,279,594 | |||||||||
41,000 | Showa Corp | 676,690 | |||||||||
118,290 | Sojitz Corp * (a) | 415,177 | |||||||||
60,000 | Sumitomo Bakelite Co Ltd | 480,471 | |||||||||
1,131,000 | Sumitomo Light Metal Industry (a) | 2,472,557 | |||||||||
207,000 | Sumitomo Warehouse (a) | 1,559,798 | |||||||||
26,500 | Suzuken Co Ltd | 986,880 | |||||||||
388 | Take And Give Needs Co Ltd | 407,938 | |||||||||
53,000 | Tamura Taiko Holdings Inc | 219,646 | |||||||||
142,000 | Tanabe Seiyaku Co Ltd | 1,805,842 | |||||||||
398,000 | TOA Corp (a) | 479,561 | |||||||||
1,420,000 | Toho Gas Co Ltd (a) | 6,085,021 | |||||||||
225,000 | Toho Zinc Co Ltd (a) | 1,734,910 | |||||||||
29,300 | Tokyo Seimitsu Co Ltd (a) | 1,407,073 | |||||||||
71,100 | Tokyo Steel Manufacturing Co | 1,151,365 | |||||||||
243,000 | Tokyo Tatemono Co Ltd | 2,614,943 | |||||||||
54,000 | Tokyo Tomin Bank Ltd (a) | 2,295,042 | |||||||||
265,000 | Topy Industries Ltd | 1,048,189 | |||||||||
131,000 | Toshiba Machine Co Ltd | 1,157,420 | |||||||||
82,000 | Toto Ltd | 833,441 | |||||||||
155,000 | Towa Real Eatate Development * (a) | 843,331 | |||||||||
95,000 | Toyama Chemical * (a) | 535,023 | |||||||||
331,000 | Toyo Construction Co * (a) | 307,929 | |||||||||
236,000 | Toyo Engineering (a) | 1,012,109 | |||||||||
281,000 | Toyo Kanetsu KK (a) | 692,070 | |||||||||
43,000 | Toyo Suisan Kaisha Ltd | 654,439 | |||||||||
995,000 | Toyo Tire & Rubber Co Ltd (a) | 4,394,989 | |||||||||
121,000 | Tsumura & Co | 3,028,216 | |||||||||
118,000 | Uchida Yoko Co Ltd | 677,394 | |||||||||
18,000 | Ulvac Inc (a) | 605,364 | |||||||||
12,000 | Union Tool Co (a) | 624,074 | |||||||||
383,000 | Unitika Ltd (a) | 542,526 | |||||||||
113,200 | Yamato Kogyo Co | 2,577,140 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
152,000 | Yaskawa Electric Corp (a) | 1,742,920 | |||||||||
706,000 | Yokohama Rubber Co | 3,214,724 | |||||||||
45,000 | Zeon Corp | 515,116 | |||||||||
183,007,608 | |||||||||||
Lichtenstein — 0.1% | |||||||||||
2,338 | Verwaltungs & Private Bank | 566,046 | |||||||||
Malaysia — 0.0% | |||||||||||
166,800 | Maxis Communications Berhad | 399,074 | |||||||||
357,000 | Promet Berhad * (b) (c) | 970 | |||||||||
312,000 | Rekapacific Berhad * (b) (c) | 848 | |||||||||
400,892 | |||||||||||
Mexico — 0.5% | |||||||||||
113,000 | Carso Global Telecom Class A * | 312,711 | |||||||||
93,000 | Fomento Economico Mexicano SA de CV | 876,060 | |||||||||
159,000 | Grupo Financiero Banorte SA de CV | 465,361 | |||||||||
249,100 | Grupo Mexico SA Class B | 794,576 | |||||||||
81,000 | Grupo Modelo SA de CV Class C | 341,281 | |||||||||
185,000 | Grupo Televisa SA (Participating Certificates) | 702,674 | |||||||||
55,000 | Telefonos de Mexico SA de CV Class L ADR | 1,327,700 | |||||||||
4,820,363 | |||||||||||
Netherlands — 4.9% | |||||||||||
48,275 | Boskalis Westminster NV | 3,042,261 | |||||||||
191,634 | Buhrmann NV (a) | 2,608,564 | |||||||||
24,502 | Core Laboratories NV * | 1,797,712 | |||||||||
28,550 | Corio NV | 1,922,222 | |||||||||
151,067 | CSM | 4,612,491 | |||||||||
9,267 | Euronext NV | 834,472 | |||||||||
17,073 | Fugro NV | 752,858 | |||||||||
394,089 | Hagemeyer NV * (a) | 1,992,789 | |||||||||
16,470 | Heineken Holding NV | 660,449 | |||||||||
27,549 | Hunter Douglas NV | 1,921,088 |
See accompanying notes to the financial statements.
13
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Netherlands — continued | |||||||||||
39,702 | Imtech NV | 2,143,993 | |||||||||
66,752 | Koninklijke Vopak NV | 2,476,973 | |||||||||
35,735 | Koninklijke Wessanen NV | 496,161 | |||||||||
25,157 | Nutreco Holding NV | 1,698,170 | |||||||||
194,591 | OCE NV (a) | 3,379,714 | |||||||||
22,413 | Ordina NV | 425,077 | |||||||||
16,911 | Randstad Holdings NV | 909,079 | |||||||||
42,888 | SBM Offshore NV | 1,174,822 | |||||||||
19,713 | Stork NV | 972,976 | |||||||||
18,491 | Univar NV | 765,752 | |||||||||
16,958 | USG People NV (a) | 1,167,218 | |||||||||
91,146 | Van der Moolen Holding NV (a) | 630,194 | |||||||||
16,357 | Vastned NV | 1,295,347 | |||||||||
58,837 | Vedior NV | 1,087,780 | |||||||||
33,851 | Wereldhave NV | 3,555,330 | |||||||||
42,323,492 | |||||||||||
Norway — 0.2% | |||||||||||
12,000 | Prosafe ASA | 799,775 | |||||||||
47,055 | TGS Nopec Geophysical ASA * | 833,980 | |||||||||
1,633,755 | |||||||||||
Philippines — 0.1% | |||||||||||
179,520 | Bank of the Philippine Islands | 186,841 | |||||||||
9,882 | Philippine Long Distance Telephone | 371,483 | |||||||||
558,324 | |||||||||||
Poland — 0.2% | |||||||||||
18,700 | KGHM Polska Miedz SA | 650,669 | |||||||||
41,900 | Polski Koncern Naftowy Orlen SA | 699,556 | |||||||||
75,900 | Telekomunikacja Polska SA | 498,013 | |||||||||
1,848,238 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Portugal — 0.1% | |||||||||||
152,556 | Banco BPI SA | 1,143,600 | |||||||||
Russia — 0.4% | |||||||||||
17,900 | Gazpromneft Spon ADR (a) | 373,215 | |||||||||
34,300 | Mobile Telesystems ADR | 1,255,380 | |||||||||
4,400 | Surgutneftegaz ADR | 320,100 | |||||||||
6,500 | Tatneft ADR | 675,285 | |||||||||
12,800 | Vimpel-Communications ADR * | 695,296 | |||||||||
3,319,276 | |||||||||||
Singapore — 1.8% | |||||||||||
222,000 | Asia Food & Properties Ltd | 112,809 | |||||||||
815,000 | Cosco Corp | 791,100 | |||||||||
2,393,000 | GES International Ltd | 1,837,155 | |||||||||
740,000 | Hyflux Ltd | 1,006,071 | |||||||||
425,000 | Keppel Land Ltd | 1,196,454 | |||||||||
258,000 | Marco Polo Developments Ltd | 275,255 | |||||||||
1,235,350 | MobileOne Ltd | 1,601,971 | |||||||||
458,000 | Noble Group Ltd | 313,870 | |||||||||
6,445,100 | Pacific Century Region Developments Ltd * | 1,474,745 | |||||||||
1,279,000 | Parkway Holdings Ltd | 1,947,656 | |||||||||
184,000 | Singapore Exchange Ltd | 464,083 | |||||||||
444,000 | Singapore Petroleum Co | 1,364,544 | |||||||||
1,281,000 | United Test And Assembly Center * | 609,101 | |||||||||
1,947,000 | Want Want Holdings Ltd | 2,917,969 | |||||||||
15,912,783 | |||||||||||
South Africa — 0.9% | |||||||||||
32,540 | ABSA Group Ltd | 465,234 | |||||||||
27,600 | Bidvest Group Ltd | 417,374 | |||||||||
336,900 | FirstRand Ltd | 832,939 | |||||||||
22,800 | Gold Fields Ltd | 448,081 | |||||||||
6,690 | Impala Platinum Holdings Ltd | 1,239,201 |
See accompanying notes to the financial statements.
15
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
South Africa — continued | |||||||||||
16,900 | Imperial Holdings Ltd * | 334,096 | |||||||||
100,600 | MTN Group Ltd | 797,310 | |||||||||
20,738 | Nedbank Group Ltd | 317,272 | |||||||||
38,300 | Remgro Ltd | 760,135 | |||||||||
260,550 | Sanlam Ltd | 547,003 | |||||||||
78,300 | Standard Bank Group Ltd | 844,572 | |||||||||
24,500 | Telkom SA Ltd | 462,698 | |||||||||
7,465,915 | |||||||||||
South Korea — 1.9% | |||||||||||
25,100 | Daewoo Engineering & Construction Co Ltd | 457,657 | |||||||||
21,634 | Hana Financial Group Inc | 929,732 | |||||||||
16,300 | Hanjin Shipping | 372,102 | |||||||||
28,500 | Hynix Semiconductor Inc * | 1,086,621 | |||||||||
11,280 | Hyundai Development Co | 460,433 | |||||||||
9,300 | Hyundai Mobis | 851,743 | |||||||||
18,400 | Hyundai Motor Co | 1,547,648 | |||||||||
10,900 | Hyundai Steel Co | 386,684 | |||||||||
23,200 | KIA Motors Corp | 367,950 | |||||||||
34,100 | KT Corp ADR | 753,610 | |||||||||
14,800 | KT Freetel Co Ltd | 427,821 | |||||||||
16,300 | KT&G Corp | 954,999 | |||||||||
5,700 | LG Cable & Machinery Ltd | 190,396 | |||||||||
6,900 | LG Chemicals Ltd | 280,541 | |||||||||
28,100 | LG Corp | 834,939 | |||||||||
12,600 | LG Electronics Inc | 840,954 | |||||||||
6,200 | Samsung SDI Co Ltd | 512,203 | |||||||||
37,700 | Shinhan Financial Group Co Ltd | 1,695,077 | |||||||||
1,500 | Shinsegae Co Ltd | 743,133 | |||||||||
22,500 | SK Corp | 1,445,272 | |||||||||
30,400 | SK Telecom Co Ltd ADR | 665,760 | |||||||||
19,600 | Woori Finance Holdings Co Ltd | 384,483 | |||||||||
16,189,758 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Spain — 0.8% | |||||||||||
50,605 | Aguas de Barcelona SA Class A | 1,419,763 | |||||||||
40,250 | Corp Financiera Alba | 2,269,551 | |||||||||
4,669 | Fomento de Construcciones y Contratas SA | 364,190 | |||||||||
281,190 | Grupo Inmocaral SA * | 1,008,474 | |||||||||
8,419 | Inmobiliaria Colonia SA | 675,986 | |||||||||
16,360 | Metrovacesa SA | 1,548,371 | |||||||||
7,286,335 | |||||||||||
Sweden — 3.9% | |||||||||||
95,700 | Alfa Laval AB | 3,170,462 | |||||||||
204,800 | Boliden AB | 3,841,888 | |||||||||
96,900 | D Carnegie AB | 1,724,162 | |||||||||
152,455 | Getinge AB (a) | 2,779,009 | |||||||||
69,838 | Holmen AB Class B | 2,924,404 | |||||||||
323,917 | Kinnevik Investment AB (a) | 3,721,327 | |||||||||
71,700 | Kungsleden AB | 694,819 | |||||||||
40,269 | Lundbergforetagen AB Class B | 2,161,811 | |||||||||
97,700 | NCC Class B (a) | 2,036,339 | |||||||||
42,300 | Nobia AB | 1,316,397 | |||||||||
76,400 | OMX AB (a) | 1,158,946 | |||||||||
216,060 | SSAB Svenskt Stal AB Series A | 4,157,709 | |||||||||
119,100 | SSAB Swedish Steel Series - B | 2,168,700 | |||||||||
156,800 | Tele2 AB Class B (a) | 1,552,482 | |||||||||
53,800 | Trelleborg AB Class B | 1,045,776 | |||||||||
34,454,231 | |||||||||||
Switzerland — 3.5% | |||||||||||
18,360 | Actelion Ltd * | 2,459,797 | |||||||||
23,425 | Baloise Holding Ltd | 1,949,458 | |||||||||
2,206 | Banque Cantonale Vaudoise | 835,353 | |||||||||
9,455 | Charles Voegele Holding AG * | 749,105 | |||||||||
14,570 | Ciba Specialty Chemical Holding Reg. | 816,637 | |||||||||
53,481 | Clariant AG * | 650,718 |
See accompanying notes to the financial statements.
17
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Switzerland — continued | |||||||||||
180,623 | Converium Holding AG | 2,138,376 | |||||||||
2,652 | Fischer (George) AG (Registered) * | 1,246,804 | |||||||||
3,446 | Forbo Holdings AG (Registered) * | 991,347 | |||||||||
2,358 | Geberit AG (Registered) | 2,743,582 | |||||||||
765 | Givaudan | 616,642 | |||||||||
5,560 | Helvetia Patria Holding (Registered) | 1,661,686 | |||||||||
338 | Jelmoli Holding AG (Bearer) | 625,416 | |||||||||
190 | Jelmoli Holding AG (Registered) | 70,254 | |||||||||
38,264 | Logitech International * | 831,437 | |||||||||
15,611 | Lonza Group AG (Registered) | 1,017,935 | |||||||||
784 | Movenpick Holdings (Bearer) * | 222,085 | |||||||||
38,977 | Phonak Holding AG (Registered) | 2,326,115 | |||||||||
1,716 | Rieter Holding AG (Registered) | 738,096 | |||||||||
739 | Sika AG (Bearer) * | 925,762 | |||||||||
1,463 | Sulzer AG (Registered) | 1,184,361 | |||||||||
9,690 | Swiss Steel AG (Registered) | 568,010 | |||||||||
8,323 | Tecan Group AG | 439,398 | |||||||||
7,270 | Unaxis Holding AG (Registered) * (a) | 2,140,914 | |||||||||
2,650 | Valora Holding AG | 595,269 | |||||||||
39,739 | Vontobel Holdings AG | 1,577,466 | |||||||||
30,122,023 | |||||||||||
Taiwan — 1.8% | |||||||||||
329,314 | Acer Inc | 508,080 | |||||||||
294,547 | Asustek Computer Inc | 659,355 | |||||||||
462,088 | AU Optronics Corp | 676,597 | |||||||||
432,484 | Cathay Financial Holding Co Ltd | 825,433 | |||||||||
470,552 | Chi Mei Optoelectronics Corp | 556,346 | |||||||||
1,264,000 | China Development Financial Holding Corp | 487,545 | |||||||||
1,096,665 | China Steel Corp | 888,947 | |||||||||
441,660 | Chunghwa Telecom Co Ltd | 728,813 | |||||||||
541,268 | Compal Electronics Inc | 472,724 | |||||||||
195,223 | Delta Electronics Inc | 542,231 | |||||||||
597,977 | Far Eastern Textile Co Ltd | 419,506 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Taiwan — continued | |||||||||||
288,000 | Far Eastone Telecommunications Co Ltd | 311,650 | |||||||||
406,995 | Formosa Chemicals & Fibre Co | 586,687 | |||||||||
616,939 | Formosa Plastics Corp | 839,695 | |||||||||
468,000 | Fubon Financial Holding Co Ltd | 348,438 | |||||||||
47,104 | High Tech Computer Corp | 1,184,470 | |||||||||
12,515 | Inventec Co Ltd | 7,604 | |||||||||
358,640 | Lite-On Technology Corp * | 444,293 | |||||||||
129,800 | MediaTek Inc | 1,180,984 | |||||||||
1,072,000 | Mega Financial Holdings Co Ltd | 712,193 | |||||||||
517,060 | Nan Ya Plastics Corp | 698,872 | |||||||||
921,594 | Powerchip Semiconductor Corp | 608,006 | |||||||||
303,466 | Quanta Computer Inc | 434,674 | |||||||||
9,136 | Siliconware Precision Industries Co | 10,793 | |||||||||
796,144 | Taishin Financial Holdings Co Ltd * | 379,121 | |||||||||
346,000 | Taiwan Cellular Corp | 321,934 | |||||||||
929,410 | United Microelectronics Corp | 509,668 | |||||||||
15,344,659 | |||||||||||
Thailand — 0.1% | |||||||||||
168,000 | Bangkok Dusit Medical Service Pcl (Foreign Registered) (c) | 128,414 | |||||||||
155,000 | Kasikornbank Pcl NVDR (c) | 257,481 | |||||||||
147,000 | PTT Pcl (Foreign Registered)(c) | 922,795 | |||||||||
1,308,690 | |||||||||||
Turkey — 0.1% | |||||||||||
78,712 | Akbank TAS | 427,715 | |||||||||
21,311 | Tupras-Turkiye Petrol Rafineriler AS | 388,335 | |||||||||
816,050 | |||||||||||
United Kingdom — 20.5% | |||||||||||
339,816 | Aberdeen Asset Management | 1,019,843 | |||||||||
76,090 | Admiral Group Plc | 980,455 | |||||||||
531,876 | Aggreko Plc | 2,852,322 | |||||||||
877,008 | AMEC | 5,395,842 |
See accompanying notes to the financial statements.
19
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
328,199 | Amlin | 1,776,049 | |||||||||
288,604 | Arriva Plc | 3,270,722 | |||||||||
59,527 | Autonomy Corp Plc * | 441,763 | |||||||||
131,770 | Babcock International Group | 871,439 | |||||||||
136,618 | Balfour Beatty Plc | 969,651 | |||||||||
620,237 | Barratt Developments Plc | 11,733,332 | |||||||||
502,120 | BBA Group Plc | 2,551,059 | |||||||||
65,198 | Bellway Plc | 1,507,808 | |||||||||
248,770 | Berkeley Group Holdings Plc * | 6,071,603 | |||||||||
313,657 | Bradford & Bingley Plc | 2,705,221 | |||||||||
212,352 | Brit Insurance Holdings Plc | 1,095,933 | |||||||||
265,776 | Bunzl Plc | 3,301,931 | |||||||||
456,255 | Cable & Wireless Plc | 1,066,195 | |||||||||
106,763 | Cattle's Plc | 667,111 | |||||||||
139,202 | Charter Plc * | 2,034,187 | |||||||||
38,273 | Close Brothers Group Plc | 665,570 | |||||||||
1,295,418 | Cobham Plc | 4,236,530 | |||||||||
98,511 | Collins Stewart Tullett Plc | 1,461,845 | |||||||||
153,406 | Countrywide Plc | 1,190,219 | |||||||||
88,398 | Crest Nicholson Plc | 892,015 | |||||||||
155,956 | CSR Plc * | 3,481,983 | |||||||||
160,706 | De la Rue (Ordinary Shares) | 1,643,546 | |||||||||
1,536,406 | Dimension Data Holdings Plc * | 1,053,434 | |||||||||
1,277,202 | DSG International Plc | 4,987,738 | |||||||||
166,840 | First Choice Holidays Plc | 674,481 | |||||||||
344,467 | Firstgroup Plc | 3,063,102 | |||||||||
509,524 | GKN Plc | 2,958,500 | |||||||||
12,838 | Go-Ahead Group Plc | 450,717 | |||||||||
173,373 | Halma Plc | 628,597 | |||||||||
130,942 | Helphire Group Plc | 958,262 | |||||||||
175,819 | Hiscox Plc | 800,263 | |||||||||
296,886 | HMV Group Plc | 859,517 | |||||||||
44,763 | Homeserve Plc | 1,431,574 | |||||||||
400,873 | IMI Plc | 3,858,544 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
425,082 | Inchcape Plc | 4,016,697 | |||||||||
387,081 | Invensys Plc * | 1,496,080 | |||||||||
29,003 | Investec Plc | 1,477,893 | |||||||||
59,029 | Johnson Matthey Plc | 1,484,873 | |||||||||
87,619 | Kensington Group Plc | 1,386,315 | |||||||||
157,702 | LG Group Holdings Plc | 707,772 | |||||||||
99,872 | London Stock Exchange | 2,192,560 | |||||||||
12,023 | Lonmin Plc | 617,403 | |||||||||
111,619 | Luminar Plc | 1,165,929 | |||||||||
278,146 | Michael Page International Plc | 1,828,987 | |||||||||
252,847 | Misys Plc | 1,189,911 | |||||||||
194,870 | Mitchells & Butlers Plc | 2,076,241 | |||||||||
35,490 | Morgan Sindall Plc | 733,720 | |||||||||
96,082 | National Express Group Plc | 1,508,088 | |||||||||
1,619,767 | Northern Foods Plc | 2,387,415 | |||||||||
394,287 | Paragon Group Cos Plc | 4,746,342 | |||||||||
51,417 | Pennon Group | 457,450 | |||||||||
371,548 | Rank Group Plc | 1,510,256 | |||||||||
131,066 | Rexam Plc | 1,354,392 | |||||||||
84,604 | Rotork Plc | 1,173,108 | |||||||||
233,516 | Royal & Sun Alliance Insurance Group | 615,763 | |||||||||
46,286 | Schroders Plc (New shares) (Non Voting) | 766,941 | |||||||||
82,062 | SIG Plc | 1,458,361 | |||||||||
1,647,118 | Signet Group Plc | 3,331,894 | |||||||||
256,342 | Smith (David S.) Holdings Plc | 766,298 | |||||||||
450,381 | Smith News Plc * | 4,073,353 | |||||||||
78,038 | Tate & Lyle Plc | 1,088,008 | |||||||||
1,695,148 | Taylor Woodrow Plc | 11,071,150 | |||||||||
235,124 | TDG Plc | 957,157 | |||||||||
62,894 | THUS Group Plc * | 142,267 | |||||||||
750,298 | Tomkins Plc | 4,067,952 | |||||||||
164,765 | Travis Perkins Plc | 5,288,360 | |||||||||
577,873 | Tullow Oil Plc | 4,310,312 | |||||||||
39,003 | Vedanta Resources Plc | 1,014,479 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
86,723 | Venture Production (Ordinary Shares) * | 1,333,879 | |||||||||
77,908 | Victrex Plc | 1,128,013 | |||||||||
163,408 | Wilson Bowden Plc | 5,257,469 | |||||||||
1,195,051 | Wimpey (George) Plc | 11,404,262 | |||||||||
104,934 | Wolfson Microelectronics Plc * | 956,441 | |||||||||
117,665 | Wood Group (John) Plc | 512,693 | |||||||||
178,665,387 | |||||||||||
TOTAL COMMON STOCKS (COST $653,145,773) | 823,875,940 | ||||||||||
PREFERRED STOCKS — 2.3% | |||||||||||
Brazil — 0.8% | |||||||||||
27,100 | Banco Bradesco SA 6.08% | 888,081 | |||||||||
39,460 | Banco Itau Holding Financeira SA 3.02% | 1,187,297 | |||||||||
1,425,800 | Companhia de Bebidas das Americas 3.54% | 640,413 | |||||||||
14,642,600 | Companhia Energetica de Minas Gerais 0.53% | 604,417 | |||||||||
71,400 | Companhia Vale do Rio Doce Class A 0.61% | 1,341,414 | |||||||||
14,431,600 | Electrobras (Centro) SA Class B 6.62% | 288,093 | |||||||||
15,850 | Gerdau Metalurgica SA 5.76% | 280,924 | |||||||||
40,200 | Gerdau SA 4.58% | 580,312 | |||||||||
174,635 | Investimentos Itau SA 3.18% | 737,149 | |||||||||
32,800 | Tele Norte Leste Participacs SA 5.48% | 425,299 | |||||||||
6,973,399 | |||||||||||
Germany — 0.8% | |||||||||||
7,157 | Fresenius Medical Care AG (Non Voting) 1.12% | 1,227,956 | |||||||||
78,058 | Hugo Boss AG 2.95% (a) | 3,339,824 | |||||||||
81,646 | ProSieben Sat.1 Media AG 3.81% | 2,198,541 | |||||||||
6,766,321 |
See accompanying notes to the financial statements.
22
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
Italy — 0.7% | |||||||||||
46,119 | Compagnia Assicuratrice Unipol 3.80% | 139,217 | |||||||||
242,278 | IFI Istituto Finanziario Industries * | 5,802,235 | |||||||||
5,941,452 | |||||||||||
Russia — 0.0% | |||||||||||
300 | Transneft 0.56% | 600,000 | |||||||||
South Korea — 0.0% | |||||||||||
3,900 | Hyundai Motor Co 2.73% | 188,526 | |||||||||
TOTAL PREFERRED STOCKS (COST $12,231,147) | 20,469,698 | ||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Hong Kong — 0.0% | |||||||||||
307,764 | Global Bio-Chem Technology Group Ltd Warrants, Expires 5/31/07 * | 396 | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $0) | 396 | ||||||||||
SHORT-TERM INVESTMENTS — 17.6% | |||||||||||
131,312,375 | Boston Global Investment Trust - Enhanced Portfolio (d) | 131,312,375 | |||||||||
21,900,000 | Branch Bank & Trust Time Deposit, 5.26% due 09/01/06 | 21,900,000 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $153,212,375) | 153,212,375 | ||||||||||
TOTAL INVESTMENTS — 114.4% (Cost $818,589,295) | 997,558,409 | ||||||||||
Other Assets and Liabilities (net) — (14.4%) | (125,685,540 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 871,872,869 |
See accompanying notes to the financial statements.
23
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||
Buys | |||||||||||||||||||||||
11/22/06 | CAD | 41,314,801 | $ | 37,472,734 | $ | 343,104 | |||||||||||||||||
11/22/06 | CHF | 50,211,032 | 41,125,470 | 22,760 | |||||||||||||||||||
11/22/06 | JPY | 3,091,249,668 | 26,621,069 | (248,717 | ) | ||||||||||||||||||
11/22/06 | NOK | 181,691,405 | 28,877,033 | (237,417 | ) | ||||||||||||||||||
11/22/06 | NZD | 7,899,756 | 5,152,395 | 134,565 | |||||||||||||||||||
11/22/06 | SEK | 70,931,075 | 9,845,740 | (95,394 | ) | ||||||||||||||||||
11/22/06 | SGD | 18,912,931 | 12,064,434 | (4,265 | ) | ||||||||||||||||||
$ | (85,364 | ) | |||||||||||||||||||||
Sales | |||||||||||||||||||||||
11/22/06 | AUD | 34,367,264 | $ | 26,197,959 | $ | (36,061 | ) | ||||||||||||||||
11/22/06 | DKK | 9,084,600 | 1,567,213 | 389 | |||||||||||||||||||
11/22/06 | EUR | 31,374,628 | 40,381,625 | 23,038 | |||||||||||||||||||
11/22/06 | GBP | 33,781,118 | 64,389,412 | (499,589 | ) | ||||||||||||||||||
11/22/06 | HKD | 49,455,119 | 6,374,150 | 2,951 | |||||||||||||||||||
$ | (509,272 | ) |
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
210 | CAC 40 | September 2006 | $ | 13,901,374 | $ | 339,733 | |||||||||||||
138 | DAX | September 2006 | 25,905,430 | 1,728,853 | |||||||||||||||
51 | TOPIX | September 2006 | 7,100,771 | 291,260 | |||||||||||||||
$ | 2,359,846 | ||||||||||||||||||
Sales | |||||||||||||||||||
160 | FTSE 100 | September 2006 | $ | 17,984,895 | $ | (787,682 | ) | ||||||||||||
89 | SPI 200 | September 2006 | 8,670,611 | (357,884 | ) | ||||||||||||||
$ | (1,145,566 | ) |
As of August 31, 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.
24
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
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
* 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).
As of August 31, 2006, 89.0% of the Net Assets of the Fund were valued using fair value prices based on models used by a third party vendor (Note 2).
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krone 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.
25
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $117,327,395 (cost $818,589,295) (Note 2) | $ | 997,558,409 | |||||
Cash | 13,338 | ||||||
Foreign currency, at value (cost $1,174,715) (Note 2) | 1,175,316 | ||||||
Receivable for investments sold | 223,197 | ||||||
Receivable for Fund shares sold | 22,860 | ||||||
Dividends and interest receivable | 1,259,489 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 5,200,000 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 526,807 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 66,588 | ||||||
Total assets | 1,006,046,004 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 131,312,375 | ||||||
Payable for investments purchased | 223,332 | ||||||
Payable for Fund shares repurchased | 596,343 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 437,114 | ||||||
Shareholder service fee | 109,278 | ||||||
Trustees and Chief Compliance Officer fees | 2,132 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 1,121,443 | ||||||
Foreign taxes payable | 30,992 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 8,142 | ||||||
Accrued expenses | 331,984 | ||||||
Total liabilities | 134,173,135 | ||||||
Net assets | $ | 871,872,869 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 582,548,688 | |||||
Accumulated undistributed net investment income | 4,124,542 | ||||||
Accumulated net realized gain | 105,607,045 | ||||||
Net unrealized appreciation | 179,592,594 | ||||||
$ | 871,872,869 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 871,872,869 | |||||
Shares outstanding: | |||||||
Class III | 65,204,926 | ||||||
Net asset value per share: | |||||||
Class III | $ | 13.37 |
See accompanying notes to the financial statements.
26
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $1,715,226) | $ | 14,279,105 | |||||
Interest (including securities lending income of $1,006,402) | 1,589,870 | ||||||
Total investment income | 15,868,975 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 2,768,316 | ||||||
Shareholder service fee – Class III (Note 3) | 692,079 | ||||||
Custodian and fund accounting agent fees | 420,348 | ||||||
Transfer agent fees | 14,720 | ||||||
Audit and tax fees | 38,364 | ||||||
Legal fees | 10,241 | ||||||
Trustees fees and related expenses (Note 3) | 8,240 | ||||||
Registration fees | 5,152 | ||||||
Miscellaneous | 10,028 | ||||||
Total expenses | 3,967,488 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (493,948 | ) | |||||
Net expenses | 3,473,540 | ||||||
Net investment income (loss) | 12,395,435 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of CPMF tax of $1,510) (Note 2) | 109,789,516 | ||||||
Closed futures contracts | (1,532,327 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (2,239,272 | ) | |||||
Net realized gain (loss) | 106,017,917 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (78,663,559 | ) | |||||
Open futures contracts | (303,851 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (946,319 | ) | |||||
Net unrealized gain (loss) | (79,913,729 | ) | |||||
Net realized and unrealized gain (loss) | 26,104,188 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 38,499,623 |
See accompanying notes to the financial statements.
27
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 12,395,435 | $ | 23,061,443 | |||||||
Net realized gain (loss) | 106,017,917 | 401,243,294 | |||||||||
Change in net unrealized appreciation (depreciation) | (79,913,729 | ) | (183,699,379 | ) | |||||||
Net increase (decrease) in net assets from operations | 38,499,623 | 240,605,358 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (3,570,460 | ) | (24,571,287 | ) | |||||||
Net realized gains | |||||||||||
Class III | (120,262,157 | ) | (364,443,342 | ) | |||||||
(123,832,617 | ) | (389,014,629 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (30,385,892 | ) | (386,907,384 | ) | |||||||
Purchase premiums and redemption fees (Notes 2 and 7) | |||||||||||
Class III | 989,789 | 4,695,237 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | (29,396,103 | ) | (382,212,147 | ) | |||||||
Total increase (decrease) in net assets | (114,729,097 | ) | (530,621,418 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 986,601,966 | 1,517,223,384 | |||||||||
End of period (including accumulated undistributed net investment income of $4,124,542 and distributions in excess of investment income of $4,700,433, respectively) | $ | 871,872,869 | $ | 986,601,966 |
See accompanying notes to the financial statements.
28
GMO International Small Companies Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.93 | $ | 17.84 | $ | 17.09 | $ | 9.50 | $ | 10.44 | $ | 11.68 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss) | 0.20 | † | 0.34 | † | 0.30 | † | 0.20 | 0.15 | 0.22 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.42 | 3.44 | 3.56 | 7.94 | (0.80 | ) | (1.11 | ) | |||||||||||||||||||
Total from investment operations | 0.62 | 3.78 | 3.86 | 8.14 | (0.65 | ) | (0.89 | ) | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.06 | ) | (0.44 | ) | (0.54 | ) | (0.20 | ) | (0.29 | ) | (0.35 | ) | |||||||||||||||
From net realized gains | (2.12 | ) | (6.25 | ) | (2.57 | ) | (0.35 | ) | — | (0.00 | )(a) | ||||||||||||||||
Total distributions | (2.18 | ) | (6.69 | ) | (3.11 | ) | (0.55 | ) | (0.29 | ) | (0.35 | ) | |||||||||||||||
Net asset value, end of period | $ | 13.37 | $ | 14.93 | $ | 17.84 | $ | 17.09 | $ | 9.50 | $ | 10.44 | |||||||||||||||
Total Return(b) | 4.59 | %** | 25.77 | % | 24.45 | % | 86.62 | % | (6.30 | )% | (7.57 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 871,873 | $ | 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 | % | 0.75 | % | |||||||||||||||
Net investment income to average daily net assets | 2.69 | %* | 2.01 | % | 1.75 | % | 1.60 | % | 1.65 | % | 2.02 | % | |||||||||||||||
Portfolio turnover rate | 23 | %** | 49 | % | 53 | % | 46 | % | 44 | % | 34 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.11 | %* | 0.11 | % | 0.11 | % | 0.13 | % | 0.17 | % | 0.22 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.02 | $ | 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
29
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its investment objective by outperforming the S&P/Citigroup Extended Market Index World ex-U.S. Index, the Fund's benchmark. The Fund typically makes equity investments in non-U.S. companies, including non-U.S. companies in developed and emerging countries, but excluding the largest 500 non-U.S. companies in developed countries based on full, non-float adjusted market capitalization and any company in an emerging country with a full, non-float adjusted market capitalization that is greater than or equal to that of any of the 500 excluded developed country companies. The Fund may make investments in emerging countries, but these investments generally will represent 10% or less of the Fund's total assets.
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 generally 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 pursuant to procedures approved by the Trustees. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign
30
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 are generally valued by a third party vendor using fair value prices based on models 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 including 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 lo ss 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. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. 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.
31
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Futures contracts outstandi ng at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
32
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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. There were no swap agreements outstanding at the end of the period.
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
33
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, the Fund had loaned securities having a market value of $117,327,395, collateralized by cash in the amount of $131,312,375, which was invested in the Boston Global Investment Trust – Enhanced Portfolio.
Taxes and distributions
The Fund intends to qualify each tax 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 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. 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 six months ended August 31, 2006, the Fund incurred $1,510 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.
34
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 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) | ||||||||||||
$ | 818,750,554 | $ | 211,587,845 | $ | (32,779,990 | ) | $ | 178,807,855 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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 purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same
35
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 six months ended August 31, 2006 and for the year ended February 28, 2006, the Fund received $22,955 and $140,159 in purchase premiums and $966,834 and $4,555,078 in redemption fees, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in U.S. 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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, nonrecurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense, and transfer taxes) exceed 0.60% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended was $5,296 and $3,036, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $204,133,803 and $362,293,601, respectively.
36
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 28.4% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund.
As of August 31, 2006, 0.9% of the Fund's shares were held by twelve related parties comprised of certain GMO employee accounts, and 20.0% 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 303,701 | $ | 4,658,375 | 2,353,389 | $ | 39,930,302 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 9,410,403 | 122,429,340 | 26,493,616 | 380,866,673 | |||||||||||||||
Shares repurchased | (10,582,809 | ) | (157,473,607 | ) | (47,804,290 | ) | (807,704,359 | ) | |||||||||||
Purchase premiums and redemption fees | — | 989,789 | — | 4,695,237 | |||||||||||||||
Net increase (decrease) | (868,705 | ) | $ | (29,396,103 | ) | (18,957,285 | ) | $ | (382,212,147 | ) |
37
GMO International Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO International Small Companies Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee
38
GMO International Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
39
GMO International Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
40
GMO International Small Companies Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | $ | 1,045.90 | $ | 3.87 | |||||||||||
2) Hypothetical | 0.75 | % | $ | 1,000.00 | $ | 1,021.42 | $ | 3.82 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
41
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Debt Obligations | 93.2 | % | |||||
Short-Term Investments | 7.0 | ||||||
Call Options Purchased | 0.4 | ||||||
Put Options Purchased | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Swaps | (0.2 | ) | |||||
Futures | (0.4 | ) | |||||
100.0 | % |
1
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 93.2% | |||||||||||
Asset-Backed Securities — 89.1% | |||||||||||
Auto Financing — 10.5% | |||||||||||
7,000,000 | ARG Funding Corp., Series 05-2A, Class A3, 144A, Variable Rate, 1 mo. LIBOR + .14%, 5.47%, due 05/20/10 | 7,003,270 | |||||||||
7,000,000 | Daimler Chrysler Master Owner Trust, Series 04-A, Class A, Variable Rate, 1 mo. LIBOR + .03%, 5.36%, due 01/15/09 | 7,002,100 | |||||||||
5,750,000 | Daimler Chrysler Master Owner Trust, Series 04-B, Class A, Variable Rate, 1 mo. LIBOR + .01%, 5.34%, due 08/17/09 | 5,753,594 | |||||||||
5,272,998 | Ford Credit Auto Owner Trust, Series 06-A, Class A2B, Variable Rate, 1 mo. LIBOR + .01%, 5.34%, due 09/15/08 | 5,272,998 | |||||||||
10,000,000 | Ford Credit Floorplan Master Owner Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .15%, 5.48%, due 05/15/10 | 9,999,945 | |||||||||
12,000,000 | Ford Credit Floorplan Master Owner Trust, Series 06-3, Class A, Variable Rate, 1 mo. LIBOR + .18%, 5.51%, due 06/15/11 | 12,006,094 | |||||||||
4,000,000 | GE Dealer Floorplan Master Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .04%, 5.37%, due 04/20/10 | 4,000,480 | |||||||||
10,000,000 | Honda Auto Receivables Owner Trust, Series 06-2, Class A1, 5.43%, due 08/21/07 | 10,000,000 | |||||||||
7,000,000 | Nissan Master Owner Trust Receivables, Series 03-A, Class A1, Variable Rate, 1 mo. LIBOR + .06%, 5.39%, due 09/15/08 | 7,010,780 | |||||||||
8,000,000 | Nissan Master Owner Trust Receivables, Series 05-A, Class A, Variable Rate, 1 mo. LIBOR + .03%, 5.36%, due 07/15/10 | 8,003,750 | |||||||||
11,000,000 | Sovereign Dealer Floor Plan Master Trust, Series 06-1, Class A, 144A, Variable Rate, 1 mo. LIBOR + .05%, 5.38%, due 08/15/11 | 10,999,949 | |||||||||
10,000,000 | Superior Wholesale Inventory Financing Trust, Series 04-A10, Class A, Variable Rate, 1 mo. LIBOR + .10%, 5.43%, due 09/15/11 | 9,952,100 | |||||||||
8,000,000 | Superior Wholesale Inventory Financing Trust, Series 05, Class A, Variable Rate, 1 mo. LIBOR + .18%, 5.51%, due 06/15/10 | 8,002,480 | |||||||||
8,000,000 | Truck Retail Installment Paper Corp., Series 05-1A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .27%, 5.60%, due 12/15/16 | 7,994,480 | |||||||||
10,000,000 | USAA Auto Owner Trust, Series 06-3, Class A1, 5.40%, due 08/15/07 | 10,000,000 | |||||||||
10,000,000 | Volkswagen Auto Lease Trust, Series 06-A, Class A1, 5.52%, due 08/20/07 | 10,004,107 | |||||||||
9,416,029 | Wachovia Auto Owner Trust, Series 06-A, Class A1, 5.31%, due 06/20/07 | 9,414,558 | |||||||||
5,000,000 | Wheels SPV LLC, Series 05-B, Class A1, Variable Rate, 1 mo. LIBOR + .08%, 5.45%, due 06/10/10 | 4,999,200 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Auto Financing — continued | |||||||||||
548,547 | World Omni Auto Receivables Trust, Series 06-A, Class A1, 4.85%, due 03/15/07 | 548,461 | |||||||||
147,968,346 | |||||||||||
Business Loans — 4.7% | |||||||||||
3,968,987 | Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .37%, 5.69%, due 01/25/35 | 3,979,704 | |||||||||
5,714,113 | Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .39%, 5.71%, due 01/25/36 | 5,722,684 | |||||||||
5,633,575 | Capitalsource Commercial Loan Trust, Series 06-1A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .12%, 5.45%, due 08/22/16 | 5,640,335 | |||||||||
5,510,738 | GE Business Loan Trust, Series 05-1A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .07%, 5.40%, due 06/15/14 | 5,510,462 | |||||||||
2,796,010 | GE Business Loan Trust, Series 05-2A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .24%, 5.57%, due 11/15/33 | 2,800,718 | |||||||||
6,000,000 | GE Commercial Equipment Financing LLC, Series 05-1, Class A3B, Variable Rate, 1 mo. LIBOR + .01%, 5.34%, due 03/20/09 | 6,000,432 | |||||||||
9,500,000 | GE Commercial Loan Trust Series 06-2, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .06%, 5.60%, due 04/19/15 | 9,505,700 | |||||||||
4,369,893 | Lehman Brothers Small Balance Commercial, Series 05-1, Class A, 144A, Variable Rate, 1 mo. LIBOR + .25%, 5.57%, due 02/25/30 | 4,374,941 | |||||||||
3,109,557 | Lehman Brothers Small Balance Commercial, Series 05-2, Class 1A, 144A, Variable Rate, 1 mo. LIBOR + .25%, 5.57%, due 09/25/30 | 3,114,040 | |||||||||
5,000,000 | Navistar Financial Dealer Note Master Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .11%, 5.43%, due 02/25/13 | 4,976,500 | |||||||||
14,000,000 | Textron Financial Floorplan Master Note, Series 05-1A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .12%, 5.45%, due 05/13/10 | 14,004,375 | |||||||||
65,629,891 | |||||||||||
CMBS — 5.6% | |||||||||||
5,547,367 | Bear Stearns Commercial Mortgage Securities, Inc., Series 05-PW10, Class A1, 5.09%, due 12/11/40 | 5,545,851 | |||||||||
7,000,000 | Citigroup/Deutsche Bank Commercial Mortgage, Series 05-CD1, Class A2FL, Variable Rate, 1 mo. LIBOR + .12%, 5.45%, due 07/15/44 | 7,008,400 | |||||||||
7,000,000 | GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45 | 6,997,812 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
CMBS — continued | |||||||||||
4,000,000 | GE Capital Commercial Mortgage Corp., Series 06-C1, Class A2, Variable Rate, 5.52%, due 03/10/44 | 3,950,000 | |||||||||
4,123,638 | Greenwich Capital Commercial Funding Corp., Series 05-FL3A, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .20%, 5.61%, due 10/05/20 | 4,123,638 | |||||||||
7,000,000 | GS Mortgage Securities Corp., Series 06-GG6, Class A2, Variable Rate, 5.51%, due 04/10/38 | 7,053,439 | |||||||||
11,000,000 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-LDP7, Class A2, 6.05%, due 04/15/45 | 11,280,170 | |||||||||
9,500,000 | Lehman Brothers Floating Rate Commercial, Series 06-LLFA, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .08%, 5.41%, due 09/15/21 | 9,500,000 | |||||||||
6,000,000 | Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, Variable Rate, 5.80%, due 05/12/39 | 6,094,922 | |||||||||
15,000,000 | Morgan Stanley Capital I, Series 06-IQ11, Class A2, 5.69%, due 10/15/42 | 15,015,000 | |||||||||
3,000,000 | Morgan Stanley Capital I, Series 06-IQ11, Class A3, Variable Rate, 5.91%, due 10/15/42 | 3,001,875 | |||||||||
79,571,107 | |||||||||||
CMBS Collateralized Debt Obligations — 1.0% | |||||||||||
7,000,000 | Guggenheim Structured Real Estate Funding, Series 05-2A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .32%, 5.64%, due 08/26/30 | 7,003,281 | |||||||||
7,400,000 | Marathon Real Estate CDO, Series 06-1, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .33%, 5.65%, due 05/25/46 | 7,400,000 | |||||||||
14,403,281 | |||||||||||
Collateralized Loan Obligations — 1.7% | |||||||||||
15,500,000 | Arran, Series 06-1A, Class A3, 144A, Variable Rate, 3 mo LIBOR + .17%, 5.65%, due 06/20/25 | 15,500,000 | |||||||||
9,000,000 | Omega Capital Europe Plc, Series GLOB-5A, Class A1, 144A, Variable Rate, 3 mo. LIBOR + .25%, 5.75%, due 07/05/11 | 9,000,352 | |||||||||
24,500,352 | |||||||||||
Credit Cards — 14.1% | |||||||||||
6,500,000 | Advanta Business Card Master Trust, Series 05-A1, Class A1, Variable Rate, 1 mo. LIBOR + .07%, 5.40%, due 04/20/11 | 6,502,665 | |||||||||
2,000,000 | Advanta Business Card Master Trust, Series 05-A5, Class A5, Variable Rate, 1 mo. LIBOR + .06%, 5.39%, due 04/20/12 | 2,000,500 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Credit Cards — continued | |||||||||||
5,000,000 | American Express Credit Account Master Trust, Series 05-3, Class A, Variable Rate, 1 mo. LIBOR, 5.33%, due 01/18/11 | 5,006,900 | |||||||||
10,000,000 | American Express Credit Account Master Trust, Series 05-5, Class A, Variable Rate, 1 mo. LIBOR + .04%, 5.37%, due 02/15/13 | 10,003,500 | |||||||||
3,000,000 | American Express Credit Account Master Trust, Series 06-1, Class A, Variable Rate, 1 mo. LIBOR + .03%, 5.36%, due 12/15/13 | 3,000,450 | |||||||||
6,000,000 | Arran, Series 2005-A, Class A, Variable Rate, 1 mo. LIBOR + .02%, 5.35%, due 12/15/10 | 5,999,400 | |||||||||
1,000,000 | Bank One Issuance Trust, Series 03-A10, Class A10, Variable Rate, 1 mo. LIBOR + .11%, 5.44%, due 06/15/11 | 1,003,800 | |||||||||
3,000,000 | Bank One Issuance Trust, Series 03-A3, Class A3, Variable Rate, 1 mo. LIBOR + .11%, 5.44%, due 12/15/10 | 3,009,300 | |||||||||
5,760,000 | Bank One Issuance Trust, Series 03-A6, Class A6, Variable Rate, 1 mo. LIBOR + .11%, 5.44%, due 02/15/11 | 5,772,821 | |||||||||
5,000,000 | Capital One Master Trust, Series 01-6, Class A, Variable Rate, 1 mo. LIBOR + .19%, 5.52%, due 06/15/11 | 5,017,700 | |||||||||
5,000,000 | Capital One Master Trust, Series 02-1A, Class A, Variable Rate, 1 mo. LIBOR + .20%, 5.53%, due 11/15/11 | 5,023,437 | |||||||||
5,530,000 | Capital One Mulit-Asset Execution Trust, Series 03-A3, Class A3, Variable Rate, 1 mo. LIBOR + .25%, 5.58%, due 05/16/11 | 5,555,922 | |||||||||
5,000,000 | Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, Variable Rate, 3 mo. LIBOR + .15%, 5.56%, due 06/16/14 | 5,023,100 | |||||||||
7,875,000 | Chase Credit Card Master Trust, Series 03-3, Class A, Variable Rate, 1 mo. LIBOR + .11%, 5.44%, due 10/15/10 | 7,888,545 | |||||||||
4,000,000 | Citibank Credit Card Issuance Trust, Series 01-A1, Class A1, Variable Rate, 3 mo. LIBOR + .17%, 5.65%, due 02/07/10 | 4,009,335 | |||||||||
21,400,000 | Citibank Credit Card Issuance Trust, Series 03-A4, Class A4, Variable Rate, 3 mo. LIBOR + .07%, 5.48%, due 03/20/09 | 21,410,867 | |||||||||
2,000,000 | Citibank Credit Card Issuance Trust, Series 06-A6, Class A6, Variable Rate, 1 mo. LIBOR + .01%, 5.34%, due 05/24/12 | 2,001,800 | |||||||||
9,750,000 | Discover Card Master Trust I, Series 03-2, Class A, Variable Rate, 1 mo. LIBOR + .13%, 5.46%, due 08/15/10 | 9,769,500 | |||||||||
10,000,000 | Discover Card Master Trust I, Series 04-2, Class A2, Variable Rate, 1 mo. LIBOR + .07%, 5.40%, due 05/15/12 | 10,015,600 | |||||||||
4,000,000 | Discover Card Master Trust I, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .01%, 5.34%, due 09/16/10 | 4,000,120 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Credit Cards — continued | |||||||||||
5,000,000 | Discover Card Master Trust I, Series 05-3, Class A, Variable Rate, 1 mo. LIBOR + .02%, 5.35%, due 05/15/11 | 5,001,029 | |||||||||
7,000,000 | GE Capital Credit Card Master Note Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .04%, 5.37%, due 03/15/13 | 7,006,785 | |||||||||
7,000,000 | Gracechurch Card Funding Plc, Series 3, Class A, Variable Rate, 1 mo. LIBOR + .11%, 5.44%, due 03/15/10 | 7,010,937 | |||||||||
7,000,000 | Gracechurch Card Funding Plc, Series 8, Class A, Variable Rate, 1 mo. LIBOR + .01%, 5.34%, due 06/15/10 | 7,002,383 | |||||||||
5,500,000 | Household Private Label Credit Card Master Note Trust I, Series 02-2, Class A, Variable Rate, 1 mo. LIBOR + .17%, 5.50%, due 01/18/11 | 5,517,600 | |||||||||
7,500,000 | MBNA Credit Card Master Note Trust, Series 04-A8, Class A8, Variable Rate, 1 mo. LIBOR + .15%, 5.48%, due 01/15/14 | 7,532,917 | |||||||||
5,000,000 | MBNA Credit Card Master Note Trust, Series 05-A5, Class A5, Variable Rate, 1 mo. LIBOR, 5.33%, due 12/15/10 | 5,001,758 | |||||||||
7,000,000 | Pillar Funding Plc, Series 04-2, Class A, 144A, Variable Rate, 3 mo. LIBOR + .14%, 5.47%, due 09/15/11 | 7,009,497 | |||||||||
6,500,000 | Turquoise Card Backed Securities Plc, Series 06-1A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .01%, 5.34%, due 05/16/11 | 6,500,000 | |||||||||
6,640,000 | World Financial Network Credit Card Master Trust, Series 03-A, Class A2, Variable Rate, 1 mo. LIBOR + .37%, 5.70%, due 05/15/12 | 6,677,350 | |||||||||
4,400,000 | World Financial Network Credit Card Master Trust, Series 04-A, Class A, Variable Rate, 1 mo. LIBOR + .18%, 5.51%, due 03/15/13 | 4,407,804 | |||||||||
7,000,000 | World Financial Network Credit Card Master Trust, Series 04-A, Class B, Variable Rate, 1 mo. LIBOR + .10%, 5.43%, due 07/15/10 | 6,999,930 | |||||||||
2,000,000 | World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .13%, 5.46%, due 02/15/17 | 1,999,989 | |||||||||
199,683,241 | |||||||||||
Emerging Markets Collateralized Debt Obligations — 0.3% | |||||||||||
4,000,000 | Santiago CDO Ltd., Series 05-1A, Class A, 144A, Variable Rate, 6 mo. LIBOR + .40%, 5.61%, due 04/18/17 | 4,000,000 | |||||||||
Equipment Leases — 0.5% | |||||||||||
7,000,000 | CNH Equipment Trust, Series 05-A, Class A4A, Variable Rate, 1 mo. LIBOR + .04%, 5.37%, due 06/15/12 | 7,001,050 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Equipment Leases — continued | |||||||||||
78,644 | GE Equipment Small Ticket LLC, Series 05-2A, Class A1, 144A, 4.56%, due 12/22/06 | 78,739 | |||||||||
7,079,789 | |||||||||||
Insurance Premiums — 0.7% | |||||||||||
7,000,000 | AICCO Premium Finance Master Trust, Series 04-1A, Class A, Variable Rate, 1 mo. LIBOR + .18%, 5.51%, due 11/17/08 | 7,005,468 | |||||||||
3,000,000 | AICCO Premium Finance Master Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .08%, 5.41%, due 04/15/10 | 3,005,700 | |||||||||
10,011,168 | |||||||||||
Insured Auto Financing — 4.3% | |||||||||||
5,000,000 | Aesop Funding II LLC, Series 05-1A, Class A3, 144A, MBIA, Variable Rate, 1 mo. LIBOR + .12%, 5.45%, due 04/20/10 | 4,979,550 | |||||||||
7,000,000 | Aesop Funding II LLC, Series 06-1, Class A1, 144A, MBIA, Variable Rate, 1 mo. LIBOR + .22%, 5.55%, due 03/20/12 | 7,002,660 | |||||||||
6,000,000 | AmeriCredit Automobile Receivables Trust, Series 05-BM, Class A4, MBIA, Variable Rate, 1 mo. LIBOR + .08%, 5.48%, due 05/06/12 | 6,006,451 | |||||||||
6,500,000 | AmeriCredit Automobile Receivables Trust, Series 06-RM, Class A1, MBIA, Variable Rate, 5.37%, due 10/06/09 | 6,507,090 | |||||||||
7,000,000 | Capital One Auto Finance Trust, Series 05-A, Class A4, AMBAC, Variable Rate, 1 mo. LIBOR + .05%, 5.38%, due 12/15/11 | 7,000,280 | |||||||||
7,500,000 | Capital One Auto Finance Trust, Series 06-A, Class A4, AMBAC, Variable Rate, 1 mo. LIBOR + .01%, 5.34%, due 12/15/12 | 7,462,500 | |||||||||
6,000,000 | Capital One Auto Finance Trust, Series 06-B, Class A4, MBIA, Variable Rate, 1 mo. LIBOR + .015%, 5.42%, due 07/15/13 | 5,999,040 | |||||||||
5,614,068 | Drive Auto Receivables Trust, Series 06-1, Class A1, FSA, 5.34%, due 06/15/07 | 5,612,496 | |||||||||
2,000,000 | Hertz Vehicle Financing LLC, Series 05-2A, Class A5, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .25%, 5.57%, due 11/25/11 | 2,007,269 | |||||||||
7,000,000 | Rental Car Finance Corp., Series 04-1A, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .20%, 5.52%, due 06/25/09 | 7,007,525 | |||||||||
1,731,371 | UPFC Auto Receivables Trust, Series 06-A, Class A1, MBIA, 5.27%, due 06/15/07 | 1,731,198 | |||||||||
61,316,059 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Insured Credit Cards — 0.5% | |||||||||||
7,000,000 | Cabela's Master Credit Card Trust, Series 04-2A, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .12%, 5.45%, due 03/15/11 | 7,016,940 | |||||||||
Insured Equipment Leasing — 0.7% | |||||||||||
10,000,000 | CLI Funding LLC, Series 06-1A, Class A, 144A, AMBAC, Variable Rate, 1 mo LIBOR + .18%, 5.51%, due 08/18/21 | 10,000,000 | |||||||||
Insured Residential Mortgage-Backed Securities (United States) — 0.8% | |||||||||||
8,000,000 | GMAC Mortgage Corp. Loan Trust, Series 05-HE3, Class A1, AMBAC, Variable Rate, 1 mo. LIBOR + .11%, 5.43%, due 02/25/36 | 8,001,715 | |||||||||
2,872,486 | SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, Variable Rate, 1 mo. LIBOR + .19%, 5.51%, due 11/25/35 | 2,876,077 | |||||||||
10,877,792 | |||||||||||
Insured Time Share — 0.6% | |||||||||||
3,860,515 | Cendant Timeshare Receivables Funding LLC, Series 05-1A, Class A2, 144A, FGIC, Variable Rate, 1 mo. LIBOR + .18%, 5.51%, due 05/20/17 | 3,859,309 | |||||||||
4,023,317 | Sierra Receivables Funding Co., Series 06-1A, Class A2, 144A, MBIA, Variable Rate, 1 mo. LIBOR + .15%, 5.48%, due 05/20/18 | 4,023,297 | |||||||||
7,882,606 | |||||||||||
Investment Grade Corporate Collateralized Debt Obligations — 3.1% | |||||||||||
2,000,000 | Morgan Stanley ACES SPC, Series 04-12, Class A, 144A, Variable Rate, 3 mo. LIBOR + .60%, 6.08%, due 08/05/09 | 2,012,000 | |||||||||
5,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class II, 144A, Variable Rate, 3 mo. LIBOR + .65%, 6.06%, due 12/20/09 | 5,025,000 | |||||||||
3,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class III, 144A, Variable Rate, 3 mo. LIBOR + .75%, 6.16%, due 12/20/09 | 3,007,500 | |||||||||
6,000,000 | Morgan Stanley ACES SPC, Series 04-16, Class I, 144A, Variable Rate, 3 mo. LIBOR + .40%, 5.88%, due 08/05/09 | 6,030,000 | |||||||||
3,000,000 | Morgan Stanley ACES SPC, Series 05-10, Class A1, 144A, Variable Rate, 3 mo. + .52%, 5.93%, due 03/20/10 | 2,997,000 | |||||||||
6,000,000 | Morgan Stanley ACES SPC, Series 05-15, Class A, 144A, Variable Rate, 3 mo. LIBOR + .40%, 5.81%, due 12/20/10 | 5,988,000 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Investment Grade Corporate Collateralized Debt Obligations — continued | |||||||||||
3,000,000 | Morgan Stanley ACES SPC, Series 05-2A, Class A, 144A, Variable Rate, 3 mo. LIBOR + .45%, 5.86%, due 03/20/10 | 3,003,000 | |||||||||
9,000,000 | Morgan Stanley ACES SPC, Series 06-13A, Class A, 144A, Variable Rate, 3 mo. LIBOR + .29%, 5.79%, due 06/20/13 | 9,009,000 | |||||||||
7,000,000 | Salisbury International Investments Ltd., Series E, MTN, Variable Rate, 3 mo. LIBOR + .42%, 5.83%, due 06/22/10 | 6,982,150 | |||||||||
44,053,650 | |||||||||||
Other — 1.0% | |||||||||||
5,500,000 | DB Master Finance LLC, Series 06-1, Class A2, 144A, AMBAC, 5.78%, due 06/20/31 | 5,565,917 | |||||||||
1,937,500 | Ensec Home Finance Pool Ltd., Series 05-R1A, 144A, Variable Rate, 1 mo. LIBOR + .20%, 5.53%, due 05/15/14 | 1,938,811 | |||||||||
6,500,000 | TIB Card Receivables Fund, 144A, FGIC, Variable Rate, 4 mo. LIBOR + .25%, 5.73%, due 01/05/14 | 6,507,800 | |||||||||
14,012,528 | |||||||||||
Rate Reduction Bonds — 1.3% | |||||||||||
5,000,000 | Massachusetts RRB Special Purpose Trust, Series 05-1, Class A3, 4.13%, due 09/15/13 | 4,825,121 | |||||||||
5,000,000 | PG&E Energy Recovery Funding LLC, Series 05-1, Class A4, 4.37%, due 06/25/14 | 4,825,000 | |||||||||
8,000,000 | PSE&G Transition Funding LLC, Series 01-1, Class A4, Variable Rate, 3 mo. LIBOR + .30%, 5.63%, due 06/15/11 | 8,029,943 | |||||||||
17,680,064 | |||||||||||
Residential Asset-Backed Securities (United States) — 22.9% | |||||||||||
7,000,000 | ACE Securities Corp., Series 05-AG1, Class A2B, Variable Rate, 1 mo. LIBOR + .21%, 5.53%, due 08/25/35 | 7,000,700 | |||||||||
1,534,000 | ACE Securities Corp., Series 05-ASP1, Class A2C, Variable Rate, 1 mo. LIBOR + .27%, 5.59%, due 09/25/35 | 1,537,313 | |||||||||
2,550,595 | ACE Securities Corp., Series 05-SDI, Class A1, Variable Rate, 1 mo. LIBOR + .40%, 5.72%, due 11/25/50 | 2,553,401 | |||||||||
4,840,938 | ACE Securities Corp., Series 06-CW1, Class A2A, Variable Rate, 1 mo. LIBOR + .05%, 5.44%, due 07/25/36 | 4,840,889 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||
5,000,000 | ACE Securities Corp., Series 06-CW1, Class A2B, Variable Rate, 1 mo. LIBOR + .10%, 5.49%, due 07/25/36 | 4,999,950 | |||||||||
3,500,000 | ACE Securities Corp., Series 06-HE3, Class A2B, Variable Rate, 1 mo. LIBOR + .09%, 5.41%, due 06/25/36 | 3,499,055 | |||||||||
5,327,418 | ACE Securities Corp., Series 06-SL1, Class A, Variable Rate, 1 mo. LIBOR + .16%, 5.48%, due 09/25/35 | 5,329,230 | |||||||||
5,743,838 | ACE Securities Corp., Series 06-SL3, Class A1, Variable Rate, 1 mo. LIBOR + .10%, 5.42%, due 06/25/36 | 5,743,953 | |||||||||
3,000,000 | ACE Securities Corp., Series 06-SL3, Class A2, Variable Rate, 1 mo. LIBOR + .17%, 5.49%, due 06/25/36 | 3,000,060 | |||||||||
5,685,000 | ACE Securities Corp., Series 06-SL4, Class A1, Variable Rate, 1 mo. LIBOR + .12%, 5.45%, due 09/25/36 | 5,685,000 | |||||||||
5,633,371 | Aegis Asset Backed Securities Trust, Series 04-6, Class 1A2, Variable Rate, 1 mo. LIBOR + .27%, 5.59%, due 03/25/35 | 5,637,765 | |||||||||
779,446 | Aegis Asset Backed Securities Trust, Series 05-3, Class A1, Variable Rate, 1 mo. LIBOR + .10%, 5.42%, due 08/25/35 | 779,476 | |||||||||
3,000,000 | Aegis Asset Backed Securities Trust, Series 05-5, Class 1A2, Variable Rate, 1 mo. LIBOR + .18%, 5.50%, due 12/25/35 | 3,005,160 | |||||||||
7,000,000 | Argent Securities, Inc., Series 06-M2, Class A2C, Variable Rate, 1 mo. LIBOR + .15%, 5.48%, due 09/25/36 | 7,000,000 | |||||||||
7,000,000 | Argent Securities, Inc., Series 06-W2, Class A2B, Variable Rate, 1 mo. LIBOR + .19%, 5.51%, due 03/25/36 | 7,006,075 | |||||||||
2,500,000 | Argent Securities, Inc., Series 06-W5, Class A2C, Variable Rate, 1 mo. LIBOR + .15%, 5.47%, due 06/25/36 | 2,500,000 | |||||||||
6,500,000 | Bayview Financial Acquisition Trust, Series 05-A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .50%, 5.90%, due 02/28/40 | 6,514,727 | |||||||||
714,599 | Carrington Mortgage Loan Trust, Series 05-OPT2, Class A1B, Variable Rate, 1 mo. LIBOR + .15%, 5.47%, due 05/25/35 | 715,599 | |||||||||
6,000,000 | Carrington Mortgage Loan Trust, Series 05-OPT2, Class A1C, Variable Rate, 1 mo. LIBOR + .23%, 5.55%, due 05/25/35 | 6,009,180 | |||||||||
1,157,431 | Centex Home Equity, Series 05-A, Class AV2, Variable Rate, 1 mo. LIBOR + .20%, 5.52%, due 07/25/34 | 1,157,069 | |||||||||
1,200,000 | Centex Home Equity, Series 05-A, Class AV3, Variable Rate, 1 mo. LIBOR + .34%, 5.66%, due 01/25/35 | 1,202,812 | |||||||||
8,000,000 | Centex Home Equity, Series 05-C, Class AV3, Variable Rate, 1 mo. LIBOR + .23%, 5.55%, due 06/25/35 | 8,000,000 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||
3,000,000 | Centex Home Equity, Series 06-A, Class AV3, Variable Rate, 1 mo. LIBOR + .16%, 5.48%, due 06/25/36 | 3,003,600 | |||||||||
197,363 | Citifinancial Mortgage Securities, Inc., Series 04-1, Class AF1, Variable Rate, 1 mo. LIBOR + .09%, 5.41%, due 04/25/34 | 197,639 | |||||||||
8,531,000 | Citigroup Mortgage Loan Trust, Inc, Series 06-WFHE2, Class A1, Variable Rate, 1 mo. LIBOR + .04%, 5.37%, due 08/25/36 | 8,533,559 | |||||||||
2,500,868 | Countrywide Asset-Backed Certificates, Series 04-14, Class A2, Variable Rate, 1 mo. LIBOR + .27%, 5.59%, due 06/25/35 | 2,501,933 | |||||||||
573,936 | Countrywide Asset-Backed Certificates, Series 05-4, Class AF1, Variable Rate, 1 mo. LIBOR + .13%, 5.45%, due 10/25/35 | 573,902 | |||||||||
9,712,000 | Countrywide Asset-Backed Certificates, Series 06-BC3, Class 2A2, Variable Rate, 1 mo. LIBOR + .14%, 5.47%, due 02/25/37 | 9,712,000 | |||||||||
6,201,167 | Credit-Based Asset Servicing & Securitization, Series 06-RP1, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .11%, 5.43%, due 04/25/36 | 6,201,167 | |||||||||
9,000,000 | First Franklin Mortgage Loan Asset Backed Certificates, Series 05-FFH2, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .25%, 5.57%, due 04/25/35 | 9,014,640 | |||||||||
5,091,312 | Fremont Home Loan Trust, Series 05-B, Class 2A2, Variable Rate, 1 mo. LIBOR + .20%, 5.52%, due 04/25/35 | 5,092,177 | |||||||||
7,164,123 | Fremont Home Loan Trust, Series 05-C, Class 2A2, Variable Rate, 1 mo. LIBOR + .16%, 5.48%, due 07/25/35 | 7,165,242 | |||||||||
5,000,000 | Fremont Home Loan Trust, Series 06-B, Class 2A3, Variable Rate, 1 mo. LIBOR + .16%, 5.55%, due 08/25/36 | 5,000,000 | |||||||||
7,000,000 | GE-WMC Mortgage Securities, Series 05-2, Class A2B, Variable Rate, 1 mo. LIBOR + .17%, 5.49%, due 12/25/35 | 7,008,750 | |||||||||
10,000,000 | GE-WMC Mortgage Securities, Series 06-1, Class A2B, Variable Rate, 1 mo. LIBOR + .15%, 5.48%, due 08/25/36 | 10,003,000 | |||||||||
3,000,000 | GreenPoint Mortgage Funding Trust, Series 05-HE4, Class 2A3C, Variable Rate, 1 mo. LIBOR + .25%, 5.57%, due 07/25/30 | 3,002,812 | |||||||||
10,500,000 | GSAMP Trust, Series 05-HE3, Class A2B, Variable Rate, 1 mo. LIBOR + .22%, 5.54%, due 06/25/35 | 10,502,950 | |||||||||
2,890,751 | Household Home Equity Loan Trust, Series 05-2, Class A2, Variable Rate, 1 mo. LIBOR + .31%, 5.64%, due 01/20/35 | 2,897,527 | |||||||||
2,031,595 | Household Home Equity Loan Trust, Series 05-3, Class A2, Variable Rate, 1 mo. LIBOR + .29%, 5.62%, due 01/20/35 | 2,035,722 | |||||||||
2,100,000 | Master Asset-Backed Securities Trust, Series 05-FRE1, Class A4, Variable Rate, 1 mo. LIBOR + .25%, 5.57%, due 10/25/35 | 2,105,862 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||
5,000,000 | Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, Variable Rate, 1 mo. LIBOR + .15%, 5.47%, due 03/25/36 | 5,000,877 | |||||||||
2,746,444 | Master Asset-Backed Securities Trust, Series 06-HE1, Class A1, Variable Rate, 1 mo. LIBOR + .08%, 5.40%, due 01/25/36 | 2,747,295 | |||||||||
3,000,000 | Master Asset-Backed Securities Trust, Series 06-HE2, Class A3, Variable Rate, 1 mo. LIBOR + .15%, 5.47%, due 06/25/36 | 2,999,826 | |||||||||
6,760,000 | Master Asset-Backed Securities Trust, Series 06-HE3, Class A3, Variable Rate, 1 mo. LIBOR + .15% Mabs, 5.48%, due 08/25/36 | 6,760,000 | |||||||||
5,512,511 | Master Second Lien Trust, Series 06-1, Class A, Variable Rate, 1 mo. LIBOR + .16%, 5.48%, due 03/25/36 | 5,518,547 | |||||||||
10,000,000 | Merrill Lynch Mortgage Investors Trust, Class 06-SD1, Series A, Variable Rate, 1 mo. LIBOR + .28%, 1.19%, due 07/25/09 | 10,000,000 | |||||||||
3,000,000 | Morgan Stanley Home Equity Loans, Series 06-3, Class A3, Variable Rate, 1 mo. LIBOR + .16%, 5.48%, due 04/25/36 | 2,962,500 | |||||||||
936,161 | New Century Home Equity Loan Trust, Series 05-3, Class A2A, Variable Rate, 1 mo. LIBOR + .09%, 5.41%, due 07/25/35 | 936,245 | |||||||||
4,500,000 | Nomura Home Equity Loan, Inc., Series 05-FM1, Class 2A2, Variable Rate, 1 mo. LIBOR + .22%, 5.54%, due 05/25/35 | 4,504,922 | |||||||||
10,000,000 | Nomura Home Equity Loan, Inc., Series 06-FM1, Class 2A3, Variable Rate, 1 mo. LIBOR + .15%, 5.48%, due 07/25/36 | 10,000,000 | |||||||||
8,000,000 | Option One Mortgage Loan Trust, Series 05-3, Class A4, Variable Rate, 1 mo. LIBOR + .25%, 5.57%, due 08/25/35 | 8,015,000 | |||||||||
284,916 | Ownit Mortgage Loan Asset Backed Certificates, Series 05-2, Class A2A, Variable Rate, 1 mo. LIBOR + .11%, 5.43%, due 03/25/36 | 285,695 | |||||||||
8,120,271 | Park Place Securities, Inc., Series 05-WCW2, Class A2B, Variable Rate, 1 mo. LIBOR + .15%, 5.47%, due 07/25/35 | 8,134,888 | |||||||||
6,184,786 | Park Place Securities, Inc., Series 05-WCWI, Class A3B, Variable Rate, 1 mo. LIBOR + .16%, 5.48%, due 09/25/35 | 6,188,651 | |||||||||
7,530,198 | People's Choice Home Loan Securities Trust, Series 05-3, Class 1A2, Variable Rate, 1 mo. LIBOR + .27%, 5.59%, due 08/25/35 | 7,540,468 | |||||||||
7,000,000 | People's Choice Home Loan Securities Trust, Series 05-4, Class 1A2, Variable Rate, 1 mo. LIBOR + .26%, 5.58%, due 12/25/35 | 7,018,620 | |||||||||
2,277,494 | RAAC Series Trust, Series 05-RP3, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .23%, 5.55%, due 05/25/39 | 2,277,471 | |||||||||
4,000,000 | Residential Asset Mortgage Products, Inc., Series 05-RS4, Class A3, Variable Rate, 1 mo. LIBOR + .23%, 5.55%, due 04/25/35 | 4,001,250 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||
5,249,776 | Residential Asset Securities Corp., Series 04-KS12, Class AI2, Variable Rate, 1 mo. LIBOR + .23%, 5.55%, due 01/25/35 | 5,251,417 | |||||||||
10,000,000 | Securitized Asset Backed Receivables LLC Trust, Series 06-HE1, Class A2C, Variable Rate, 1 mo. LIBOR + .16%, 5.49%, due 07/25/36 | 9,999,953 | |||||||||
1,181,401 | Security National Mortgage Loan Trust, Series 05-2A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .29%, 5.68%, due 02/25/36 | 1,182,001 | |||||||||
3,500,000 | SG Mortgage Securities Trust, Series 05-OPT1, Class A2, Variable Rate, 1 mo. LIBOR + .26%, 5.58%, due 10/25/35 | 3,508,190 | |||||||||
429,553 | Specialty Underwriting & Residential Finance, Series 05-BC2, Class A2A, Variable Rate, 1 mo. LIBOR + .10%, 5.42%, due 12/25/35 | 430,845 | |||||||||
4,000,000 | Specialty Underwriting & Residential Finance, Series 06-BC3, Class A2C, Variable Rate, 1 mo. LIBOR + .15%, 5.47%, due 06/25/37 | 4,000,000 | |||||||||
3,000,000 | Structured Asset Investment Loan Trust, Series 06-1, Class A3, Variable Rate, 1 mo. LIBOR + .20%, 5.52%, due 01/25/36 | 3,003,589 | |||||||||
7,000,000 | Structured Asset Securities Corp., Series 05-S6, Class A2, Variable Rate, 1 mo. LIBOR + .29%, 5.61%, due 11/25/35 | 7,013,930 | |||||||||
5,721,482 | Structured Asset Securities Corp., Series 05-WF1, Class A2, Variable Rate, 1 mo. LIBOR + .20%, 5.52%, due 02/25/35 | 5,730,082 | |||||||||
323,282,158 | |||||||||||
Residential Mortgage-Backed Securities (Australian) — 3.0% | |||||||||||
3,940,409 | Australian Mortgage Securities II, Series G3, Class A1A, Variable Rate, 3 mo. LIBOR + .21%, 5.72%, due 01/10/35 | 3,949,865 | |||||||||
4,800,455 | Crusade Global Trust, Series 04-2, Class A1, Variable Rate, 3 mo. LIBOR + .13%, 5.52%, due 11/19/37 | 4,807,743 | |||||||||
6,618,721 | Crusade Global Trust, Series 06-1, Class A1, 144A, Variable Rate, 3 mo. LIBOR + .06%, 5.56%, due 07/20/38 | 6,611,044 | |||||||||
10,185,689 | Interstar Millennium Trust, Series 05-1G, Class A, Variable Rate, 3 mo. LIBOR + .12%, 5.39%, due 12/08/36 | 10,192,106 | |||||||||
4,275,038 | Medallion Trust, Series 05-1G, Class A1, Variable Rate, 3 mo. LIBOR + .08%, 5.53%, due 05/10/36 | 4,275,252 | |||||||||
6,412,826 | Medallion Trust, Series 06-1G, Class A1, Variable Rate, 3 mo. LIBOR + .05%, 5.37%, due 06/14/37 | 6,412,634 | |||||||||
3,708,982 | National RMBS Trust, Series 04-1, Class A1, Variable Rate, 3 mo. LIBOR + .11%, 5.52%, due 03/20/34 | 3,709,390 |
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)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Residential Mortgage-Backed Securities (Australian) — continued | |||||||||||
2,962,014 | Westpac Securitization Trust, Series 05-1G, Class A1, Variable Rate, 3 mo. LIBOR + .07%, 5.52%, due 03/23/36 | 2,961,481 | |||||||||
42,919,515 | |||||||||||
Residential Mortgage-Backed Securities (European) — 6.1% | |||||||||||
11,000,000 | Aire Valley Mortgages, Series 06-1A, Class 1A, 144A, Variable Rate, 1 mo. LIBOR + .11%, 5.43%, due 09/20/66 | 11,003,300 | |||||||||
4,000,000 | Gracechurch Mortgage Funding Plc, Series 1A, Class A2B, 144A, Variable Rate, 3 mo. LIBOR + .07%, 5.58%, due 10/11/41 | 4,001,133 | |||||||||
1,142,850 | Granite Master Issuer Plc, Series 05-1, Class A1, Variable Rate, 1 mo. LIBOR + .04%, 5.37%, due 12/20/19 | 1,142,863 | |||||||||
5,000,000 | Granite Master Issuer Plc, Series 05-2, Class A4, Variable Rate, 3 mo. LIBOR + .08%, 5.47%, due 12/20/54 | 5,000,000 | |||||||||
10,000,000 | Holmes Financing Plc, Series 10A, Class 4A1, 144A, Variable Rate, 3 mo. LIBOR + .08%, 5.55%, due 07/15/40 | 10,000,500 | |||||||||
5,236,560 | Leek Finance Plc, Series 15A, Class AB, 144A, Variable Rate, 3 mo. LIBOR + .14%, 5.56%, due 03/21/37 | 5,233,942 | |||||||||
10,000,000 | Leek Finance Plc, Series 16A, Class A2B, 144A, Variable Rate, 3 mo. LIBOR + .16%, 5.58%, due 09/21/37 | 10,011,600 | |||||||||
3,000,000 | Mound Financing Plc, Series 5A, Class 2A, 144A, Variable Rate, 3 mo. LIBOR + .04%, 5.54%, due 05/08/16 | 3,000,469 | |||||||||
5,380,762 | Paragon Mortgages Plc, Series 11A, Class A1, 144A, Variable Rate, 1 mo. LIBOR - .01%, 5.32%, due 10/15/41 | 5,379,686 | |||||||||
5,000,000 | Paragon Mortgages Plc, Series 12A, Class A2C, 144A, Variable Rate, 3 mo. LIBOR + .11%, 5.63%, due 11/15/38 | 4,999,588 | |||||||||
7,000,000 | Paragon Mortgages Plc, Series 6A, Class A2A, 144A, Variable Rate, 3 mo. LIBOR + .35%, 5.68%, due 03/15/30 | 7,015,371 | |||||||||
3,550,000 | Permanent Financing Plc, Series 6, Class 2A, Variable Rate, 3 mo. LIBOR + .09%, 5.39%, due 12/10/11 | 3,555,822 | |||||||||
5,000,000 | Permanent Financing Plc, Series 7, Class 2A, Variable Rate, 3 mo. LIBOR + .04%, 5.43%, due 09/10/14 | 5,004,687 | |||||||||
6,000,000 | Permanent Financing Plc, Series 8, Class 2A, Variable Rate, 3 mo. LIBOR + .07%, 5.37%, due 06/10/14 | 6,010,740 | |||||||||
4,239,620 | Residential Mortgage Securities, Series 20A, Class A1B, 144A, Variable Rate, 3 mo. LIBOR + .07%, 5.52%, due 08/10/30 | 4,239,620 | |||||||||
85,599,321 |
See accompanying notes to the financial statements.
14
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Student Loans — 5.7% | |||||||||||
5,000,000 | College Loan Corp. Trust, Series 04-1, Class A2, Variable Rate, 3 mo. LIBOR + .11%, 5.60%, due 04/25/16 | 5,004,687 | |||||||||
2,000,000 | College Loan Corp. Trust, Series 05-1, Class A1, Variable Rate, 3 mo. LIBOR + .03%, 5.52%, due 01/25/14 | 2,002,188 | |||||||||
2,250,712 | Collegiate Funding Services Education Loan Trust I, Series 05-A, Class A1, Variable Rate, 3 mo. LIBOR + .02%, 5.51%, due 09/29/14 | 2,250,712 | |||||||||
4,348,837 | Goal Capital Funding Trust, Series 06-1, Class A1, Variable Rate, 3 mo. LIBOR, 5.40%, due 08/25/20 | 4,348,778 | |||||||||
4,081,681 | Keycorp Student Loan Trust, Series 05-A, Class 2A1, Variable Rate, 3 mo. LIBOR + .05%, 5.53%, due 09/27/21 | 4,081,722 | |||||||||
3,868,607 | Montana Higher Education Student Assistance Corp., Series 05-1, Class A, Variable Rate, 3 mo. LIBOR + .04%, 5.45%, due 06/20/15 | 3,875,184 | |||||||||
8,000,000 | National Collegiate Student Loan Trust, Series 05-2, Class A2, Variable Rate, 1 mo. LIBOR + .15%, 5.47%, due 02/25/26 | 7,989,680 | |||||||||
2,000,000 | National Collegiate Student Loan Trust, Series 06-1, Class A2, Variable Rate, 1 mo. LIBOR + .14%, 5.46%, due 08/25/23 | 2,001,250 | |||||||||
7,826,444 | National Collegiate Student Loan Trust, Series 06-A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .08%, 5.40%, due 08/26/19 | 7,826,366 | |||||||||
7,000,000 | Nelnet Student Loan Corp., Series 04-2A, Class A3, Variable Rate, 3 mo. LIBOR + .10%, 5.50%, due 11/25/15 | 7,003,360 | |||||||||
9,000,000 | Nelnet Student Loan Trust, Series 05-3, Class A3, Variable Rate, 3 mo. LIBOR + .05%, 5.49%, due 06/22/17 | 8,994,375 | |||||||||
5,000,000 | SLM Student Loan Trust, Series 05-3, Class A3, Variable Rate, 3 mo. LIBOR + .03%, 5.52%, due 07/25/16 | 4,995,808 | |||||||||
3,579,372 | SLM Student Loan Trust, Series 05-4, Class A1, Variable Rate, 3 mo. LIBOR + .01%, 5.50%, due 10/26/15 | 3,584,741 | |||||||||
7,146,459 | SLM Student Loan Trust, Series 05-6, Class A2, Variable Rate, 3 mo. LIBOR, 5.49%, due 07/25/16 | 7,148,692 | |||||||||
3,155,111 | SLM Student Loan Trust, Series 05-7, Class A1, Variable Rate, 3 mo. LIBOR, 5.49%, due 01/25/18 | 3,154,827 | |||||||||
2,441,379 | SLM Student Loan Trust, Series 06-1, Class A1, Variable Rate, 3 mo. LIBOR - .02%, 5.47%, due 01/25/12 | 2,441,379 | |||||||||
4,000,000 | Wachovia Student Loan Trust, Series 06-1, Class A1, 144A, Variable Rate, 3 mo. LIBOR - .02%, 5.51%, due 10/25/13 | 4,000,600 | |||||||||
80,704,349 | |||||||||||
Total Asset-Backed Securities | 1,258,192,157 |
See accompanying notes to the financial statements.
15
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) / Principal Amount | Description | Value ($) | |||||||||
Corporate Debt — 0.3% | |||||||||||
5,000,000 | TIAA Global Markets, 144A, Variable Rate, 3 mo. LIBOR + .10%, 5.60%, due 01/12/11 | 5,002,800 | |||||||||
U.S. Government — 3.6% | |||||||||||
25,116,800 | U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (a) (b) | 25,442,534 | |||||||||
25,000,000 | U.S. Treasury Note, 2.50%, due 10/31/06 (c) | 24,890,625 | |||||||||
50,333,159 | |||||||||||
U.S. Government Agency — 0.2% | |||||||||||
2,419,707 | Jamaica Aid, Variable Rate, 4 mo. LIBOR + .30%, 5.69%, due 10/01/18 | 2,419,707 | |||||||||
TOTAL DEBT OBLIGATIONS (COST $1,316,633,172) | 1,315,947,823 | ||||||||||
CALL OPTIONS PURCHASED — 0.4% | |||||||||||
Options on Interest Rate Swaps — 0.4% | |||||||||||
97,000,000 | USD Interest Rate Swaption, Expires 9/11/06, Strike 5.48% | 1,478,475 | |||||||||
98,000,000 | USD Interest Rate Swaption, Expires 9/18/06, Strike 5.41% | 1,018,244 | |||||||||
98,000,000 | USD Interest Rate Swaption, Expires 9/25/06, Strike 5.39% | 953,432 | |||||||||
98,000,000 | USD Interest Rate Swaption, Expires 9/29/06, Strike 5.31% | 591,773 | |||||||||
87,000,000 | USD Interest Rate Swaption, Expires 9/5/06, Strike 5.55% | 1,753,465 | |||||||||
5,795,389 | |||||||||||
TOTAL CALL OPTIONS PURCHASED (COST $2,758,169) | 5,795,389 | ||||||||||
PUT OPTIONS PURCHASED — 0.0% | |||||||||||
Options on Interest Rate Swaps — 0.0% | |||||||||||
97,000,000 | USD Interest Rate Swaption, Expires 9/11/06, Strike 5.48% | 9,477 | |||||||||
98,000,000 | USD Interest Rate Swaption, Expires 9/18/06, Strike 5.41% | 99,341 | |||||||||
98,000,000 | USD Interest Rate Swaption, Expires 9/25/06, Strike 5.39% | 184,703 | |||||||||
98,000,000 | USD Interest Rate Swaption, Expires 9/29/06, Strike 5.31% | 427,075 | |||||||||
87,000,000 | USD Interest Rate Swaption, Expires 9/5/06, Strike 5.55% | 15 | |||||||||
720,611 | |||||||||||
TOTAL PUT OPTIONS PURCHASED (COST $2,758,169) | 720,611 |
See accompanying notes to the financial statements.
16
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 7.0% | |||||||||||
Money Market Funds — 0.5% | |||||||||||
6,151,108 | Merrimac Cash Series-Premium Class | 6,151,108 | |||||||||
Other Short-Term Investments — 6.5% | |||||||||||
15,000,000 | Barton Capital Corp., 5.25%, due 9/12/06 | 14,975,938 | |||||||||
15,000,000 | Kitty Hawk Funding, 5.25%, due 9/6/06 | 14,989,063 | |||||||||
15,000,000 | Old Line Funding LLC, 5.26%, due 9/14/06 | 14,971,508 | |||||||||
25,000,000 | Sheffield Receivables, 5.30%, due 9/5/06 | 24,985,278 | |||||||||
20,000,000 | UBS Financial Services, 5.24%, due 9/7/06 | 19,982,533 | |||||||||
2,153,000 | Windmill Funding Corp., 5.27%, due 9/7/06 | 2,151,109 | |||||||||
92,055,429 | |||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $98,206,537) | 98,206,537 | ||||||||||
TOTAL INVESTMENTS — 100.6% (Cost $1,420,356,047) | 1,420,670,360 | ||||||||||
Other Assets and Liabilities (net) — (0.6%) | (8,488,173 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,412,182,187 |
See accompanying notes to the financial statements.
17
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||
Buys | |||||||||||||||||||||||
9/05/06 | AUD | 128,000 | $ | 97,728 | $ | (38 | ) | ||||||||||||||||
9/01/06 | CAD | 1,918,000 | 1,735,275 | (628 | ) | ||||||||||||||||||
9/05/06 | CHF | 556,000 | 451,720 | (55 | ) | ||||||||||||||||||
9/05/06 | EUR | 344,500 | 441,356 | 51 | |||||||||||||||||||
9/01/06 | JPY | 5,718,000 | 48,707 | (122 | ) | ||||||||||||||||||
9/01/06 | SEK | 7,157,000 | 987,608 | (3,666 | ) | ||||||||||||||||||
$ | (4,458 | ) | |||||||||||||||||||||
Sales | |||||||||||||||||||||||
9/05/06 | JPY | 3,555,000 | $ | 30,282 | $ | 17 | |||||||||||||||||
9/05/06 | SEK | 207,000 | 28,564 | (13 | ) | ||||||||||||||||||
$ | 4 |
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales | |||||||||||||||||||
8,376 | Eurodollar 90 Day | September 2007 | $ | 1,990,242,300 | $ | (5,153,985 | ) | ||||||||||||
91 | U.S. Treasury Note 10 Yr. | December 2006 | 9,771,125 | (30,889 | ) | ||||||||||||||
75 | U.S. Treasury Note 5 Yr. | December 2006 | 7,883,203 | (19,623 | ) | ||||||||||||||
$ | (5,204,497 | ) |
As of August 31, 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.
18
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
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 | $ | 112,265 | |||||||||||||||||||
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 | (49,763 | ) | |||||||||||||||||||
5,000,000 USD | 3/20/2015 | Lehman Brothers | Receive | 0.88 | % | Credit Swap AAA CDO | (43,579 | ) | |||||||||||||||||||
$ | 18,923 |
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||
320,400,000 EUR | 10/4/2008 | JP Morgan Chase Bank | Receive | 3.92 | % | 6 month EUR LIBOR | $ | 1,326,251 | |||||||||||||||||||
400,500,000 USD | 10/5/2008 | Deutsche Bank AG | (Pay) | 5.65 | % | 3 month LIBOR | (3,523,420 | ) | |||||||||||||||||||
410,000,000 USD | 11/3/2008 | Deutsche Bank AG | (Pay) | 5.39 | % | 3 month LIBOR | (1,789,926 | ) | |||||||||||||||||||
2,960,000,000 SEK | 11/3/2008 | Deutsche Bank AG | Receive | 3.70 | % | 3 month SEK STIBOR | (129,230 | ) | |||||||||||||||||||
2,000,000,000 SEK | 12/4/2008 | Barclays Bank Plc | Receive | 3.75 | % | 3 month SEK STIBOR | (12,684 | ) | |||||||||||||||||||
1,500,000,000 SEK | 12/4/2008 | JP Morgan Chase Bank | Receive | 3.75 | % | 3 month SEK STIBOR | (9,513 | ) | |||||||||||||||||||
480,000,000 USD | 12/5/2008 | JP Morgan Chase Bank | (Pay) | 5.17 | % | 3 month LIBOR | (364,778 | ) | |||||||||||||||||||
508,000,000 AUD | 12/20/2008 | Deutsche Bank AG | Receive | 6.35 | % | 3 month AUD BBSW | 790,169 | ||||||||||||||||||||
202,000,000 CAD | 12/20/2008 | Deutsche Bank AG | Receive | 4.50 | % | 3 month Canadian Dollar Offering Rate | 946,925 | ||||||||||||||||||||
125,000,000 USD | 12/20/2008 | Deutsche Bank AG | Receive | 5.50 | % | 3 month LIBOR | 883,693 | ||||||||||||||||||||
398,000,000 USD | 12/20/2008 | JP Morgan Chase Bank | Receive | 5.50 | % | 3 month LIBOR | 2,814,895 | ||||||||||||||||||||
1,135,000,000 SEK | 12/20/2008 | Citigroup | Receive | 3.60 | % | 3 month SEK STIBOR | (495,344 | ) | |||||||||||||||||||
2,108,000,000 SEK | 12/20/2008 | Deutsche Bank AG | Receive | 3.60 | % | 3 month SEK STIBOR | (919,986 | ) | |||||||||||||||||||
2,042,000,000 SEK | 12/20/2008 | JP Morgan Chase Bank | Receive | 3.60 | % | 3 month SEK STIBOR | (891,182 | ) | |||||||||||||||||||
253,000,000 CHF | 12/20/2008 | Deutsche Bank AG | (Pay) | 2.50 | % | 6 month CHF LIBOR | (370,746 | ) | |||||||||||||||||||
114,000,000 CHF | 12/20/2008 | JP Morgan Chase Bank | (Pay) | 2.50 | % | 6 month CHF LIBOR | (167,055 | ) | |||||||||||||||||||
202,000,000 CHF | 12/20/2008 | Merrill Lynch Capital Services Inc. | (Pay) | 2.50 | % | 6 month CHF LIBOR | (296,010) | ||||||||||||||||||||
164,400,000 GBP | 12/20/2008 | Deutsche Bank AG | Receive | 5.10 | % | 6 month GBP LIBOR | (512,520 | ) | |||||||||||||||||||
60,500,000 GBP | 12/20/2008 | Merrill Lynch Capital Services Inc. | Receive | 5.10 | % | 6 month GBP LIBOR | (188,610) | ||||||||||||||||||||
16,800,000,000 JPY | 12/20/2008 | Citigroup | (Pay) | 1.10 | % | 6 month JPY LIBOR | (757,255 | ) | |||||||||||||||||||
18,300,000,000 JPY | 12/20/2008 | Deutsche Bank AG | (Pay) | 1.10 | % | 6 month JPY LIBOR | (825,815 | ) |
See accompanying notes to the financial statements.
19
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Interest Rate Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||
81,550,000,000 JPY | 12/20/2008 | JP Morgan Chase Bank | (Pay) | 1.10 | % | 6 month JPY LIBOR | $ | (3,675,844 | ) | ||||||||||||||||||
72,700,000,000 JPY | 12/20/2008 | Merrill Lynch Capital Services Inc. | (Pay) | 1.10 | % | 6 month JPY LIBOR | (3,276,932) | ||||||||||||||||||||
137,000,000 EUR | 12/20/2008 | JP Morgan Chase Bank | (Pay) | 3.80 | % | 6 motn EUR LIBOR | (92,358 | ) | |||||||||||||||||||
5,000,000 USD | 2/7/2012 | Deutsche Bank AG | (Pay) | 4.34 | % | 3 month LIBOR | 207,878 | ||||||||||||||||||||
114,000,000 USD | 8/30/2013 | Deutsche Bank AG | Receive | 5.30 | % | 3 month LIBOR | 489,916 | ||||||||||||||||||||
126,000,000 USD | 8/30/2013 | JP Morgan Chase Bank | Receive | 5.30 | % | 3 month LIBOR | 534,172 | ||||||||||||||||||||
15,000,000 USD | 2/8/2015 | JP Morgan Chase Bank | (Pay) | 4.47 | % | 3 month LIBOR | 941,402 | ||||||||||||||||||||
41,300,000 GBP | 9/15/2016 | Deutsche Bank AG | (Pay) | 4.98 | % | 6 month GBP LIBOR | (436,501 | ) | |||||||||||||||||||
568,400,000 SEK | 9/19/2016 | Deutsche Bank AG | Receive | 4.28 | % | 3 month SEK STIBOR | 1,000,397 | ||||||||||||||||||||
569,300,000 SEK | 10/18/2016 | Deutsche Bank AG | Receive | 4.35 | % | 3 month SEK STIBOR | 1,366,934 | ||||||||||||||||||||
42,800,000 GBP | 10/18/2016 | Citigroup | (Pay) | 4.96 | % | 6 month GBP LIBOR | (334,640 | ) | |||||||||||||||||||
90,800,000 USD | 11/16/2016 | JP Morgan Chase Bank | (Pay) | 5.54 | % | 3 month LIBOR | (1,772,616 | ) | |||||||||||||||||||
657,000,000 SEK | 11/16/2016 | Deutsche Bank AG | Receive | 4.40 | % | 3 month SEK STIBOR | 1,877,890 | ||||||||||||||||||||
48,000,000 CAD | 12/20/2016 | Deutsche Bank AG | (Pay) | 4.80 | % | 3 month Canadian Dollar Offering Rate | (875,872) | ||||||||||||||||||||
31,000,000 USD | 12/20/2016 | Deutsche Bank AG | (Pay) | 5.50 | % | 3 month LIBOR | (506,210 | ) | |||||||||||||||||||
97,000,000 USD | 12/20/2016 | JP Morgan Chase Bank | (Pay) | 5.50 | % | 3 month LIBOR | (1,583,948 | ) | |||||||||||||||||||
267,000,000 SEK | 12/20/2016 | Citigroup | (Pay) | 4.30 | % | 3 month SEK STIBOR | (422,134 | ) | |||||||||||||||||||
497,000,000 SEK | 12/20/2016 | Deutsche Bank AG | (Pay) | 4.30 | % | 3 month SEK STIBOR | (785,769 | ) | |||||||||||||||||||
481,000,000 SEK | 12/20/2016 | JP Morgan Chase Bank | (Pay) | 4.30 | % | 3 month SEK STIBOR | (760,473 | ) | |||||||||||||||||||
127,000,000 AUD | 12/20/2016 | Deutsche Bank AG | (Pay) | 6.35 | % | 6 month AUD BBSW | (1,439,930 | ) | |||||||||||||||||||
56,000,000 CHF | 12/20/2016 | Deutsche Bank AG | Receive | 3.20 | % | 6 month CHF LIBOR | 1,226,851 | ||||||||||||||||||||
26,000,000 CHF | 12/20/2016 | JP Morgan Chase Bank | Receive | 3.20 | % | 6 month CHF LIBOR | 569,609 | ||||||||||||||||||||
45,000,000 CHF | 12/20/2016 | Merrill Lynch Capital Services Inc. | Receive | 3.20 | % | 6 month CHF LIBOR | 985,862 | ||||||||||||||||||||
32,000,000 EUR | 12/20/2016 | JP Morgan Chase Bank | Receive | 4.30 | % | 6 month EUR LIBOR | 904,460 | ||||||||||||||||||||
38,000,000 GBP | 12/20/2016 | Deutsche Bank AG | (Pay) | 5.00 | % | 6 month GBP LIBOR | (577,461 | ) | |||||||||||||||||||
14,000,000 GBP | 12/20/2016 | Merrill Lynch Capital Services Inc. | (Pay) | 5.00 | % | 6 month GBP LIBOR | (212,749) | ||||||||||||||||||||
3,600,000,000 JPY | 12/20/2016 | Citigroup | Receive | 2.15 | % | 6 month JPY LIBOR | 760,139 | ||||||||||||||||||||
4,000,000,000 JPY | 12/20/2016 | Deutsche Bank AG | Receive | 2.15 | % | 6 month JPY LIBOR | 844,598 | ||||||||||||||||||||
17,500,000,000 JPY | 12/20/2016 | JP Morgan Chase Bank | Receive | 2.15 | % | 6 month JPY LIBOR | 3,695,118 | ||||||||||||||||||||
16,000,000,000 JPY | 12/20/2016 | Merrill Lynch Capital | Receive | 2.15 | % | 6 month JPY LIBOR | 3,378,394 | ||||||||||||||||||||
Services Inc. | |||||||||||||||||||||||||||
65,000,000 USD | 8/30/2021 | Deutsche Bank AG | (Pay) | 5.43 | % | 3 month LIBOR | (447,838 | ) | |||||||||||||||||||
71,000,000 USD | 8/30/2021 | JP Morgan Chase Bank | (Pay) | 5.43 | % | 3 month LIBOR | (470,951 | ) | |||||||||||||||||||
$ | (3,380,747 | ) |
See accompanying notes to the financial statements.
20
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 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 (Note 2).
(c) All or a portion of this security has been segregated to cover collateral requirements on open swap contracts (Note 2).
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBR - British Pound
JPY - Japanese Yen
SEK - Swedish Krona
USD - United States Dollar
See accompanying notes to the financial statements.
21
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value (cost $1,420,356,047) (Note 2) | $ | 1,420,670,360 | |||||
Cash | 3,668,673 | ||||||
Receivable for Fund shares sold | 2,700,000 | ||||||
Interest receivable | 5,215,992 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 68 | ||||||
Receivable for open swap contracts (Note 2) | 25,657,818 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 24,056 | ||||||
Total assets | 1,457,936,967 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 10,000,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 1,768 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 4,522 | ||||||
Interest payable for open swap contracts | 124,689 | ||||||
Payable for open swap contracts (Note 2) | 29,019,642 | ||||||
Payable for closed swap contracts (Note 2) | 1,099,755 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 1,078,153 | ||||||
Payable for option premiums (Note 2) | 4,363,451 | ||||||
Accrued expenses | 62,800 | ||||||
Total liabilities | 45,754,780 | ||||||
Net assets | $ | 1,412,182,187 | |||||
Net assets consist of: | |||||||
Net Capital(1) | $ | 1,419,480,895 | |||||
Net unrealized depreciation | (7,298,708 | ) | |||||
$ | 1,412,182,187 | ||||||
Shares outstanding | 55,504,048 | ||||||
Net asset value per share | $ | 25.44 |
(1) Net capital includes net investment income (loss) and net realized gain (loss) on investments.
See accompanying notes to the financial statements.
22
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Interest | $ | 30,197,863 | |||||
Total investment income | 30,197,863 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 86,664 | ||||||
Audit and tax fees | 41,308 | ||||||
Legal fees | 10,396 | ||||||
Trustees fees and related expenses (Note 3) | 8,502 | ||||||
Interest expense (Note 2) | 14,271 | ||||||
Miscellaneous | 7,544 | ||||||
Total expenses | 168,685 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (142,692 | ) | |||||
Net expenses | 25,993 | ||||||
Net investment income (loss) | 30,171,870 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (42,336 | ) | |||||
Closed futures contracts | (8,149,973 | ) | |||||
Closed swap contracts | (28,927,292 | ) | |||||
Written options | 12,992,868 | ||||||
Net realized gain (loss) | (24,126,733 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 1,896,142 | ||||||
Open futures contracts | (3,508,841 | ) | |||||
Open swap contracts | 4,562,389 | ||||||
Written options | (1,440,469 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (4,561 | ) | |||||
Net unrealized gain (loss) | 1,504,660 | ||||||
Net realized and unrealized gain (loss) | (22,622,073 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | 7,549,797 |
See accompanying notes to the financial statements.
23
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 30,171,870 | $ | 32,700,349 | |||||||
Net realized gain (loss) | (24,126,733 | ) | (19,117,031 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 1,504,660 | (9,650,704 | ) | ||||||||
Net increase (decrease) in net assets from operations | 7,549,797 | 3,932,614 | |||||||||
Net share transactions (Note 7): | 392,355,000 | 426,066,000 | |||||||||
Total increase (decrease) in net assets | 399,904,797 | 429,998,614 | |||||||||
Net assets: | |||||||||||
Beginning of period | 1,012,277,390 | 582,278,776 | |||||||||
End of period | $ | 1,412,182,187 | $ | 1,012,277,390 |
See accompanying notes to the financial statements.
24
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Financial Highlights
(For a share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28, | ||||||||||||||
(Unaudited) | 2006 | 2005(a) | |||||||||||||
Net asset value, beginning of period | $ | 25.23 | $ | 25.17 | $ | 25.00 | |||||||||
Income (loss) from investment operations: | |||||||||||||||
Net investment income (loss)† | 0.67 | 0.96 | 0.15 | ||||||||||||
Net realized and unrealized gain (loss) | (0.46 | ) | (0.90 | ) | 0.02 | ||||||||||
Total from investment operations | 0.21 | 0.06 | 0.17 | ||||||||||||
Net asset value, end of period | $ | 25.44 | $ | 25.23 | $ | 25.17 | |||||||||
Total Return(b) | 0.83 | %** | 0.24 | % | 0.68 | %** | |||||||||
Ratios/Supplemental Data: | |||||||||||||||
Net assets, end of period (000's) | $ | 1,412,182 | $ | 1,012,277 | $ | 582,279 | |||||||||
Net expenses to average daily net assets | 0.00 | %*(c) | 0.00 | %(c) | 0.01 | %* | |||||||||
Interest expense to average daily net assets | 0.00 | %*(c) | — | — | |||||||||||
Total net expenses to average daily net assets | 0.00 | %*(c) | 0.00 | %(c) | 0.00 | %* | |||||||||
Net investment income to average daily net assets | 5.24 | %* | 3.84 | % | 2.21 | %* | |||||||||
Portfolio turnover rate | 53 | %** | 31 | % | 8 | %** | |||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 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) Ratio is less than 0.01%.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
25
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks total return in excess of the JPMorgan U.S. 3 Month Cash Index. The Fund's investment program has two principal components. One component of the Fund's investment program involves the use of derivatives, primarily interest rate swap contracts, to seek to exploit misvaluations in world interest rates and to add value relative to the JPMorgan U.S. 3 Month Cash Index. The other component of the Fund's investment program involves making direct investments primarily in high quality U.S. and foreign fixed income securities, in particular asset-backed securities, to gain exposure to the JPMorgan U.S. 3 Month Cash Index (and to securities with similar characteristics to those in the benchmark) and to generate a core return.
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 generally 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 pursuant to procedures approved by the Trustees.
26
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 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. As of August 31, 2006, the total value of these securities represented 34.3% 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 including 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 lo ss 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. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
27
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may write call and put options. 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 t he 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. There were no written options outstanding at the end of the period.
28
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
For the six months ended August 31, 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 | $ | 212,000,000 | $ | 1,374,150 | $ | 212,000,000 | $ | 1,374,150 | |||||||||||
Options written | — | — | 350,000,000 | 945,000 | |||||||||||||||
Options exercised | (212,000,000 | ) | (1,374,150 | ) | — | — | |||||||||||||
Options expired | — | — | (562,000,000 | ) | (2,319,150 | ) | |||||||||||||
Options sold | — | — | — | — | |||||||||||||||
Outstanding, end of period | $ | — | $ | — | $ | — | $ | — |
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. 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. Purchased options outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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.
29
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no loan agreements outstanding at the end of the period.
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. Indexed securities held by the Fund at the end of the period are listed in the Fund's Schedule of Investments.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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. Credit default swaps may be used to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where a party 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
30
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. There were no repurchase agreements o utstanding at the end of the period.
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. There were no reverse repurchase agreements outstanding at the end of the period.
31
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 six months ended A ugust 31, 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.
As of August 31, 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) | ||||||||||||
$ | 1,420,356,047 | $ | 4,023,122 | $ | (3,708,809 | ) | $ | 314,313 |
Distributions
The Fund does not intend to make any distributions to its shareholders but may do so in the sole discretion of the Trustees.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
32
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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, if any, 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 capit al 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, the Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 (excluding fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 six months ended August 31, 2006 was $5,834 and $2,852, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $588,292,515 and $833,683,216, respectively.
33
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 63.0% 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 August 31, 2006, all 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||
Shares sold | 25,935,456 | $ | 661,690,000 | 21,368,341 | $ | 535,516,000 | |||||||||||||
Shares repurchased | (10,556,798 | ) | (269,335,000 | ) | (4,377,470 | ) | (109,450,000 | ) | |||||||||||
Net increase (decrease) | 15,378,658 | $ | 392,355,000 | 16,990,871 | $ | 426,066,000 |
34
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO World Opportunity Overlay Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees gave substantial consideration to the fact that the Fund does not pay an advisory fee to the Manager under the Fund's investment management agreement. The Trustees also considered the so-called "fallout benefits" to the Manager, such as the reputational value derived from serving as investment
35
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees did not consider possible economies of scale to the Manager because the Manager does not receive an advisory fee from the Fund.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
36
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | $ | 1,008.30 | $ | 0.00 | *** | ||||||||||
2) Hypothetical | 0.00 | %** | $ | 1,000.00 | $ | 1,025.21 | $ | 0.00 | *** |
* Expenses are calculated using the annualized expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
** Annualized net expense ratios are less than 0.01%.
*** Net expenses incurred are less than $0.01.
37
GMO International Core Equity Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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 Core Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.1 | % | |||||
Short-Term Investments | 5.4 | ||||||
Preferred Stocks | 0.5 | ||||||
Futures | 0.1 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Other | (2.1 | ) | |||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
Japan | 26.7 | % | |||||
United Kingdom | 24.4 | ||||||
France | 11.2 | ||||||
Germany | 9.4 | ||||||
Switzerland | 6.4 | ||||||
Netherlands | 6.0 | ||||||
Australia | 2.9 | ||||||
Italy | 2.9 | ||||||
Canada | 2.4 | ||||||
Finland | 2.1 | ||||||
Sweden | 1.4 | ||||||
Spain | 1.0 | ||||||
Belgium | 0.8 | ||||||
Singapore | 0.6 | ||||||
Hong Kong | 0.5 | ||||||
Norway | 0.5 | ||||||
Austria | 0.5 | ||||||
Ireland | 0.3 | ||||||
100.0 | % |
1
GMO International Core Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Industry Sector Summary | % of Equity Investments | ||||||
Financials | 29.8 | % | |||||
Consumer Discretionary | 14.5 | ||||||
Materials | 11.0 | ||||||
Energy | 10.3 | ||||||
Industrials | 9.5 | ||||||
Health Care | 9.3 | ||||||
Consumer Staples | 5.4 | ||||||
Utilities | 4.5 | ||||||
Information Technology | 3.3 | ||||||
Telecommunication Services | 2.4 | ||||||
100.0 | % |
2
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 96.1% | |||||||||||
Australia — 2.8% | |||||||||||
141 | Aristocrat Leisure Ltd | 1,407 | |||||||||
416,671 | Australia and New Zealand Banking Group Ltd | 8,650,831 | |||||||||
926,532 | BHP Billiton Ltd | 19,516,445 | |||||||||
204,777 | Commonwealth Bank of Australia | 7,136,329 | |||||||||
581,561 | Foster's Group Ltd | 2,640,021 | |||||||||
1,027,813 | Investa Property Group | 1,858,096 | |||||||||
682,231 | Mirvac Group Ltd | 2,379,083 | |||||||||
62,753 | National Australia Bank Ltd | 1,735,801 | |||||||||
187,821 | Rio Tinto Ltd | 10,423,527 | |||||||||
220,809 | Santos Ltd | 1,886,496 | |||||||||
1,243,649 | Telstra Corp Ltd | 3,419,338 | |||||||||
161,983 | Woodside Petroleum Ltd | 5,211,054 | |||||||||
361,142 | Woolworths Ltd | 5,700,564 | |||||||||
435,413 | Zinifex Ltd | 3,930,545 | |||||||||
74,489,537 | |||||||||||
Austria — 0.4% | |||||||||||
19,106 | Austrian Airlines * (a) | 159,007 | |||||||||
38,160 | Boehler Uddeholm (Bearer) | 2,053,242 | |||||||||
7,533 | Flughafen Wien AG | 610,675 | |||||||||
2,960 | Mayr-Melnhof Karton AG (Bearer) | 519,565 | |||||||||
88,416 | OMV AG | 4,719,160 | |||||||||
89,884 | Voestalpine AG | 3,405,568 | |||||||||
11,467,217 | |||||||||||
Belgium — 0.8% | |||||||||||
8,432 | Colruyt SA (a) | 1,433,321 | |||||||||
17,700 | Delhaize Group | 1,347,236 | |||||||||
145,815 | Dexia | 3,745,988 | |||||||||
267,276 | Fortis | 10,407,567 | |||||||||
67,002 | UCB SA | 3,927,540 | |||||||||
20,861,652 |
See accompanying notes to the financial statements.
3
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Canada — 2.3% | |||||||||||
89,900 | Alcan Inc | 4,043,182 | |||||||||
144,100 | Canadian Imperial Bank of Commerce | 10,472,770 | |||||||||
240,000 | Canadian Natural Resources | 12,600,380 | |||||||||
156,600 | EnCana Corp | 8,217,498 | |||||||||
205,300 | Goldcorp Inc | 5,674,401 | |||||||||
25,400 | Magna International Inc Class A | 1,822,788 | |||||||||
63,700 | National Bank of Canada | 3,456,156 | |||||||||
223,600 | Petro-Canada | 9,548,467 | |||||||||
124,200 | Royal Bank of Canada | 5,503,769 | |||||||||
61,339,411 | |||||||||||
Finland — 2.1% | |||||||||||
316,321 | Fortum Oyj | 8,500,095 | |||||||||
77,100 | Kesko Oyj Class B | 3,265,576 | |||||||||
168,700 | Metso Oyj | 6,284,110 | |||||||||
60,750 | Neste Oil Oyj | 1,909,135 | |||||||||
606,518 | Nokia Oyj | 12,676,950 | |||||||||
206,600 | Outokumpu Oyj (a) | 5,256,682 | |||||||||
172,202 | Rautaruukki Oyj | 5,033,544 | |||||||||
320,849 | Sampo Oyj Class A | 6,641,550 | |||||||||
1,880 | Stora Enso Oyj (R Shares) | 28,528 | |||||||||
197,850 | YIT Oyj | 4,297,627 | |||||||||
53,893,797 | |||||||||||
France — 10.9% | |||||||||||
270,133 | Alcatel SA * | 3,384,948 | |||||||||
57,332 | Alstom * | 5,407,117 | |||||||||
269,795 | Axa (a) | 10,034,676 | |||||||||
477,933 | BNP Paribas | 50,817,608 | |||||||||
44,533 | Cap Gemini SA | 2,442,350 | |||||||||
78,841 | Carrefour SA | 4,867,302 | |||||||||
101,330 | Cie de Saint-Gobain | 7,517,555 | |||||||||
419,209 | Credit Agricole SA | 17,034,505 | |||||||||
31,083 | Lafarge SA | 4,007,294 |
See accompanying notes to the financial statements.
4
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
France — continued | |||||||||||
48,852 | L'Oreal SA | 5,115,327 | |||||||||
73,054 | LVMH Moet Hennessy Louis Vuitton SA | 7,525,412 | |||||||||
60,058 | Michelin SA Class B | 4,078,957 | |||||||||
147,025 | Mittal Steel Company NV | 4,906,806 | |||||||||
222,114 | Peugeot SA | 12,532,310 | |||||||||
188,470 | Renault SA | 21,961,336 | |||||||||
44,953 | Sanofi-Aventis | 4,037,305 | |||||||||
69,455 | Schneider Electric SA | 7,408,673 | |||||||||
126,064 | Societe Generale | 20,362,143 | |||||||||
109,357 | Suez SA | 4,682,345 | |||||||||
1,114,881 | Total SA | 75,285,692 | |||||||||
48,503 | Vallourec SA | 10,863,814 | |||||||||
22,700 | Vinci SA | 2,457,388 | |||||||||
286,730,863 | |||||||||||
Germany — 8.6% | |||||||||||
44,108 | Adidas AG | 2,110,966 | |||||||||
24,612 | Allianz AG (Registered) | 4,183,281 | |||||||||
160,932 | Altana AG | 9,501,570 | |||||||||
163,925 | Bankgesellschaft Berlin AG * | 995,648 | |||||||||
258,486 | Bayerische Motoren Werke AG | 13,370,989 | |||||||||
355 | Celesio AG | 18,125 | |||||||||
561,374 | Commerzbank AG | 19,606,444 | |||||||||
301,275 | DaimlerChrysler AG (Registered) | 15,885,986 | |||||||||
457,279 | Depfa Bank Plc | 8,534,971 | |||||||||
224,737 | Deutsche Bank AG (Registered) | 25,689,391 | |||||||||
82,937 | Deutsche Boerse AG | 12,579,998 | |||||||||
114,390 | Deutsche Post AG (Registered) | 2,897,147 | |||||||||
100,121 | E. On AG | 12,709,378 | |||||||||
50,222 | Hochtief AG | 2,853,615 | |||||||||
151,055 | MAN AG | 11,557,937 | |||||||||
30,317 | Merck KGaA | 3,005,814 | |||||||||
154,471 | Muenchener Rueckversicherungs AG (Registered) | 23,224,240 | |||||||||
9,555 | Puma AG Rudolf Dassler Sport | 3,326,988 |
See accompanying notes to the financial statements.
5
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Germany — continued | |||||||||||
57,731 | Salzgitter AG | 5,171,532 | |||||||||
51,621 | SAP AG | 9,855,398 | |||||||||
181,044 | Suedzucker AG | 4,506,891 | |||||||||
554,058 | ThyssenKrupp AG | 18,849,218 | |||||||||
208,094 | TUI AG (a) | 4,082,387 | |||||||||
153,765 | Volkswagen AG (a) | 12,275,315 | |||||||||
226,793,229 | |||||||||||
Hong Kong — 0.5% | |||||||||||
509,200 | Cheung Kong Holdings Ltd | 5,620,465 | |||||||||
481,500 | CLP Holdings Ltd | 3,044,750 | |||||||||
428,000 | Hang Lung Group Co Ltd | 1,158,127 | |||||||||
636,500 | Hong Kong Electric Holdings Ltd | 3,043,341 | |||||||||
283,000 | Yue Yuen Industrial Holdings | 818,680 | |||||||||
13,685,363 | |||||||||||
Ireland — 0.3% | |||||||||||
209,230 | CRH Plc | 7,242,337 | |||||||||
63,149 | DCC Plc | 1,585,997 | |||||||||
8,828,334 | |||||||||||
Italy — 2.7% | |||||||||||
1,039,162 | Banca Monte dei Paschi di Siena SPA (a) | 6,320,986 | |||||||||
203,463 | Banca Popolare di Verona | 6,046,553 | |||||||||
1,421,766 | ENI SPA | 43,472,176 | |||||||||
374,387 | Fiat SPA * (a) | 5,366,422 | |||||||||
1,354,475 | UniCredito Italiano SPA | 10,793,650 | |||||||||
71,999,787 | |||||||||||
Japan — 25.8% | |||||||||||
24,580 | Acom Co Ltd | 1,096,875 | |||||||||
288,900 | Aeon Co Ltd | 7,248,263 | |||||||||
102,800 | Astellas Pharma Inc | 4,159,038 | |||||||||
270,750 | Canon Inc | 13,450,406 |
See accompanying notes to the financial statements.
6
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
163,000 | Chiyoda Corp | 3,555,220 | |||||||||
337,700 | Chubu Electric Power Co Inc | 9,138,984 | |||||||||
381,000 | Daido Steel Co Ltd | 2,911,700 | |||||||||
132,050 | Daiei Inc * (a) | 2,532,831 | |||||||||
233,748 | Daiichi Sankyo Co Ltd | 6,440,404 | |||||||||
459,000 | Daikyo Inc * (a) | 2,348,105 | |||||||||
1,231,000 | Daiwa Securities Group Inc | 14,570,809 | |||||||||
606 | East Japan Railway Co | 4,465,418 | |||||||||
99,200 | Eisai Co Ltd | 4,711,346 | |||||||||
754,000 | Fuji Heavy Industries Ltd | 4,347,391 | |||||||||
1,524,000 | Haseko Corp * (a) | 5,428,393 | |||||||||
1,515,300 | Honda Motor Co Ltd | 51,277,580 | |||||||||
86,500 | Hoya Corp | 3,131,302 | |||||||||
117,400 | Ibiden Co Ltd | 5,985,999 | |||||||||
205,900 | Isetan Co Ltd | 3,460,482 | |||||||||
1,196,000 | Ishikawajima-Harima Heavy Industries Co Ltd (a) | 3,463,606 | |||||||||
808,000 | Isuzu Motors Ltd (a) | 2,609,610 | |||||||||
1,414,000 | Itochu Corp | 11,808,360 | |||||||||
569,000 | Japan Steel Works Ltd (The) (a) | 4,012,597 | |||||||||
437,100 | Kansai Electric Power Co Inc | 10,471,965 | |||||||||
128,000 | Kao Corp | 3,407,623 | |||||||||
1,074,000 | Kawasaki Heavy Industries Ltd (a) | 3,379,732 | |||||||||
166,000 | Keisei Electric Railway Co (a) | 1,004,257 | |||||||||
595 | Kenedix Inc (a) | 2,851,598 | |||||||||
1,287,000 | Kobe Steel Ltd | 4,095,452 | |||||||||
868,000 | Komatsu Ltd | 15,752,503 | |||||||||
57,300 | Konami Corp | 1,454,906 | |||||||||
478,000 | Kubota Corp | 3,907,426 | |||||||||
164,700 | Kyushu Electric Power Co Inc | 3,923,139 | |||||||||
114,000 | Leopalance21 Corp | 4,023,309 | |||||||||
1,440,000 | Marubeni Corp | 7,656,108 | |||||||||
681,000 | Mazda Motor Corp | 4,342,945 | |||||||||
895,200 | Mitsubishi Corp | 18,121,366 | |||||||||
476,500 | Mitsubishi Estate Co Ltd | 10,213,959 |
See accompanying notes to the financial statements.
7
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
2,030,000 | Mitsubishi Heavy Industries | 8,469,235 | |||||||||
1,299,000 | Mitsubishi Materials Corp (a) | 5,621,382 | |||||||||
660,000 | Mitsubishi Rayon Co Ltd | 4,529,668 | |||||||||
3,359 | Mitsubishi UFJ Financial Group Inc | 45,567,697 | |||||||||
600,000 | Mitsui & Co | 8,657,366 | |||||||||
184,000 | Mitsui Fudosan Co Ltd | 4,103,435 | |||||||||
853,600 | Mitsui Trust Holding Inc | 9,941,522 | |||||||||
2,545 | Mizuho Financial Group Inc | 20,500,629 | |||||||||
156,000 | NGK Spark Plug Co Ltd | 3,161,807 | |||||||||
399,500 | Nikko Cordial Corp | 5,038,456 | |||||||||
312,000 | Nikon Corp (a) | 5,619,510 | |||||||||
29,200 | Nintendo Co Ltd | 5,969,339 | |||||||||
1,850 | Nippon Telegraph & Telephone Corp | 9,319,465 | |||||||||
390,000 | Nippon Yusen Kabushiki Kaisha | 2,408,469 | |||||||||
2,362,700 | Nissan Motor Co | 26,820,903 | |||||||||
76,900 | Nisshin Seifun Group Inc | 820,570 | |||||||||
709,500 | Nomura Holdings Inc | 13,612,781 | |||||||||
4,547 | NTT Docomo Inc | 7,029,055 | |||||||||
40,000 | Ono Pharmaceutical Co Ltd | 1,862,281 | |||||||||
56,640 | ORIX Corp | 14,953,841 | |||||||||
1,848,000 | Osaka Gas Co Ltd | 6,792,483 | |||||||||
21,500 | Promise Co Ltd | 959,417 | |||||||||
4,455 | Resona Holdings Inc | 13,970,766 | |||||||||
645,000 | Ricoh Company Ltd | 12,619,547 | |||||||||
78,800 | Seven & I Holdings Co Ltd | 2,771,140 | |||||||||
119,900 | Shinko Electric Industries Co Ltd | 3,466,835 | |||||||||
360,000 | Softbank Corp (a) | 6,226,009 | |||||||||
112,700 | Sony Corp | 4,888,586 | |||||||||
569,700 | Sumitomo Corp | 7,661,439 | |||||||||
310,000 | Sumitomo Light Metal Industry (a) | 677,712 | |||||||||
1,303,000 | Sumitomo Metal Industries Ltd | 5,338,553 | |||||||||
602,000 | Sumitomo Metal Mining Co Ltd | 8,431,462 | |||||||||
415 | Sumitomo Mitsui Financial Group Inc | 4,654,308 | |||||||||
206,000 | Sumitomo Realty & Development Co Ltd | 6,038,671 | |||||||||
477,000 | Sumitomo Trust & Banking Co Ltd | 5,051,039 |
See accompanying notes to the financial statements.
8
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
453,000 | Taiheiyo Cement Co Ltd | 1,697,655 | |||||||||
104,000 | Taisho Pharmaceutical Co Ltd | 2,030,184 | |||||||||
264,000 | Takashimaya Co Ltd | 3,311,702 | |||||||||
574,900 | Takeda Pharmaceutical Co Ltd | 37,988,448 | |||||||||
180,800 | Tohoku Electric Power Co Inc | 4,091,660 | |||||||||
109,400 | Tokyo Electric Power Co Inc | 3,115,867 | |||||||||
51,900 | Tokyo Electron Ltd | 3,399,063 | |||||||||
1,276,000 | Tokyo Gas Co Ltd | 6,768,660 | |||||||||
223,000 | TonenGeneral Sekiyu KK | 2,009,134 | |||||||||
474,000 | Toray Industries Inc | 3,761,229 | |||||||||
586,000 | Toshiba Corp | 4,156,440 | |||||||||
735,400 | Toyota Motor Corp | 39,742,452 | |||||||||
58,900 | Yamada Denki Co Ltd | 6,285,996 | |||||||||
139,000 | Yaskawa Electric Corp (a) | 1,593,855 | |||||||||
680,268,730 | |||||||||||
Netherlands — 5.8% | |||||||||||
1,013,058 | ABN Amro Holdings NV | 28,898,580 | |||||||||
827,977 | Aegon NV | 14,794,776 | |||||||||
126,179 | Akzo Nobel NV | 7,266,859 | |||||||||
154,373 | Buhrmann NV (a) | 2,101,359 | |||||||||
19,303 | Corio NV | 1,299,638 | |||||||||
12,700 | Euronext NV | 1,133,650 | |||||||||
59,012 | Euronext NV | 5,313,894 | |||||||||
848,581 | Hagemeyer NV * (a) | 4,291,019 | |||||||||
51,431 | Heineken Holding NV | 2,062,389 | |||||||||
271,973 | Heineken NV | 12,611,094 | |||||||||
1,183,391 | ING Groep NV | 51,271,062 | |||||||||
610,819 | Koninklijke Ahold NV * | 5,881,104 | |||||||||
72,636 | Koninklijke DSM | 2,873,638 | |||||||||
572,525 | Reed Elsevier NV | 9,199,510 | |||||||||
94,154 | TNT NV | 3,541,670 | |||||||||
11,869 | Wereldhave NV | 1,246,587 | |||||||||
153,786,829 |
See accompanying notes to the financial statements.
9
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Norway — 0.5% | |||||||||||
239,675 | Norsk Hydro ASA | 6,173,500 | |||||||||
255,300 | Statoil ASA | 6,892,874 | |||||||||
13,066,374 | |||||||||||
Singapore — 0.6% | |||||||||||
1,562,000 | Capitaland Ltd | 4,716,223 | |||||||||
742,500 | DBS Group Holdings Ltd | 8,476,790 | |||||||||
202,000 | Keppel Corp Ltd | 1,923,643 | |||||||||
458,000 | MobileOne Ltd | 593,923 | |||||||||
15,710,579 | |||||||||||
Spain — 1.0% | |||||||||||
54,960 | ACS Actividades de Construccion y Servicios SA | 2,465,772 | |||||||||
19,433 | Fomento de Construcciones y Contratas SA | 1,515,806 | |||||||||
356,964 | Iberdrola SA | 13,265,198 | |||||||||
312,116 | Repsol YPF SA | 8,979,982 | |||||||||
26,226,758 | |||||||||||
Sweden — 1.4% | |||||||||||
343,200 | Atlas Copco AB Class A | 8,853,573 | |||||||||
221,950 | Boliden AB | 4,163,608 | |||||||||
383,500 | Electrolux AB | 5,930,253 | |||||||||
488,100 | Sandvik AB | 5,348,395 | |||||||||
174,200 | Skandinaviska Enskilda Banken AB Class A | 4,507,890 | |||||||||
122,800 | Svenska Cellulosa AB (SCA) | 5,261,052 | |||||||||
157,050 | Tele2 AB Class B (a) | 1,554,957 | |||||||||
35,619,728 | |||||||||||
Switzerland — 6.1% | |||||||||||
1,720,682 | ABB Ltd | 22,896,527 | |||||||||
116,644 | Compagnie Financiere Richemont AG Class A | 5,543,814 | |||||||||
85,645 | Credit Suisse Group | 4,773,464 | |||||||||
5,164 | GHV-Split Vermoegensver * | 6,616 | |||||||||
48,852 | Nestle SA (Registered) | 16,784,128 |
See accompanying notes to the financial statements.
10
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Switzerland — continued | |||||||||||
120,160 | Novartis AG (Registered) | 6,854,885 | |||||||||
4,306 | Roche Holding AG (Bearer) | 837,512 | |||||||||
189,597 | Roche Holding AG (Non Voting) | 34,933,569 | |||||||||
4,653 | Serono SA | 3,249,838 | |||||||||
111,868 | Swiss Reinsurance Co (Registered) | 8,532,415 | |||||||||
535,148 | UBS AG (Registered) | 30,251,547 | |||||||||
120,245 | Zurich Financial Services AG | 27,409,520 | |||||||||
162,073,835 | |||||||||||
United Kingdom — 23.5% | |||||||||||
99,931 | Alliance & Leicester Plc | 1,953,254 | |||||||||
615,238 | Alliance Boots Plc | 9,032,184 | |||||||||
980,981 | Anglo American Plc | 42,445,659 | |||||||||
890,005 | AstraZeneca Plc | 57,755,666 | |||||||||
481,394 | Aviva Plc | 6,765,137 | |||||||||
1,000,701 | BAE Systems Plc | 7,058,307 | |||||||||
473,060 | Barclays Plc | 5,926,893 | |||||||||
330,365 | Barratt Developments Plc | 6,249,679 | |||||||||
385,057 | BBA Group Plc | 1,956,312 | |||||||||
94,887 | Berkeley Group Holdings Plc * | 2,315,859 | |||||||||
1,565,444 | BG Group Plc | 20,468,951 | |||||||||
424,039 | BHP Billiton Plc | 8,089,417 | |||||||||
471,678 | British American Tobacco Plc | 12,960,639 | |||||||||
3,370,064 | BT Group Plc | 15,841,081 | |||||||||
837,519 | Cadbury Schweppes Plc | 8,932,749 | |||||||||
2,810,271 | Centrica Plc | 15,787,285 | |||||||||
1,012,238 | Cobham Plc | 3,310,419 | |||||||||
722,212 | Compass Group Plc | 3,511,114 | |||||||||
1,654,930 | DSG International Plc | 6,462,844 | |||||||||
1,862,992 | GlaxoSmithKline Plc | 52,853,726 | |||||||||
276,101 | GUS Plc | 5,129,038 | |||||||||
265,387 | Hanson Plc | 3,343,384 | |||||||||
822,866 | HBOS Plc | 15,714,313 | |||||||||
173,887 | IMI Plc | 1,673,724 |
See accompanying notes to the financial statements.
11
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
1,141,221 | Imperial Chemical Industries Plc | 8,094,208 | |||||||||
499,432 | Imperial Tobacco Group Plc | 17,216,262 | |||||||||
662,183 | J Sainsbury Plc | 4,493,344 | |||||||||
1,050,873 | Kingfisher Plc | 4,720,958 | |||||||||
279,518 | Ladbrokes Plc | 2,036,951 | |||||||||
474,513 | Lloyds TSB Group Plc | 4,706,313 | |||||||||
1,298,588 | Man Group Plc | 10,443,174 | |||||||||
1,316,681 | Marks & Spencer Group Plc | 14,849,870 | |||||||||
332,191 | Next Plc | 10,543,027 | |||||||||
960,444 | Rio Tinto Plc | 48,454,120 | |||||||||
710,774 | Rolls-Royce Group Plc * | 5,905,745 | |||||||||
3,980,360 | Royal & Sun Alliance Insurance Group | 10,495,886 | |||||||||
1,199,437 | Royal Bank of Scotland Group | 40,684,770 | |||||||||
785,414 | Royal Dutch Shell Group Class A | 27,083,369 | |||||||||
298,842 | Royal Dutch Shell Plc A Shares | 10,337,890 | |||||||||
485,394 | Royal Dutch Shell Plc B Shares | 17,350,001 | |||||||||
597,637 | Scottish Power Plc | 7,060,974 | |||||||||
261,820 | Scottish Power Plc (Deferred Shares) * (c) | — | |||||||||
220,362 | Smith News Plc * | 1,993,006 | |||||||||
259,956 | Standard Chartered Plc | 6,510,924 | |||||||||
210,567 | Tate & Lyle Plc | 2,935,730 | |||||||||
1,030,749 | Taylor Woodrow Plc | 6,731,906 | |||||||||
486,015 | Tomkins Plc | 2,635,068 | |||||||||
219,731 | United Utilities Plc | 2,874,346 | |||||||||
7,875,961 | Vodafone Group Inc | 17,068,702 | |||||||||
682,228 | Wimpey (George) Plc | 6,510,439 | |||||||||
320,574 | Xstrata Plc | 14,427,153 | |||||||||
621,701,770 | |||||||||||
TOTAL COMMON STOCKS (COST $2,221,489,303) | 2,538,543,793 |
See accompanying notes to the financial statements.
12
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
PREFERRED STOCKS — 0.5% | |||||||||||
Germany — 0.4% | |||||||||||
18,455 | Fresenius Medical Care AG (Non Voting) 1.12% | 3,166,402 | |||||||||
22,956 | Henkel KGaA 1.34% | 2,930,829 | |||||||||
103,417 | Volkswagen AG 2.70% | 5,840,397 | |||||||||
11,937,628 | |||||||||||
Italy — 0.1% | |||||||||||
717,501 | Compagnia Assicuratrice Unipol 3.80% | 2,165,881 | |||||||||
TOTAL PREFERRED STOCKS (COST $9,965,436) | 14,103,509 | ||||||||||
SHORT-TERM INVESTMENTS — 5.4% | |||||||||||
72,361,004 | Boston Global Investment Trust - Enhanced Portfolio (b) | 72,361,004 | |||||||||
69,800,000 | Societe Generale Time Deposit, 5.27%, due 09/01/06 | 69,800,000 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $142,161,004) | 142,161,004 | ||||||||||
TOTAL INVESTMENTS — 102.0% (Cost $2,373,615,743) | 2,694,808,306 | ||||||||||
Other Assets and Liabilities (net) — (2.0%) | (53,738,216 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 2,641,070,090 |
See accompanying notes to the financial statements.
13
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
11/22/06 | CHF | 150,475,181 | $ | 123,247,069 | $ | 68,209 | |||||||||||||
11/22/06 | HKD | 197,348,072 | 25,435,713 | (11,776 | ) | ||||||||||||||
11/22/06 | JPY | 11,659,891,845 | 100,412,071 | (938,138 | ) | ||||||||||||||
11/22/06 | NOK | 375,319,761 | 59,651,260 | (490,431 | ) | ||||||||||||||
11/22/06 | SEK | 724,788,493 | 100,605,823 | (974,759 | ) | ||||||||||||||
11/22/06 | SGD | 1,843,810 | 1,176,154 | (416 | ) | ||||||||||||||
$ | (2,347,311 | ) | |||||||||||||||||
Sales | |||||||||||||||||||
11/22/06 | AUD | 83,803,337 | $ | 63,882,781 | $ | (87,934 | ) | ||||||||||||
11/22/06 | CAD | 2,510,259 | 2,276,818 | (20,768 | ) | ||||||||||||||
11/22/06 | EUR | 111,172,319 | 143,087,557 | 91,469 | |||||||||||||||
11/22/06 | GBP | 66,895,491 | 127,507,957 | (989,317 | ) | ||||||||||||||
$ | (1,006,550 | ) |
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
413 | DAX | September 2006 | $ | 77,528,568 | $ | 5,734,912 | |||||||||||||
713 | MSCI Singapore | September 2006 | 26,893,522 | 404,756 | |||||||||||||||
92 | TOPIX | September 2006 | 12,809,234 | 502,911 | |||||||||||||||
$ | 6,642,579 | ||||||||||||||||||
Sales | |||||||||||||||||||
9 | AEX | September 2006 | $ | 1,082,469 | $ | 6,178 | |||||||||||||
36 | CAC40 | September 2006 | 2,383,093 | 16,961 | |||||||||||||||
59 | FTSE 100 | September 2006 | 6,631,930 | (135,295 | ) | ||||||||||||||
1 | HANG SENG | September 2006 | 111,723 | (399 | ) | ||||||||||||||
4 | IBEX 35 | September 2006 | 623,100 | 2,890 | |||||||||||||||
31 | OMXS30 | September 2006 | 424,567 | 2,614 | |||||||||||||||
432 | S&P Toronto 60 | September 2006 | 53,358,039 | (4,481,482 | ) | ||||||||||||||
3 | S&P/MIB | September 2006 | 730,698 | 1,207 | |||||||||||||||
5 | SPI 200 | September 2006 | 487,113 | (2,786 | ) | ||||||||||||||
$ | (4,590,112 | ) |
As of August 31, 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.
14
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
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) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
As of August 31, 2006, 94.0% of the Net Assets of the Fund were valued using fair value prices based on models used by a third party vendor (Note 2).
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - B ritish Pound | HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone SEK - Swedish Krona SGD - Singapore Dollar | ||||||
See accompanying notes to the financial statements.
15
GMO International Core Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $66,123,557 (cost $2,373,615,743) (Note 2) | $ | 2,694,808,306 | |||||
Cash | 91,701 | ||||||
Foreign currency, at value (cost $4,251,144) (Note 2) | 4,275,916 | ||||||
Receivable for investments sold | 3,976,507 | ||||||
Dividends and interest receivable | 6,029,622 | ||||||
Foreign taxes receivable | 1,231,489 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 159,678 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 11,500,000 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 177,259 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 95,263 | ||||||
Total assets | 2,722,345,741 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 72,361,004 | ||||||
Payable for investments purchased | 3,979,051 | ||||||
Payable for Fund shares repurchased | 36,550 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 823,359 | ||||||
Shareholder service fee | 211,011 | ||||||
Trustees and Chief Compliance Officer fees | 4,936 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 3,513,539 | ||||||
Accrued expenses | 346,201 | ||||||
Total liabilities | 81,275,651 | ||||||
Net assets | $ | 2,641,070,090 |
See accompanying notes to the financial statements.
16
GMO International Core Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 2,191,701,726 | |||||
Accumulated undistributed net investment income | 40,580,303 | ||||||
Accumulated net realized gain | 88,828,848 | ||||||
Net unrealized appreciation | 319,959,213 | ||||||
$ | 2,641,070,090 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 816,545,286 | |||||
Class IV shares | $ | 984,531,231 | |||||
Class VI shares | $ | 839,993,573 | |||||
Shares outstanding: | |||||||
Class III | 21,832,903 | ||||||
Class IV | 26,328,608 | ||||||
Class VI | 22,467,279 | ||||||
Net asset value per share: | |||||||
Class III | $ | 37.40 | |||||
Class IV | $ | 37.39 | |||||
Class VI | $ | 37.39 |
See accompanying notes to the financial statements.
17
GMO International Core Equity Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $5,093,354) | $ | 44,965,912 | |||||
Interest (including securities lending income of $1,431,488) | 5,288,820 | ||||||
Total investment income | 50,254,732 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 4,689,214 | ||||||
Shareholder service fee – Class III (Note 3) | 657,591 | ||||||
Shareholder service fee – Class IV (Note 3) | 405,569 | ||||||
Shareholder service fee – Class VI (Note 3) | 189,738 | ||||||
Custodian and fund accounting agent fees | 457,516 | ||||||
Transfer agent fees | 22,724 | ||||||
Audit and tax fees | 30,777 | ||||||
Legal fees | 23,092 | ||||||
Trustees fees and related expenses (Note 3) | 18,902 | ||||||
Registration fees | 5,336 | ||||||
Miscellaneous | 22,540 | ||||||
Total expenses | 6,522,999 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (558,371 | ) | |||||
Net expenses | 5,964,628 | ||||||
Net investment income (loss) | 44,290,104 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 87,352,876 | ||||||
Closed futures contracts | 2,852,488 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (641,170 | ) | |||||
Net realized gain (loss) | 89,564,194 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 50,298,869 | ||||||
Open futures contracts | (1,674,534 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (3,399,246 | ) | |||||
Net unrealized gain (loss) | 45,225,089 | ||||||
Net realized and unrealized gain (loss) | 134,789,283 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 179,079,387 |
See accompanying notes to the financial statements.
18
GMO International Core Equity Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 44,290,104 | $ | 25,593,534 | |||||||
Net realized gain (loss) | 89,564,194 | 62,485,553 | |||||||||
Change in net unrealized appreciation (depreciation) | 45,225,089 | 184,448,363 | |||||||||
Net increase (decrease) in net assets from operations | 179,079,387 | 272,527,450 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (2,255,032 | ) | (3,605,459 | ) | |||||||
Class IV | (2,110,161 | ) | (5,874,542 | ) | |||||||
Class VI | (2,325,149 | ) | — | ||||||||
Total distributions from net investment income | (6,690,342 | ) | (9,480,001 | ) | |||||||
Net realized gains | |||||||||||
Class III | (13,981,201 | ) | (19,637,551 | ) | |||||||
Class IV | (12,946,714 | ) | (23,339,375 | ) | |||||||
Class VI | (13,168,393 | ) | — | ||||||||
Total distributions from net realized gains | (40,096,308 | ) | (42,976,926 | ) | |||||||
(46,786,650 | ) | (52,456,927 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (56,679,777 | ) | 395,557,147 | ||||||||
Class IV | (257,414,853 | ) | 811,200,322 | ||||||||
Class VI | 819,000,459 | — | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 504,905,829 | 1,206,757,469 | |||||||||
Total increase (decrease) in net assets | 637,198,566 | 1,426,827,992 | |||||||||
Net assets: | |||||||||||
Beginning of period | 2,003,871,524 | 577,043,532 | |||||||||
End of period (including accumulated undistributed net investment income of $40,580,303 and $2,980,541, respectively) | $ | 2,641,070,090 | $ | 2,003,871,524 |
See accompanying notes to the financial statements.
19
GMO International Core Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002(a) | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 35.23 | $ | 30.81 | $ | 26.75 | $ | 18.04 | $ | 20.40 | $ | 20.00 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.66 | 0.72 | 0.55 | 0.40 | 0.37 | 0.02 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.20 | 4.79 | 4.54 | 8.81 | (2.03 | ) | 0.38 | ||||||||||||||||||||
Total from investment operations | 2.86 | 5.51 | 5.09 | 9.21 | (1.66 | ) | 0.40 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.10 | ) | (0.16 | ) | (0.54 | ) | (0.50 | ) | (0.70 | ) | — | ||||||||||||||||
From net realized gains | (0.59 | ) | (0.93 | ) | (0.49 | ) | — | — | — | ||||||||||||||||||
Total distributions | (0.69 | ) | (1.09 | ) | (1.03 | ) | (0.50 | ) | (0.70 | ) | — | ||||||||||||||||
Net asset value, end of period | $ | 37.40 | $ | 35.23 | $ | 30.81 | $ | 26.75 | $ | 18.04 | $ | 20.40 | |||||||||||||||
Total Return(b) | 8.16 | %** | 18.26 | % | 19.20 | % | 51.46 | % | (8.28 | )% | 2.00 | %** | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 816,545 | $ | 820,336 | $ | 321,463 | $ | 201,333 | $ | 68,047 | $ | 47,081 | |||||||||||||||
Net expenses to average daily net assets | 0.53 | %* | 0.54 | % | 0.55 | % | 0.55 | % | 0.55 | % | 0.55 | %* | |||||||||||||||
Net investment income to average daily net assets | 3.59 | %* | 2.26 | % | 1.98 | % | 1.77 | % | 1.82 | % | 1.56 | %* | |||||||||||||||
Portfolio turnover rate | 20 | %** | 43 | % | 45 | % | 43 | % | 64 | % | — | (c) | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.10 | % | 0.14 | % | 0.27 | % | 0.39 | % | 1.89 | %* |
(a) Period from January 29, 2002 (commencment of operations) through February 28, 2002.
(b) Total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(c) Portfolio turnover rate was less than 1%.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
20
GMO International Core Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 35.21 | $ | 30.80 | $ | 26.75 | $ | 21.08 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.67 | 0.65 | 0.56 | 0.16 | |||||||||||||||
Net realized and unrealized gain (loss) | 2.20 | 4.87 | 4.54 | 6.03 | |||||||||||||||
Total from investment operations | 2.87 | 5.52 | 5.10 | 6.19 | |||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.10 | ) | (0.18 | ) | (0.56 | ) | (0.52 | ) | |||||||||||
From net realized gains | (0.59 | ) | (0.93 | ) | (0.49 | ) | — | ||||||||||||
Total distributions | (0.69 | ) | (1.11 | ) | (1.05 | ) | (0.52 | ) | |||||||||||
Net asset value, end of period | $ | 37.39 | $ | 35.21 | $ | 30.80 | $ | 26.75 | |||||||||||
Total Return(b) | 8.20 | %** | 18.31 | % | 19.24 | % | 29.71 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 984,531 | $ | 1,183,535 | $ | 255,580 | $ | 24,134 | |||||||||||
Net expenses to average daily net assets | 0.47 | %* | 0.48 | % | 0.49 | % | 0.49 | %* | |||||||||||
Net investment income to average daily net assets | 3.66 | %* | 1.98 | % | 2.01 | % | 0.99 | %* | |||||||||||
Portfolio turnover rate | 20 | %** | 43 | % | 45 | % | 43 | %†† | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.11 | % | 0.14 | % | 0.26 | %* |
(a) Period from June 30, 2003 (commencement of operations) through February 29, 2004.
(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 year ended February 29, 2004.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
21
GMO International Core Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout the period)
Period from March 28, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||
Net asset value, beginning of period | $ | 36.09 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)† | 0.55 | ||||||
Net realized and unrealized gain (loss) | 1.44 | ||||||
Total from investment operations | 1.99 | ||||||
Less distributions to shareholders: | |||||||
From net investment income | (0.10 | ) | |||||
From net realized gains | (0.59 | ) | |||||
Total distributions | (0.69 | ) | |||||
Net asset value, end of period | $ | 37.39 | |||||
Total Return(a) | 5.58 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 839,994 | |||||
Net expenses to average daily net assets | 0.44 | %* | |||||
Net investment income to average daily net assets | 3.50 | %* | |||||
Portfolio turnover rate | 20 | %†† | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* |
(a) Total return would have been lower had certain expenses not been reimbursed during the period shown.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the six months ended August 31, 2006.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
22
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
1. Organization
GMO International Core 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, 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 Funds into classes.
The Fund commenced operations following an in-kind purchase of shares by GMO International Disciplined Equity Fund ("Predecessor Fund") effected as of the close of business on September 16, 2005. For tax purposes, this transaction met all requirements for a tax-free transaction under the Internal Revenue Code, and consequently the Fund retained the Predecessor Fund's basis and holding period in each asset contributed in-kind. For accounting purposes, the Fund recorded a cost for each in-kind asset contributed by the Predecessor Fund equal to such asset's historical cost. For tax and accounting purposes, the Fund is treated as a continuation of the the Predecessor Fund's operations. Therefore, the Financial Statements reflect the performance and operational history of the Predecessor Fund prior to September 16, 2005.
The Fund seeks high total return. The Fund seeks to achieve its objective by outperforming the MSCI EAFE Index. The Fund typically makes equity investments in companies from developed countries, other than the U.S.
As of August 31, 2006, the Fund had three classes of shares outstanding: Class III, Class IV and Class VI. Class VI shares commenced operations on March 28, 2006. Each class of shares bears a different level of shareholder service fees.
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
23
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
quotations are readily available are generally 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 pursuant to procedures approved by the Trustees. 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 are generally valued by a third party v endor using fair value prices based on models 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 including 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 lo ss 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. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
24
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
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
25
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no purchased option contracts outstanding at the end of the period.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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
26
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
may be unfavorable changes in interest rates or the price of the index or security underlying these transactions. There were no swap agreements outstanding at the end of the period.
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 August 31, 2006, the Fund had loaned securities having a market value of $66,123,557, collateralized by cash in the amount of $72,361,004 which was invested in the Boston Global Investment Trust – Enhanced Portfolio.
Taxes and distributions
The Fund intends to qualify each tax 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 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.
27
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 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) | ||||||||||||
$ | 2,374,614,983 | $ | 352,458,811 | $ | (32,265,488 | ) | $ | 320,193,323 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
For the period ended August 31, 2006, the Fund had gross gains attributed to redemption in-kind transactions of $27,258,704.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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 income, common expenses and realized and unrealized gains and losses are allocated pro rata among the classes of shares of the Fund
28
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 U.S. 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 0.38% 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, 0.09% for Class IV shares and 0.055% for Class VI shares.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO")(excluding employee benefits), 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 0.38% of the Fund's average daily net assets.
The Fund's portion of the fee paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $12,461 and $6,716, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $989,134,099 and $473,027,618, 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
29
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 12.0% 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 August 31, 2006, 0.2% of the Fund's shares were held by five related parties comprised of certain GMO employee accounts, and 19.7% 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares Sold | 5,026,050 | $ | 183,724,308 | 14,144,079 | $ | 438,166,388 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 391,840 | 14,227,708 | 610,012 | 19,747,732 | |||||||||||||||
Shares repurchased | (6,871,877 | ) | (254,631,793 | ) | (1,436,989 | ) | (47,278,262 | ) | |||||||||||
Redemption in-kind | — | — | (462,581 | ) | (15,078,711 | ) | |||||||||||||
Net increase (decrease) | (1,453,987 | ) | $ | (56,679,777 | ) | 12,854,521 | $ | 395,557,147 |
30
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares Sold | 7,903,816 | $ | 293,463,734 | 24,636,218 | $ | 788,940,573 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 398,306 | 14,458,512 | 854,891 | 28,092,886 | |||||||||||||||
Shares repurchased | (15,586,408 | ) | (565,337,099 | ) | (175,618 | ) | (5,833,137 | ) | |||||||||||
Net increase (decrease) | (7,284,286 | ) | $ | (257,414,853 | ) | 25,315,491 | $ | 811,200,322 | |||||||||||
Period from March 28, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||||||||||||||
Class VI: | Shares | Amount | |||||||||||||||||
Shares Sold | 23,560,060 | $ | 860,506,917 | ||||||||||||||||
Shares issued to shareholders in reinvestment of distributions | 426,937 | 15,493,542 | |||||||||||||||||
Shares repurchased | (1,519,718 | ) | (57,000,000 | ) | |||||||||||||||
Net increase (decrease) | 22,467,279 | $ | 819,000,459 |
31
GMO International Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO International Core Equity Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
Noting that the Fund is the successor to GMO International Disciplined Equity Fund (the "Predecessor Fund"), a former series of the Trust that had an investment objective and policies and restrictions substantially identical to those of the Fund, the Trustees considered investment performance and fee and expense information of the Predecessor Fund for periods ending on or before September 16, 2005. In particular, the Trustees noted that the Fund's advisory fee was 0.02% lower than the Predecessor Fund's advisory fee.
In addition, the Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the
32
GMO International Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to th e Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's
33
GMO International Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
34
GMO International Core Equity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, as outlined in the notes to the table below.
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.
35
GMO International Core Equity Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 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. 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 | 0.53 | % | $ | 1,000.00 | $ | 1,081.60 | $ | 2.78 | (a) | |||||||||
2 | ) Hypothetical | 0.53 | % | $ | 1,000.00 | $ | 1,022.53 | $ | 2.70 | (a) | |||||||||
Class IV | |||||||||||||||||||
1 | ) Actual | 0.47 | % | $ | 1,000.00 | $ | 1,082.00 | $ | 2.47 | (a) | |||||||||
2 | ) Hypothetical | 0.47 | % | $ | 1,000.00 | $ | 1,022.84 | $ | 2.40 | (a) | |||||||||
Class VI | |||||||||||||||||||
1 | ) Actual | 0.44 | % | $ | 1,000.00 | $ | 1,055.80 | $ | 1.93 | (b) | |||||||||
2 | ) Hypothetical | 0.44 | % | $ | 1,000.00 | $ | 1,022.99 | $ | 2.24 | (a) |
(a) For the period March 1, 2006 through August 31, 2006. Expense is calculated using the Class's annualized net expense ratio for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
(b) For the period March 28, 2006 (commencement of operations) through August 31, 2006. Expense is calculated using the Class's annualized net expense ratios for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 156 days in the period, divided by 365 days in the year.
36
GMO International Growth Equity Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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 Growth Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 94.3 | % | |||||
Short-Term Investments | 6.8 | ||||||
Preferred Stocks | 0.5 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures | (0.1 | ) | |||||
Other | (1.5 | ) | |||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
Japan | 27.5 | % | |||||
United Kingdom | 20.6 | ||||||
France | 9.2 | ||||||
Germany | 5.2 | ||||||
Netherlands | 5.1 | ||||||
Switzerland | 5.0 | ||||||
Australia | 4.6 | ||||||
Canada | 4.3 | ||||||
Sweden | 3.4 | ||||||
Italy | 3.3 | ||||||
Finland | 2.4 | ||||||
Norway | 1.9 | ||||||
Belgium | 1.6 | ||||||
Spain | 1.4 | ||||||
Hong Kong | 1.3 | ||||||
Ireland | 1.2 | ||||||
Singapore | 0.7 | ||||||
Denmark | 0.6 | ||||||
Austria | 0.5 | ||||||
China | 0.2 | ||||||
100.0 | % |
1
GMO International Growth Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Industry Sector Summary | % of Equity Investments | ||||||
Financials | 22.0 | % | |||||
Consumer Discretionary | 15.7 | ||||||
Energy | 15.3 | ||||||
Materials | 11.8 | ||||||
Health Care | 10.4 | ||||||
Industrials | 9.1 | ||||||
Information Technology | 6.0 | ||||||
Consumer Staples | 5.0 | ||||||
Utilities | 3.5 | ||||||
Telecommunication Services | 1.2 | ||||||
100.0 | % |
2
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 94.3% | |||||||||||
Australia — 4.4% | |||||||||||
779,120 | Amcor Ltd | 3,989,237 | |||||||||
371,074 | Australia and New Zealand Banking Group Ltd | 7,704,156 | |||||||||
347,772 | BHP Billiton Ltd | 7,325,460 | |||||||||
231,005 | CSL Ltd | 8,946,556 | |||||||||
3,842,415 | CSR Ltd | 9,221,742 | |||||||||
907,140 | Foster's Group Ltd | 4,118,000 | |||||||||
1,850,875 | Harvey Norman Holdings Ltd | 4,853,722 | |||||||||
1,625,621 | Insurance Australia Group Ltd | 6,655,853 | |||||||||
1,856,970 | Lihir Gold Ltd * | 4,288,551 | |||||||||
154,975 | Macquarie Bank Ltd | 7,645,148 | |||||||||
442,099 | Newcrest Mining Ltd | 6,566,587 | |||||||||
1,702,007 | Promina Group Ltd | 7,628,741 | |||||||||
453,052 | QBE Insurance Group Ltd | 8,239,393 | |||||||||
207,124 | Rio Tinto Ltd | 11,494,789 | |||||||||
142,821 | Westfarmers Ltd | 3,659,304 | |||||||||
436,502 | Westpac Banking Corp | 7,779,805 | |||||||||
440,810 | Woodside Petroleum Ltd | 14,181,024 | |||||||||
496,469 | Woolworths Ltd | 7,836,678 | |||||||||
521,093 | Worleyparsons Ltd | 7,172,521 | |||||||||
858,263 | Zinifex Ltd | 7,747,682 | |||||||||
147,054,949 | |||||||||||
Austria — 0.5% | |||||||||||
106,464 | Oesterreichische Elektrizitaetswirtschafts AG Class A (a) | 5,361,836 | |||||||||
124,910 | OMV AG | 6,667,009 | |||||||||
170,473 | Telekom Austria AG | 4,181,646 | |||||||||
16,210,491 | |||||||||||
Belgium — 1.5% | |||||||||||
40,143 | Colruyt SA | 6,823,745 | |||||||||
359,333 | Fortis | 13,992,212 | |||||||||
89,880 | Inbev NV | 4,664,049 | |||||||||
60,087 | KBC Groep NV | 6,471,455 |
See accompanying notes to the financial statements.
3
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Belgium — continued | |||||||||||
161,021 | UCB SA | 9,438,769 | |||||||||
51,120 | Umicore | 7,439,215 | |||||||||
48,829,445 | |||||||||||
Canada — 4.1% | |||||||||||
251,800 | Barrick Gold Corp | 8,429,024 | |||||||||
68,200 | Canadian Imperial Bank of Commerce | 4,956,578 | |||||||||
173,600 | Canadian National Railway Co | 7,405,446 | |||||||||
376,900 | Canadian Natural Resources | 19,787,847 | |||||||||
58,400 | Canadian Oil Sands Trust | 1,785,868 | |||||||||
154,700 | Canadian Pacific Railway Ltd | 7,599,937 | |||||||||
297,700 | EnCana Corp | 15,621,641 | |||||||||
391,300 | Goldcorp Inc | 10,815,358 | |||||||||
287,000 | Nexen Inc | 16,719,379 | |||||||||
478,520 | Petro-Canada | 20,434,401 | |||||||||
297,800 | Royal Bank of Canada | 13,196,638 | |||||||||
120,700 | Teck Corp Class B | 8,037,203 | |||||||||
135,900 | Trican Well Service Ltd | 2,770,132 | |||||||||
137,559,452 | |||||||||||
China — 0.2% | |||||||||||
2,206,000 | Foxconn International Holdings * | 5,824,538 | |||||||||
Denmark — 0.5% | |||||||||||
118,050 | Novo-Nordisk A/S | 8,719,129 | |||||||||
321,700 | Vestas Wind Systems A/S * (a) | 9,010,451 | |||||||||
17,729,580 | |||||||||||
Finland — 2.3% | |||||||||||
364,000 | Fortum Oyj | 9,781,312 | |||||||||
260,700 | Metso Oyj | 9,711,128 | |||||||||
196,800 | Neste Oil Oyj | 6,184,656 | |||||||||
1,417,650 | Nokia Oyj | 29,630,577 | |||||||||
171,050 | Rautaruukki Oyj | 4,999,871 |
See accompanying notes to the financial statements.
4
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Finland — continued | |||||||||||
462,600 | Sampo Oyj Class A | 9,575,785 | |||||||||
333,400 | YIT Oyj | 7,241,995 | |||||||||
77,125,324 | |||||||||||
France — 8.7% | |||||||||||
191,657 | BNP Paribas | 20,378,485 | |||||||||
51,990 | Bouygues | 2,739,073 | |||||||||
105,258 | Business Objects SA * | 2,938,167 | |||||||||
102,165 | Carrefour SA | 6,307,225 | |||||||||
264,084 | Credit Agricole SA | 10,731,020 | |||||||||
70,222 | Electricite de France | 3,993,588 | |||||||||
26,713 | Essilor International SA | 2,765,901 | |||||||||
232,548 | European Aeronautic Defense and Space Co | 7,017,715 | |||||||||
61,759 | Hermes International | 5,242,240 | |||||||||
78,677 | LVMH Moet Hennessy Louis Vuitton SA | 8,104,646 | |||||||||
30,199 | Neopost SA | 3,527,677 | |||||||||
263,596 | Peugeot SA | 14,872,843 | |||||||||
266,158 | Renault SA | 31,013,877 | |||||||||
56,282 | Sanofi-Aventis | 5,054,782 | |||||||||
130,411 | Societe Generale | 21,064,280 | |||||||||
1,908,652 | Total SA | 128,887,466 | |||||||||
79,630 | Vallourec SA | 17,835,711 | |||||||||
292,474,696 | |||||||||||
Germany — 4.4% | |||||||||||
117,448 | Altana AG | 6,934,236 | |||||||||
194,692 | Bayerische Motoren Werke AG | 10,071,047 | |||||||||
87,191 | Continental AG | 9,338,696 | |||||||||
252,488 | Depfa Bank Plc | 4,712,610 | |||||||||
113,891 | Deutsche Boerse AG | 17,275,143 | |||||||||
40,304 | Deutsche Postbank AG | 3,158,258 | |||||||||
40,895 | Fresenius Medical Care AG & Co | 5,391,102 | |||||||||
100,529 | Hypo Real Estate Holding AG | 6,241,180 | |||||||||
30,641 | MAN AG | 2,344,489 |
See accompanying notes to the financial statements.
5
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Germany — continued | |||||||||||
49,499 | Merck KGaA | 4,907,635 | |||||||||
24,458 | Puma AG Rudolf Dassler Sport | 8,516,114 | |||||||||
86,182 | Salzgitter AG | 7,720,166 | |||||||||
96,926 | SAP AG | 18,504,955 | |||||||||
42,468 | Siemens AG (Registered) | 3,608,053 | |||||||||
113,268 | Solarworld AG (a) | 6,650,020 | |||||||||
111,708 | Stada Arzneimittel AG (a) | 5,444,641 | |||||||||
262,334 | ThyssenKrupp AG | 8,924,681 | |||||||||
355,433 | United Internet AG (Registered) | 4,773,434 | |||||||||
113,577 | Volkswagen AG | 9,067,040 | |||||||||
27,341 | Wincor Nixdorf AG | 3,817,861 | |||||||||
147,401,361 | |||||||||||
Hong Kong — 1.3% | |||||||||||
547,000 | Cheung Kong Holdings Ltd | 6,037,696 | |||||||||
1,943,000 | CLP Holdings Ltd | 12,286,500 | |||||||||
563,500 | Esprit Holdings Ltd | 4,678,747 | |||||||||
1,618,000 | Hong Kong Electric Holdings Ltd | 7,736,255 | |||||||||
709,500 | Hong Kong Exchanges and Clearing Ltd | 4,810,706 | |||||||||
2,583,600 | Li & Fung Ltd | 6,142,372 | |||||||||
41,692,276 | |||||||||||
Ireland — 1.1% | |||||||||||
452,185 | Anglo Irish Bank Corp | 7,476,026 | |||||||||
627,245 | C&C Group Plc | 7,006,464 | |||||||||
406,942 | CRH Plc | 14,085,988 | |||||||||
155,571 | DCC Plc | 3,907,189 | |||||||||
226,548 | Kerry Group Plc | 5,048,324 | |||||||||
37,523,991 | |||||||||||
Italy — 3.1% | |||||||||||
95,925 | Assicurazioni Generali SPA | 3,613,474 | |||||||||
363,739 | Banca Popolare di Verona (a) | 10,809,667 | |||||||||
2,472,075 | ENI SPA | 75,586,615 |
See accompanying notes to the financial statements.
6
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Italy — continued | |||||||||||
1,836,929 | UniCredito Italiano SPA | 14,638,269 | |||||||||
104,648,025 | |||||||||||
Japan — 26.1% | |||||||||||
63,960 | Acom Co Ltd | 2,854,197 | |||||||||
717,900 | Aeon Co Ltd | 18,011,519 | |||||||||
88,675 | Aiful Corp | 3,540,904 | |||||||||
205,600 | Aisin Seiki Co Ltd | 6,213,945 | |||||||||
130,400 | ARRK Corp | 1,566,796 | |||||||||
248,400 | Astellas Pharma Inc | 10,049,660 | |||||||||
832,050 | Canon Inc | 41,334,850 | |||||||||
468 | Central Japan Railway Co | 5,055,715 | |||||||||
393,000 | Chiyoda Corp | 8,571,788 | |||||||||
292,700 | Chubu Electric Power Co Inc | 7,921,175 | |||||||||
245,800 | Daiichi Sankyo Co Ltd | 6,772,470 | |||||||||
956,000 | Daikyo Inc * (a) | 4,890,607 | |||||||||
410,000 | Daimaru Inc (The) | 5,036,311 | |||||||||
395,200 | Denso Corp | 13,705,952 | |||||||||
1,391 | East Japan Railway Co | 10,249,830 | |||||||||
53,500 | Fanuc Ltd | 4,226,214 | |||||||||
83,600 | Fast Retailing Co Ltd | 7,773,386 | |||||||||
657,000 | Fuji Heavy Industries Ltd | 3,788,111 | |||||||||
2,709,400 | Honda Motor Co Ltd | 91,685,789 | |||||||||
392,100 | Hoya Corp | 14,194,030 | |||||||||
208,000 | Ibiden Co Ltd | 10,605,517 | |||||||||
579 | Inpex Holdings Inc * | 5,109,390 | |||||||||
1,235,000 | Itochu Corp | 10,313,526 | |||||||||
941,000 | Japan Steel Works Ltd (The) (a) | 6,635,946 | |||||||||
130,600 | JFE Holdings Inc | 5,298,273 | |||||||||
299,000 | JGC Corp | 5,343,200 | |||||||||
188,700 | JSR Corp | 4,465,890 | |||||||||
157,000 | Kansai Electric Power Co Inc | 3,761,378 | |||||||||
1,625,000 | Kawasaki Heavy Industries Ltd (a) | 5,113,654 | |||||||||
616,000 | Kawasaki Kisen Kaisha Ltd (a) | 3,992,662 |
See accompanying notes to the financial statements.
7
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
25,200 | Keyence Corp | 5,794,961 | |||||||||
403,000 | Kirin Brewery Co Ltd | 5,587,744 | |||||||||
4,577 | KK DaVinci Advisors * | 4,100,984 | |||||||||
1,572,000 | Kobe Steel Ltd | 5,002,371 | |||||||||
463,000 | Komatsu Ltd | 8,402,545 | |||||||||
339,500 | Konica Minolta Holdings Inc * | 4,420,331 | |||||||||
543,000 | Kubota Corp | 4,438,770 | |||||||||
279,500 | Leopalance21 Corp | 9,864,165 | |||||||||
124,200 | Makita Corp | 3,638,774 | |||||||||
270,500 | Marui Co Ltd | 4,004,519 | |||||||||
2,072,000 | Mazda Motor Corp | 13,213,776 | |||||||||
235,700 | Mitsubishi Corp | 4,771,231 | |||||||||
705,000 | Mitsubishi Estate Co Ltd | 15,111,944 | |||||||||
731,000 | Mitsubishi Gas Chemical Co Inc | 7,926,077 | |||||||||
879,000 | Mitsubishi Heavy Industries | 3,667,221 | |||||||||
781,000 | Mitsubishi Rayon Co Ltd | 5,360,107 | |||||||||
3,105 | Mitsubishi UFJ Financial Group Inc | 42,121,971 | |||||||||
666,000 | Mitsui Fudosan Co Ltd | 14,852,652 | |||||||||
705,000 | Mitsui OSK Lines Ltd (a) | 5,352,498 | |||||||||
656,000 | Mitsui Sumitomo Insurance Co Ltd | 7,967,444 | |||||||||
1,085,000 | Mitsui Trust Holding Inc | 12,636,542 | |||||||||
53,800 | Murata Manufacturing Co Ltd | 3,682,461 | |||||||||
295,000 | NGK Spark Plug Co Ltd | 5,979,058 | |||||||||
57,800 | Nidec Corp | 4,173,674 | |||||||||
243,000 | Nikon Corp (a) | 4,376,734 | |||||||||
56,100 | Nintendo Co Ltd | 11,468,491 | |||||||||
996 | Nippon Telegraph & Telephone Corp | 5,017,398 | |||||||||
451,000 | Nissan Chemical Industries Ltd | 5,823,601 | |||||||||
2,999,800 | Nissan Motor Co | 34,053,136 | |||||||||
108,900 | Nitto Denko Corp | 7,795,481 | |||||||||
395,200 | Nomura Holdings Inc | 7,582,482 | |||||||||
1,332 | NTT Data Corp (a) | 6,125,534 | |||||||||
189,000 | Olympus Corp | 5,588,351 | |||||||||
42,600 | ORIX Corp | 11,247,063 |
See accompanying notes to the financial statements.
8
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
2,390,000 | Osaka Gas Co Ltd | 8,784,650 | |||||||||
12,044 | Resona Holdings Inc (a) | 37,769,675 | |||||||||
605,000 | Ricoh Company Ltd | 11,836,939 | |||||||||
6,023 | SBI Holdings Inc | 2,283,002 | |||||||||
36,400 | Shimamura Co | 3,580,087 | |||||||||
171,300 | Shin-Etsu Chemical Co Ltd | 9,724,795 | |||||||||
211,700 | Shinko Electric Industries Co Ltd | 6,121,175 | |||||||||
548,300 | Softbank Corp (a) | 9,482,557 | |||||||||
1,229,000 | Sumitomo Chemical Co Ltd | 9,645,642 | |||||||||
311,000 | Sumitomo Corp | 4,182,390 | |||||||||
303,000 | Sumitomo Heavy Industries Ltd | 2,606,069 | |||||||||
511,000 | Sumitomo Metal Mining Co Ltd | 7,156,939 | |||||||||
354,000 | Sumitomo Realty & Development Co Ltd | 10,377,134 | |||||||||
428,000 | Takashimaya Co Ltd | 5,368,971 | |||||||||
387,400 | Takeda Pharmaceutical Co Ltd | 25,598,756 | |||||||||
48,000 | Toho Titanium Co Ltd (a) | 2,951,570 | |||||||||
1,166,000 | Tokyo Gas Co Ltd | 6,185,154 | |||||||||
705,000 | TonenGeneral Sekiyu KK (a) | 6,351,748 | |||||||||
662,000 | Toray Industries Inc | 5,253,025 | |||||||||
938,600 | Toyota Motor Corp | 50,723,776 | |||||||||
88,000 | Trend Micro Inc | 2,535,370 | |||||||||
141,460 | Yamada Denki Co Ltd | 15,097,063 | |||||||||
872,849,263 | |||||||||||
Netherlands — 4.8% | |||||||||||
794,267 | ABN Amro Holdings NV | 22,657,329 | |||||||||
127,388 | Akzo Nobel NV | 7,336,487 | |||||||||
101,390 | Euronext NV | 9,129,934 | |||||||||
101,202 | Fugro NV | 4,462,645 | |||||||||
299,852 | Heineken NV | 13,903,813 | |||||||||
2,033,736 | ING Groep NV | 88,112,723 | |||||||||
914,082 | James Hardies Industries NV | 4,666,031 | |||||||||
102,222 | Randstad Holdings NV | 5,495,114 | |||||||||
162,655 | TNT NV | 6,118,384 | |||||||||
161,882,460 |
See accompanying notes to the financial statements.
9
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Norway — 1.8% | |||||||||||
2,226,260 | Det Norske Oljeselskap ASA * (a) | 3,872,995 | |||||||||
418,660 | DnB NOR ASA | 5,417,998 | |||||||||
163,350 | Frontline Ltd (a) | 6,679,178 | |||||||||
509,500 | Norsk Hydro ASA | 13,123,598 | |||||||||
595,300 | Statoil ASA | 16,072,573 | |||||||||
483,500 | Telenor ASA | 6,123,074 | |||||||||
372,901 | TGS Nopec Geophysical ASA * | 6,609,119 | |||||||||
198,400 | Yara International ASA | 2,928,716 | |||||||||
60,827,251 | |||||||||||
Singapore — 0.7% | |||||||||||
2,651,000 | Capitaland Ltd | 8,004,293 | |||||||||
2,531,000 | Neptune Orient Lines Ltd | 3,096,706 | |||||||||
2,815,000 | Sembcorp Industrie | 6,219,920 | |||||||||
23,000 | Singapore Press Holdings Ltd | 58,117 | |||||||||
3,220,500 | Singapore Telecommunications | 5,088,953 | |||||||||
22,467,989 | |||||||||||
Spain — 1.3% | |||||||||||
60,945 | Fomento de Construcciones y Contratas SA | 4,753,811 | |||||||||
175,709 | Gamesa Corp Tecnologica SA | 3,702,873 | |||||||||
156,877 | Iberdrola SA | 5,829,732 | |||||||||
371,813 | Inditex SA | 16,756,311 | |||||||||
157,047 | Repsol YPF SA | 4,518,446 | |||||||||
183,740 | Sacyr Vallehermoso SA | 7,085,895 | |||||||||
42,647,068 | |||||||||||
Sweden — 3.2% | |||||||||||
120,900 | Alfa Laval AB | 4,005,317 | |||||||||
310,400 | Assa Abloy AB Class B | 5,448,341 | |||||||||
366,400 | Atlas Copco AB Class A | 9,452,066 | |||||||||
287,200 | Atlas Copco AB Class B | 6,946,916 | |||||||||
632,050 | Boliden AB | 11,856,764 | |||||||||
245,400 | Electrolux AB | 3,794,743 |
See accompanying notes to the financial statements.
10
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Sweden — continued | |||||||||||
100,600 | Nobia AB | 3,130,722 | |||||||||
1,059,000 | Nordea AB | 13,295,778 | |||||||||
603,000 | Sandvik AB | 6,607,421 | |||||||||
355,800 | Skandinaviska Enskilda Banken AB Class A | 9,207,275 | |||||||||
440,800 | SKF AB Class B | 6,312,130 | |||||||||
425,600 | SSAB Svenskt Stal AB Series A | 8,189,952 | |||||||||
269,900 | Svenska Cellulosa AB (SCA) | 11,563,175 | |||||||||
415,000 | Swedish Match AB | 7,017,822 | |||||||||
106,828,422 | |||||||||||
Switzerland — 4.8% | |||||||||||
51,764 | Alcon Inc | 6,097,282 | |||||||||
100,036 | Credit Suisse Group | 5,575,553 | |||||||||
7,394 | Geberit AG (Registered) | 8,603,071 | |||||||||
29,725 | Julius Baer Holding AG (Registered) | 2,853,520 | |||||||||
32,137 | Nestle SA (Registered) | 11,041,339 | |||||||||
231,475 | Novartis AG (Registered) | 13,205,180 | |||||||||
101,921 | Phonak Holding AG (Registered) | 6,082,560 | |||||||||
291,990 | Roche Holding AG (Non Voting) | 53,799,653 | |||||||||
8,633 | Serono SA | 6,029,626 | |||||||||
5,543 | Societe Generale de Surveillance Holding SA (Registered) | 5,067,916 | |||||||||
80,071 | Swiss Reinsurance Co (Registered) | 6,107,189 | |||||||||
613,525 | UBS AG (Registered) | 34,682,144 | |||||||||
159,145,033 | |||||||||||
United Kingdom — 19.5% | |||||||||||
227,339 | Alliance Boots Plc | 3,337,518 | |||||||||
1,929,325 | Anglo American Plc | 83,479,161 | |||||||||
1,157,544 | AstraZeneca Plc | 75,117,246 | |||||||||
531,647 | Aviva Plc | 7,471,353 | |||||||||
443,350 | Barclays Plc | 5,554,661 | |||||||||
485,139 | Barratt Developments Plc | 9,177,616 | |||||||||
783,049 | BHP Billiton Plc | 14,938,271 | |||||||||
314,129 | British American Tobacco Plc | 8,631,551 |
See accompanying notes to the financial statements.
11
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
1,026,589 | BT Group Plc | 4,825,511 | |||||||||
595,501 | Cadbury Schweppes Plc | 6,351,451 | |||||||||
139,446 | Cairn Energy Plc * | 5,657,453 | |||||||||
449,348 | Capita Group Plc | 4,681,312 | |||||||||
7,077,289 | Centrica Plc | 39,758,151 | |||||||||
1,237,443 | Cobham Plc | 4,046,929 | |||||||||
2,077,064 | DSG International Plc | 8,111,364 | |||||||||
298,159 | Enterprise Inns Plc | 5,814,198 | |||||||||
2,244,853 | GlaxoSmithKline Plc | 63,687,254 | |||||||||
290,734 | HBOS Plc | 5,552,162 | |||||||||
286,792 | HSBC Holdings Plc | 5,204,285 | |||||||||
518,774 | ICAP Plc | 4,565,579 | |||||||||
715,555 | Imperial Tobacco Group Plc | 24,666,385 | |||||||||
451,821 | Ladbrokes Plc | 3,292,587 | |||||||||
134,844 | Land Securities Group Plc | 4,863,173 | |||||||||
2,248,836 | Man Group Plc | 18,085,017 | |||||||||
1,615,395 | Marks & Spencer Group Plc | 18,218,844 | |||||||||
403,872 | Next Plc | 12,818,028 | |||||||||
470,113 | Northern Rock Plc | 9,984,332 | |||||||||
196,274 | Persimmon Plc | 4,653,057 | |||||||||
133,172 | Reckitt Benckiser Plc | 5,529,365 | |||||||||
796,063 | Rio Tinto Plc | 40,161,147 | |||||||||
705,824 | Royal Bank of Scotland Group | 23,941,472 | |||||||||
1,071,822 | Royal Dutch Shell Group Class A | 36,959,553 | |||||||||
849,417 | Royal Dutch Shell Plc A Shares | 29,384,019 | |||||||||
832,246 | Royal Dutch Shell Plc B Shares | 29,747,934 | |||||||||
460,514 | Taylor Woodrow Plc | 3,007,655 | |||||||||
2,861,393 | William Morrison Supermarkets Plc | 12,058,034 | |||||||||
539,121 | Wimpey (George) Plc | 5,144,782 | |||||||||
351,131 | WPP Group Plc | 4,278,854 | |||||||||
652,757,264 | |||||||||||
TOTAL COMMON STOCKS (COST $2,728,511,629) | 3,153,478,878 |
See accompanying notes to the financial statements.
12
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
PREFERRED STOCKS — 0.5% | |||||||||||
Germany — 0.5% | |||||||||||
7,785 | Porsche AG (Non Voting) 0.64% | 8,007,855 | |||||||||
141,013 | Volkswagen AG 2.70% | 7,963,603 | |||||||||
15,971,458 | |||||||||||
TOTAL PREFERRED STOCKS (COST $11,314,426) | 15,971,458 | ||||||||||
SHORT-TERM INVESTMENTS — 6.8% | |||||||||||
91,066,294 | Boston Global Investment Trust-Enhanced Portfolio (b) | 91,066,294 | |||||||||
137,300,000 | Societe Generale Time Deposit, 5.27%, due 09/01/06 | 137,300,000 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $228,366,294) | 228,366,294 | ||||||||||
TOTAL INVESTMENTS — 101.6% (Cost $2,968,192,349) | 3,397,816,630 | ||||||||||
Other Assets and Liabilities (net) — (1.6%) | (52,868,800 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 3,344,947,830 |
See accompanying notes to the financial statements.
13
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
11/22/06 | CHF | 213,144,306 | $ | 174,576,370 | $ | 68,583 | |||||||||||||
11/22/06 | EUR | 9,036,000 | 11,630,046 | (27,867 | ) | ||||||||||||||
11/22/06 | JPY | 16,563,104,057 | 142,637,307 | (1,235,604 | ) | ||||||||||||||
11/22/06 | NOK | 380,545,227 | 60,481,767 | (497,259 | ) | ||||||||||||||
11/22/06 | SEK | 489,657,790 | 67,968,001 | (658,534 | ) | ||||||||||||||
11/22/06 | SGD | 11,853,090 | 7,561,008 | (2,673 | ) | ||||||||||||||
$ | (2,353,354 | ) | |||||||||||||||||
Sales | |||||||||||||||||||
11/22/06 | AUD | 94,081,782 | $ | 71,717,978 | $ | (98,719 | ) | ||||||||||||
11/22/06 | CAD | 57,600,354 | 52,243,813 | (478,350 | ) | ||||||||||||||
11/22/06 | DKK | 110,711,222 | 19,099,140 | 1,203 | |||||||||||||||
11/22/06 | EUR | 43,367,987 | 55,818,025 | 31,845 | |||||||||||||||
11/22/06 | GBP | 39,551,742 | 75,388,666 | (584,931 | ) | ||||||||||||||
11/22/06 | HKD | 330,206,470 | 42,559,510 | 19,703 | |||||||||||||||
$ | (1,109,249 | ) |
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
16 | AEX | September 2006 | $ | 1,924,390 | $ | (4,187 | ) | ||||||||||||
70 | CAC40 | September 2006 | 4,633,792 | (13,698 | ) | ||||||||||||||
377 | DAX | September 2006 | 70,770,630 | 2,201,337 | |||||||||||||||
57 | FTSE 100 | September 2006 | 6,407,119 | (5,627 | ) | ||||||||||||||
4 | HANG SENG | September 2006 | 446,893 | 7,276 | |||||||||||||||
11 | IBEX 35 | September 2006 | 1,713,525 | (5,440 | ) | ||||||||||||||
586 | MSCI Singapore | September 2006 | 22,103,231 | 330,360 | |||||||||||||||
1,165 | OMXS 30 | September 2006 | 15,955,491 | 103,012 |
See accompanying notes to the financial statements.
14
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Futures Contracts — continued
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
8 | S&P/MIB | September 2006 | $ | 1,948,527 | $ | 3,697 | |||||||||||||
161 | SPI 200 | September 2006 | 15,685,039 | 559,222 | |||||||||||||||
632 | TOPIX | September 2006 | 87,993,867 | 3,585,915 | |||||||||||||||
$ | 6,761,867 | ||||||||||||||||||
Sales | |||||||||||||||||||
928 | S&P Toronto 60 | September 2006 | $ | 114,620,972 | $ | (10,471,074 | ) |
As of August 31, 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).
As of August 31, 2006, 90.5% of the Net Assets of the Fund were valued using fair value prices based on models used by third party vendor (Note 2).
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krone EUR - Euro GBP - British Pound | HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone SEK - Swedish Krona SGD - Singapore Dollar | ||||||
See accompanying notes to the financial statements.
15
GMO International Growth Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $84,560,762 (cost $2,968,192,349) (Note 2) | $ | 3,397,816,630 | |||||
Cash | 52,995 | ||||||
Foreign currency, at value (cost $2,937,821) (Note 2) | 2,946,830 | ||||||
Receivable for investments sold | 2,725,907 | ||||||
Receivable for Fund shares sold | 6,715,858 | ||||||
Dividends and interest receivable | 7,254,789 | ||||||
Foreign taxes receivable | 1,506,837 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 121,334 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 24,000,000 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 1,152,105 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 133,145 | ||||||
Total assets | 3,444,426,430 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 91,066,294 | ||||||
Payable for investments purchased | 2,432,326 | ||||||
Payable for Fund shares repurchased | 10,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 1,442,542 | ||||||
Shareholder service fee | 293,977 | ||||||
Trustees and Chief Compliance Officer fees | 7,140 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 3,583,937 | ||||||
Accrued expenses | 642,384 | ||||||
Total liabilities | 99,478,600 | ||||||
Net assets | $ | 3,344,947,830 |
See accompanying notes to the financial statements.
16
GMO International Growth Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 2,645,693,912 | |||||
Accumulated undistributed net investment income | 39,170,815 | ||||||
Accumulated net realized gain | 237,547,530 | ||||||
Net unrealized appreciation | 422,535,573 | ||||||
$ | 3,344,947,830 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 886,322,763 | |||||
Class IV shares | $ | 2,458,625,067 | |||||
Shares outstanding: | |||||||
Class III | 28,369,517 | ||||||
Class IV | 78,673,880 | ||||||
Net asset value per share: | |||||||
Class III | $ | 31.24 | |||||
Class IV | $ | 31.25 |
See accompanying notes to the financial statements.
17
GMO International Growth Equity Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $5,521,667) | $ | 50,525,738 | |||||
Interest (including securities lending income of $1,786,697) | 5,336,973 | ||||||
Total investment income | 55,862,711 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 8,442,314 | ||||||
Shareholder service fee – Class III (Note 3) | 1,952,457 | ||||||
Shareholder service fee – Class IV (Note 3) | 289,696 | ||||||
Custodian and fund accounting agent fees | 676,108 | ||||||
Transfer agent fees | 14,260 | ||||||
Audit and tax fees | 31,247 | ||||||
Legal fees | 30,636 | ||||||
Trustees fees and related expenses (Note 3) | 26,319 | ||||||
Registration fees | 1,564 | ||||||
Miscellaneous | 30,176 | ||||||
Total expenses | 11,494,777 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (781,348 | ) | |||||
Net expenses | 10,713,429 | ||||||
Net investment income (loss) | 45,149,282 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 230,523,340 | ||||||
Closed futures contracts | 518,712 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 6,830,674 | ||||||
Net realized gain (loss) | 237,872,726 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (21,195,974 | ) | |||||
Open futures contracts | (2,305,334 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (3,071,791 | ) | |||||
Net unrealized gain (loss) | (26,573,099 | ) | |||||
Net realized and unrealized gain (loss) | 211,299,627 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 256,448,909 |
See accompanying notes to the financial statements.
18
GMO International Growth Equity Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 45,149,282 | $ | 45,124,066 | |||||||
Net realized gain (loss) | 237,872,726 | 137,270,663 | |||||||||
Change in net unrealized appreciation (depreciation) | (26,573,099 | ) | 212,021,228 | ||||||||
Net increase (decrease) in net assets from operations | 256,448,909 | 394,415,957 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (8,503,002 | ) | ||||||||
Net realized gains | |||||||||||
Class III | (91,053,815 | ) | (120,000,273 | ) | |||||||
(91,053,815 | ) | (128,503,275 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (2,295,567,667 | ) | 1,200,953,519 | ||||||||
Class IV | 2,355,201,352 | — | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 59,633,685 | 1,200,953,519 | |||||||||
Total increase (decrease) in net assets | 225,028,779 | 1,466,866,201 | |||||||||
Net assets: | |||||||||||
Beginning of period | 3,119,919,051 | 1,653,052,850 | |||||||||
End of period (including accumulated undistributed net investment income of $39,170,815 and distributions in excess of net investment income of $5,978,467, respectively) | $ | 3,344,947,830 | $ | 3,119,919,051 |
See accompanying notes to the financial statements.
19
GMO International Growth Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002(a) | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 29.90 | $ | 27.22 | $ | 23.67 | $ | 16.83 | $ | 19.65 | $ | 20.00 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.48 | 0.53 | 0.40 | 0.29 | 0.25 | 0.01 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 1.75 | 3.57 | 3.94 | 6.81 | (2.46 | ) | (0.36 | ) | |||||||||||||||||||
Total from investment operations | 2.23 | 4.10 | 4.34 | 7.10 | (2.21 | ) | (0.35 | ) | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.10 | ) | (0.33 | ) | (0.26 | ) | (0.61 | ) | — | |||||||||||||||||
From net realized gains | (0.89 | ) | (1.32 | ) | (0.46 | ) | — | — | — | ||||||||||||||||||
Total distributions | (0.89 | ) | (1.42 | ) | (0.79 | ) | (0.26 | ) | (0.61 | ) | — | ||||||||||||||||
Net asset value, end of period | $ | 31.24 | $ | 29.90 | $ | 27.22 | $ | 23.67 | $ | 16.83 | $ | 19.65 | |||||||||||||||
Total Return(b) | 7.55 | %** | 15.54 | % | 18.66 | % | 42.33 | % | (11.40 | )% | (1.75 | )%** | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 886,323 | $ | 3,119,919 | $ | 1,653,053 | $ | 565,104 | $ | 178,804 | $ | 84,884 | |||||||||||||||
Net expenses to average daily net assets | 0.67 | %* | 0.68 | % | 0.69 | % | 0.69 | % | 0.69 | % | 0.69 | %* | |||||||||||||||
Net investment income to average daily net assets | 3.06 | %* | 1.89 | % | 1.64 | % | 1.38 | % | 1.32 | % | 0.36 | %* | |||||||||||||||
Portfolio turnover rate | 36 | %** | 57 | % | 52 | % | 63 | % | 78 | % | 15 | %** | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.08 | % | 0.09 | % | 0.16 | % | 0.22 | % | 0.65 | %* |
(a) Period from November 30, 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
20
GMO International Growth Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout the period)
Period from July 12, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||
Net asset value, beginning of period | $ | 29.92 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)† | 0.07 | ||||||
Net realized and unrealized gain (loss) | 1.26 | ||||||
Total from investment operations | 1.33 | ||||||
Net asset value, end of period | $ | 31.25 | |||||
Total Return(a) | 4.45 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 2,458,625 | |||||
Net expenses to average daily net assets | 0.61 | %* | |||||
Net investment income to average daily net assets | 1.64 | %* | |||||
Portfolio turnover rate | 36 | %*** | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* |
(a) The total return would have been lower had certain expenses not been reimbursed during the period shown.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
*** Calculation represents portfolio turnover of the Fund for the six months ended August 31, 2006.
See accompanying notes to the financial statements.
21
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
1. Organization
GMO International Growth 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, 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 Funds into classes.
The Fund commenced operations following an in-kind purchase of shares by GMO International Growth Fund ("Predecessor Fund") effected as of the close of business on September 16, 2005. For tax purposes, this transaction met all requirements for a tax-free reorganization under the Internal Revenue Code, and consequently the Fund retained the Predecessor Fund's basis and holding period in each asset contributed in-kind. For accounting purposes, the Fund also recorded a cost for each in-kind asset contributed by the Predecessor Fund equal to such asset's historical cost. For tax and accounting purposes, the Fund is treated as a continuation of the Predecessor Fund's operations. Therefore, the Financial Statements reflect the performance and operational history of the Predecessor Fund prior to September 16, 2005.
The Fund seeks high total return. The Fund seeks to achieve its objective by outperforming the S&P/Citigroup Primary Market Index ("PMI") Europe, Pacific, Asia Composite ("EPAC") Growth Index. The Fund typically makes equity investments in companies from developed countries, other than the U.S.
As of August 31, 2006, the Fund had two classes of shares outstanding: Class III and Class IV. Class IV shares commenced operations on July 12, 2006. Each class of shares bears a different level of shareholder service fees.
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 generally valued at the most recent quoted bid price. Short-term
22
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 pursuant to procedures approved by the Trustees. 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 are generally valued by a third party vendor using fair value prices based on models 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 including 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 lo ss 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. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
23
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
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
24
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no purchased option contracts outstanding at the end of the period.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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
25
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
may be unfavorable changes in interest rates or the price of the index or security underlying these transactions. There were no swap agreements outstanding at the end of the period.
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 August 31, 2006, the Fund had loaned securities having a market value of $84,560,762, collateralized by cash in the amount of $91,066,294 which was invested in the Boston Global Investment Trust – Enhanced Portfolio.
Taxes and distributions
The Fund intends to qualify each tax 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 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.
26
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 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) | ||||||||||||
$ | 2,971,916,356 | $ | 482,253,389 | $ | (56,353,115 | ) | $ | 425,900,274 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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 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.
27
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in U.S. 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 0.52% 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 0.09% for Class IV shares.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO")(excluding employee benefits), 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 0.52% of the Fund's average daily net assets.
The Fund's portion of the fee paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $16,659 and $9,016, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $1,125,054,616 and $1,109,218,349, 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;
28
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 37.8% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. 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 August 31, 2006, less than 0.1% of the Fund's shares were held by three 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 and Predecessor Fund shares were as follows (See Note 1):
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 9,283,530 | $ | 285,414,544 | 55,020,086 | $ | 1,524,390,777 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 2,995,290 | 91,026,847 | 4,627,472 | 127,858,155 | |||||||||||||||
Shares repurchased | (88,262,006 | ) | (2,672,009,058 | ) | (15,502,785 | ) | (436,220,849 | ) | |||||||||||
Redemption in Kind | — | — | (524,991 | ) | (15,074,564 | ) | |||||||||||||
Net increase (decrease) | (75,983,186 | ) | $ | (2,295,567,667 | ) | 43,619,782 | $ | 1,200,953,519 | |||||||||||
Period from July 12, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||||||||||||||
Class IV: | Shares | Amount | |||||||||||||||||
Shares sold | 79,491,474 | $ | 2,380,267,108 | ||||||||||||||||
Shares repurchased | (817,594 | ) | (25,065,756 | ) | |||||||||||||||
Net increase (decrease) | 78,673,880 | $ | 2,355,201,352 |
29
GMO International Growth Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO International Growth Equity Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
Noting that the Fund is the successor to GMO International Growth Fund (the "Predecessor Fund"), a former series of the Trust that had an investment objective and policies and restrictions substantially identical to those of the Fund, the Trustees considered investment performance and fee and expense information of the Predecessor Fund for periods ending on or before September 16, 2005. In particular, the Trustees noted that the Fund's advisory fee was 0.02% lower than the Predecessor Fund's advisory fee.
In addition, the Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The
30
GMO International Growth Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to th e Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to
31
GMO International Growth Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
32
GMO International Growth Equity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, as outlined in the notes to the table below.
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 | 0.67 | % | $ | 1,000.00 | $ | 1,075.50 | $ | 3.51 | (a) | ||||||||||
2) Hypothetical | 0.67 | % | $ | 1,000.00 | $ | 1,021.83 | $ | 3.41 | (a) | ||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.61 | % | $ | 1,000.00 | $ | 1,044.50 | $ | 0.85 | (b) | ||||||||||
2) Hypothetical | 0.61 | % | $ | 1,000.00 | $ | 1,022.13 | $ | 3.11 | (a) |
(a) For the period March 1, 2006 through August 31, 2006. Expense is calculated using the Class's annualized net expense ratio for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
(b) For the period July 12, 2006 (commencement of operations) through August 31, 2006. Expense is calculated using the Class's annualized net expense ratio for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 50 days in the period, divided by 365 days in the year.
33
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 95.2 | % | |||||
Short-Term Investments | 6.2 | ||||||
Preferred Stocks | 0.7 | ||||||
Forward Currency Contracts | (0.2 | ) | |||||
Futures | (0.2 | ) | |||||
Other | (1.7 | ) | |||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
Japan | 26.0 | % | |||||
United Kingdom | 24.9 | ||||||
France | 11.0 | ||||||
Germany | 9.0 | ||||||
Netherlands | 8.2 | ||||||
Switzerland | 3.6 | ||||||
Italy | 3.5 | ||||||
Finland | 2.5 | ||||||
Canada | 2.2 | ||||||
Belgium | 1.9 | ||||||
Australia | 1.7 | ||||||
Sweden | 1.2 | ||||||
Spain | 0.9 | ||||||
Hong Kong | 0.8 | ||||||
Austria | 0.8 | ||||||
Singapore | 0.7 | ||||||
Ireland | 0.5 | ||||||
Norway | 0.4 | ||||||
Denmark | 0.2 | ||||||
Malaysia | 0.0 | ||||||
100.0 | % |
1
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 95.2% | |||||||||||
Australia — 1.7% | |||||||||||
1,121,666 | Australia and New Zealand Banking Group Ltd | 23,287,782 | |||||||||
624,520 | BHP Billiton Ltd | 13,154,872 | |||||||||
419,986 | Commonwealth Bank of Australia | 14,636,206 | |||||||||
986,958 | General Property Trust Units | 3,441,730 | |||||||||
830,172 | Promina Group Ltd | 3,720,999 | |||||||||
375,466 | Rio Tinto Ltd | 20,837,287 | |||||||||
2,398,754 | Stockland | 13,247,967 | |||||||||
3,779,772 | Telstra Corp Ltd | 10,392,256 | |||||||||
828,068 | Woolworths Ltd | 13,070,911 | |||||||||
115,790,010 | |||||||||||
Austria — 0.8% | |||||||||||
72,291 | Austrian Airlines * (a) | 601,631 | |||||||||
244,384 | Boehler Uddeholm (Bearer) | 13,149,355 | |||||||||
52,092 | Flughafen Wien AG | 4,222,926 | |||||||||
203,178 | OMV AG | 10,844,525 | |||||||||
126,213 | RHI AG * | 4,335,684 | |||||||||
530,592 | Voestalpine AG | 20,103,321 | |||||||||
53,257,442 | |||||||||||
Belgium — 1.8% | |||||||||||
23,203 | Colruyt SA | 3,944,184 | |||||||||
84,992 | Delhaize Group | 6,469,170 | |||||||||
1,337,827 | Dexia | 34,368,781 | |||||||||
1,560,402 | Fortis | 60,761,120 | |||||||||
260,067 | UCB SA | 15,244,672 | |||||||||
38,820 | Umicore | 5,649,263 | |||||||||
126,437,190 | |||||||||||
Canada — 2.1% | |||||||||||
316,700 | Alcan Inc | 14,243,334 | |||||||||
208,711 | BCE Inc | 5,205,973 |
See accompanying notes to the financial statements.
2
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Canada — continued | |||||||||||
360,800 | Canadian Imperial Bank of Commerce | 26,221,898 | |||||||||
597,400 | Canadian Natural Resources | 31,364,446 | |||||||||
74,900 | Inco Ltd | 5,840,614 | |||||||||
75,400 | Magna International Inc Class A | 5,410,954 | |||||||||
255,100 | National Bank of Canada | 13,840,900 | |||||||||
695,100 | Petro-Canada | 29,683,091 | |||||||||
21,400 | Quebecor Inc Class B | 542,115 | |||||||||
189,200 | Royal Bank of Canada | 8,384,164 | |||||||||
93,500 | Teck Corp Class B | 6,226,002 | |||||||||
146,963,491 | |||||||||||
Denmark — 0.2% | |||||||||||
331,200 | Danske Bank A/S | 12,738,327 | |||||||||
Finland — 2.4% | |||||||||||
993,600 | Fortum Oyj | 26,699,758 | |||||||||
303,000 | Kesko Oyj Class B | 12,833,588 | |||||||||
194,000 | Metso Oyj | 7,226,540 | |||||||||
2,174,150 | Nokia Oyj | 45,442,330 | |||||||||
346,600 | Outokumpu Oyj (a) | 8,818,810 | |||||||||
596,154 | Rautaruukki Oyj | 17,425,857 | |||||||||
1,970,300 | Sampo Oyj Class A | 40,785,062 | |||||||||
38,760 | Stockmann Oyj AB Class A | 1,637,571 | |||||||||
38,200 | Wartsila Oyj Class A | 1,575,998 | |||||||||
194,500 | YIT Oyj | 4,224,859 | |||||||||
166,670,373 | |||||||||||
France — 10.6% | |||||||||||
325,841 | Axa (a) | 12,119,234 | |||||||||
1,773,328 | BNP Paribas | 188,554,227 | |||||||||
35,055 | Bongrain SA | 2,422,637 | |||||||||
217,998 | Carrefour SA | 13,458,253 | |||||||||
117,700 | Casino Guichard-Perrachon SA (a) | 10,103,413 | |||||||||
330,057 | Cie de Saint-Gobain | 24,486,544 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
France — continued | |||||||||||
751,317 | Credit Agricole SA | 30,529,672 | |||||||||
5,686 | Fromageries Bel Vache qui Rit | 1,139,953 | |||||||||
87,900 | Lafarge SA | 11,332,277 | |||||||||
239,546 | Michelin SA Class B | 16,269,237 | |||||||||
764,918 | Mittal Steel Company NV | 25,528,341 | |||||||||
700,080 | Peugeot SA | 39,500,523 | |||||||||
570,007 | Renault SA | 66,419,671 | |||||||||
154,020 | Schneider Electric SA | 16,429,110 | |||||||||
315,849 | Societe Generale | 51,016,647 | |||||||||
161,787 | Suez SA | 6,927,243 | |||||||||
3,215,606 | Total SA | 217,143,465 | |||||||||
733,380,447 | |||||||||||
Germany — 8.2% | |||||||||||
48,717 | Aareal Bank AG * (a) | 2,179,408 | |||||||||
193,300 | Adidas AG | 9,251,149 | |||||||||
240,580 | Allianz AG (Registered) | 40,891,177 | |||||||||
276,686 | Altana AG | 16,335,791 | |||||||||
116,288 | Bankgesellschaft Berlin AG * | 706,311 | |||||||||
904,607 | Bayerische Motoren Werke AG | 46,793,598 | |||||||||
742,042 | Commerzbank AG | 25,916,421 | |||||||||
785,807 | DaimlerChrysler AG (Registered) | 41,434,964 | |||||||||
1,039,157 | Depfa Bank Plc | 19,395,543 | |||||||||
701,187 | Deutsche Bank AG (Registered) | 80,151,765 | |||||||||
68,611 | Deutsche Postbank AG | 5,376,420 | |||||||||
522,119 | E. On AG | 66,277,883 | |||||||||
90,600 | Heidelberger Druckmaschinen | 3,628,626 | |||||||||
48,721 | Hochtief AG | 2,768,329 | |||||||||
41,966 | Hypo Real Estate Holding AG | 2,605,391 | |||||||||
165,558 | MAN AG | 12,667,631 | |||||||||
87,101 | Merck KGaA | 8,635,729 | |||||||||
1,009 | Mobilcom AG * | 21,347 | |||||||||
377,538 | Muenchener Rueckversicherungs AG (Registered) | 56,761,677 | |||||||||
143,147 | Salzgitter AG | 12,823,080 |
See accompanying notes to the financial statements.
4
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Germany — continued | |||||||||||
320,562 | Suedzucker AG (a) | 7,980,038 | |||||||||
1,422,557 | ThyssenKrupp AG | 48,395,813 | |||||||||
883,656 | TUI AG (a) | 17,335,558 | |||||||||
565,619 | Volkswagen AG (a) | 45,154,303 | |||||||||
573,487,952 | |||||||||||
Hong Kong — 0.8% | |||||||||||
2,842,098 | CLP Holdings Ltd | 17,971,919 | |||||||||
218,000 | Guoco Group | 2,662,861 | |||||||||
1,499,511 | Hang Lung Group Co Ltd | 4,057,534 | |||||||||
651,900 | Hong Kong Aircraft Engineering Co Ltd | 8,862,973 | |||||||||
3,371,969 | Hong Kong Electric Holdings Ltd | 16,122,627 | |||||||||
561,700 | Hong Kong Ferry Co Ltd | 623,859 | |||||||||
162 | Jardine Matheson Holdings Ltd | 2,851 | |||||||||
83,411 | Jardine Strategic Holdings Ltd | 900,814 | |||||||||
26,862 | Mandarin Oriental International Ltd | 29,825 | |||||||||
1,560,400 | Yue Yuen Industrial Holdings | 4,514,020 | |||||||||
55,749,283 | |||||||||||
Ireland — 0.4% | |||||||||||
901,538 | CRH Plc | 31,206,052 | |||||||||
Italy — 3.1% | |||||||||||
4,153,158 | Banca Monte dei Paschi di Siena SPA (a) | 25,262,714 | |||||||||
329,079 | Banca Popolare di Verona (a) | 9,779,634 | |||||||||
3,988,530 | ENI SPA | 121,954,020 | |||||||||
1,158,482 | Fiat SPA * (a) | 16,605,554 | |||||||||
185,747 | Fiat SPA-Di RISP * (a) | 2,474,314 | |||||||||
256,425 | Fondiaria-Sai SPA-Di RISP | 8,223,452 | |||||||||
588,000 | Grassetto SPA * (b) (c) | 7,533 | |||||||||
289,488 | Italcementi SPA-Di RISP | 4,571,066 | |||||||||
24,342 | Italmobiliare SPA | 2,139,589 | |||||||||
607,433 | Milano Assicurazioni SPA (a) | 4,418,070 | |||||||||
96,800 | Natuzzi SPA ADR * | 676,632 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Italy — continued | |||||||||||
491,236 | SMI (Societa Metallurgica Italy) * | 223,985 | |||||||||
2,099,438 | UniCredito Italiano SPA | 16,730,172 | |||||||||
213,066,735 | |||||||||||
Japan — 24.9% | |||||||||||
135,130 | Acom Co Ltd | 6,030,138 | |||||||||
87,600 | Aisin Seiki Co Ltd | 2,647,576 | |||||||||
202,000 | Asics Corp | 2,514,250 | |||||||||
122,100 | Autobacs Seven Co Ltd | 5,032,151 | |||||||||
336,400 | Canon Inc | 16,711,788 | |||||||||
1,419,300 | Chubu Electric Power Co Inc | 38,409,715 | |||||||||
797,000 | Cosmo Oil Co Ltd | 3,494,039 | |||||||||
464,150 | Daiei Inc * (a) | 8,902,790 | |||||||||
974,280 | Daiichi Sankyo Co Ltd | 26,844,107 | |||||||||
1,671,000 | Daikyo Inc * (a) | 8,548,330 | |||||||||
139,191 | Daiwa House Industry Co Ltd | 2,259,743 | |||||||||
1,817,000 | Daiwa Securities Group Inc | 21,507,035 | |||||||||
125,000 | Denso Corp | 4,335,132 | |||||||||
1,311 | East Japan Railway Co | 9,660,336 | |||||||||
574,800 | Eisai Co Ltd | 27,299,212 | |||||||||
1,027,000 | Fuji Electric Holdings Co Ltd | 5,189,939 | |||||||||
3,206,000 | Fuji Heavy Industries Ltd (a) | 18,485,059 | |||||||||
747,000 | Fujikura Ltd | 8,786,735 | |||||||||
854,000 | Fujitsu Ltd | 6,816,536 | |||||||||
5,789,000 | Haseko Corp * (a) | 20,620,059 | |||||||||
110,800 | Hitachi Chemical Co Ltd | 2,669,670 | |||||||||
83,900 | Hitachi Construction Machinery | 1,838,888 | |||||||||
352,100 | Hokkaido Electric Power | 8,688,095 | |||||||||
5,511,400 | Honda Motor Co Ltd | 186,505,152 | |||||||||
2,719,000 | Isuzu Motors Ltd (a) | 8,781,598 | |||||||||
4,738,000 | Itochu Corp | 39,567,194 | |||||||||
307,000 | Kandenko Co | 2,146,479 | |||||||||
1,014,000 | Kansai Electric Power Co Inc | 24,293,233 | |||||||||
1,064,000 | Kao Corp | 28,325,870 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
914,000 | Kawasaki Heavy Industries Ltd (a) | 2,876,234 | |||||||||
1,987,000 | Kawasaki Kisen Kaisha Ltd (a) | 12,878,928 | |||||||||
616,000 | Keisei Electric Railway Co (a) | 3,726,641 | |||||||||
286,000 | Kirin Brewery Co Ltd | 3,965,496 | |||||||||
783,000 | Komatsu Ltd | 14,209,919 | |||||||||
278,600 | Konami Corp | 7,073,942 | |||||||||
1,511,000 | Kubota Corp | 12,351,715 | |||||||||
887,200 | Kyushu Electric Power Co Inc | 21,133,025 | |||||||||
146,500 | Leopalance21 Corp | 5,170,305 | |||||||||
327,000 | Maeda Corp (a) | 1,512,157 | |||||||||
4,185,000 | Marubeni Corp | 22,250,564 | |||||||||
3,014,000 | Mazda Motor Corp | 19,221,197 | |||||||||
2,583,100 | Mitsubishi Corp | 52,289,210 | |||||||||
3,540,000 | Mitsubishi Heavy Industries | 14,769,011 | |||||||||
1,302,000 | Mitsubishi Materials Corp (a) | 5,634,364 | |||||||||
1,343,000 | Mitsubishi Rayon Co Ltd | 9,217,188 | |||||||||
4,655 | Mitsubishi UFJ Financial Group Inc | 63,151,754 | |||||||||
464,000 | Mitsubishi UFJ Securities Corp | 6,187,224 | |||||||||
1,282,000 | Mitsui & Co | 18,497,905 | |||||||||
2,533,000 | Mitsui Trust Holding Inc | 29,500,792 | |||||||||
3,626 | Mizuho Financial Group Inc | 29,208,362 | |||||||||
219,000 | Nagase & Co | 2,730,978 | |||||||||
359,000 | Nikko Cordial Corp | 4,527,674 | |||||||||
67,300 | Nintendo Co Ltd | 13,758,100 | |||||||||
151,000 | Nippon Corp | 1,293,235 | |||||||||
1,692,000 | Nippon Light Metal (a) | 4,332,278 | |||||||||
773,000 | Nippon Sheet Glass (a) | 3,721,766 | |||||||||
9,205 | Nippon Telegraph & Telephone Corp | 46,370,634 | |||||||||
1,444,000 | Nippon Yusen Kabushiki Kaisha | 8,917,512 | |||||||||
7,623,200 | Nissan Motor Co | 86,537,057 | |||||||||
1,371,300 | Nomura Holdings Inc | 26,310,370 | |||||||||
20,447 | NTT Docomo Inc | 31,608,334 | |||||||||
162,900 | Ono Pharmaceutical Co Ltd | 7,584,140 | |||||||||
377,000 | Orient Corp | 1,039,567 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
103,410 | ORIX Corp | 27,301,849 | |||||||||
6,145,000 | Osaka Gas Co Ltd | 22,586,475 | |||||||||
137,050 | Promise Co Ltd | 6,115,728 | |||||||||
12,492 | Resona Holdings Inc | 39,174,591 | |||||||||
1,360,000 | Ricoh Company Ltd | 26,608,656 | |||||||||
101,100 | Ryosan Co | 2,640,625 | |||||||||
1,065,000 | Shinko Securities Co Ltd | 4,279,291 | |||||||||
546,000 | Showa Denko | 2,334,784 | |||||||||
357,500 | Showa Shell Sekiyu KK | 3,982,321 | |||||||||
1,015,200 | Sojitz Corp * (a) | 3,563,171 | |||||||||
323,100 | Sony Corp | 14,015,103 | |||||||||
1,108,000 | Sumitomo Chemical Co Ltd | 8,695,989 | |||||||||
1,455,000 | Sumitomo Corp | 19,567,131 | |||||||||
464,000 | Sumitomo Metal Mining Co Ltd | 6,498,668 | |||||||||
843,000 | Sumitomo Trust & Banking Co Ltd | 8,926,679 | |||||||||
596,000 | Taisho Pharmaceutical Co Ltd | 11,634,516 | |||||||||
2,769,000 | Takeda Pharmaceutical Co Ltd | 182,970,975 | |||||||||
74,490 | Takefuji Corp | 4,009,207 | |||||||||
868,300 | Tohoku Electric Power Co Inc | 19,650,379 | |||||||||
665,600 | Tokyo Electric Power Co Inc | 18,957,230 | |||||||||
3,569,000 | Tokyo Gas Co Ltd | 18,932,090 | |||||||||
287,700 | Tokyo Steel Manufacturing Co | 4,658,898 | |||||||||
892,000 | TonenGeneral Sekiyu KK (a) | 8,036,537 | |||||||||
1,180,000 | Toray Industries Inc | 9,363,397 | |||||||||
850,000 | Toshiba Corp | 6,028,966 | |||||||||
158,000 | Toyo Suisan Kaisha Ltd | 2,404,684 | |||||||||
12,600 | Toyota Industries Corp | 523,040 | |||||||||
1,902,700 | Toyota Motor Corp | 102,825,623 | |||||||||
106,743 | Toyota Tsusho Kaisha | 2,799,006 | |||||||||
1,729,554,036 | |||||||||||
Malaysia — 0.0% | |||||||||||
751,000 | Promet Berhad * (b) (c) | 2,040 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Netherlands — 7.8% | |||||||||||
5,198,164 | ABN Amro Holdings NV | 148,283,273 | |||||||||
4,215,749 | Aegon NV | 75,329,463 | |||||||||
488,346 | Akzo Nobel NV | 28,124,659 | |||||||||
168,337 | Corio NV | 11,333,840 | |||||||||
14,788 | Gamma Holdings NV | 835,357 | |||||||||
382,222 | Heineken NV | 17,723,221 | |||||||||
5,231,075 | ING Groep NV | 226,639,182 | |||||||||
255,681 | Koninklijke DSM | 10,115,295 | |||||||||
177,968 | Koninklijke Wessanen NV (a) | 2,470,990 | |||||||||
372,504 | OCE NV (a) | 6,469,759 | |||||||||
127,686 | TNT NV | 4,803,000 | |||||||||
277,652 | Vedior NV | 5,133,236 | |||||||||
61,825 | Wereldhave NV (a) | 6,493,406 | |||||||||
543,754,681 | |||||||||||
Norway — 0.4% | |||||||||||
596,247 | Norsk Hydro ASA | 15,358,010 | |||||||||
425,200 | Statoil ASA | 11,480,023 | |||||||||
26,838,033 | |||||||||||
Singapore — 0.7% | |||||||||||
2,440,000 | DBS Group Holdings Ltd | 27,856,389 | |||||||||
1,965,000 | Fraser & Neave Ltd | 4,961,602 | |||||||||
254,193 | Haw Par Corp Ltd | 951,469 | |||||||||
551,104 | Hotel Properties Ltd | 714,063 | |||||||||
915,000 | Overseas Chinese Town Group | 3,745,061 | |||||||||
3,241,100 | Sembcorp Industrie | 7,161,415 | |||||||||
1,761,201 | Straits Trading Co Ltd | 3,186,557 | |||||||||
48,576,556 | |||||||||||
Spain — 0.8% | |||||||||||
38,036 | Fomento de Construcciones y Contratas SA | 2,966,871 | |||||||||
118,264 | Gas Natural SDG SA | 3,960,604 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Spain — continued | |||||||||||
442,142 | Iberdrola SA | 16,430,512 | |||||||||
1,244,380 | Repsol YPF SA | 35,802,428 | |||||||||
59,160,415 | |||||||||||
Sweden — 1.2% | |||||||||||
717,000 | Electrolux AB (a) | 11,087,330 | |||||||||
296,200 | Holmen AB Class B | 12,403,111 | |||||||||
558,000 | Nordea AB | 7,005,707 | |||||||||
601,600 | Sandvik AB | 6,592,081 | |||||||||
322,800 | Skandinaviska Enskilda Banken AB Class A | 8,353,312 | |||||||||
335,000 | SKF AB Class B | 4,797,104 | |||||||||
193,200 | Svenska Cellulosa AB (SCA) | 8,277,160 | |||||||||
238,200 | Svenska Handelsbanken AB Class A | 6,214,302 | |||||||||
971,300 | Tele2 AB Class B (a) | 9,616,873 | |||||||||
1,276,500 | Telia AB | 7,897,749 | |||||||||
82,244,729 | |||||||||||
Switzerland — 3.5% | |||||||||||
5,373 | Banque Cantonale Vaudoise | 2,034,610 | |||||||||
297,813 | Credit Suisse Group | 16,598,747 | |||||||||
22,098 | GHV-Split Vermoegensver * (a) | 28,311 | |||||||||
42,148 | Nestle SA (Registered) | 14,480,828 | |||||||||
69,855 | Swiss Life Holding | 16,894,961 | |||||||||
290,032 | Swiss Reinsurance Co (Registered) | 22,121,370 | |||||||||
1,209,004 | UBS AG (Registered) | 68,344,161 | |||||||||
8,313 | Valora Holding AG | 1,867,348 | |||||||||
433,908 | Zurich Financial Services AG | 98,908,145 | |||||||||
241,278,481 | |||||||||||
United Kingdom — 23.8% | |||||||||||
831,195 | Alliance & Leicester Plc | 16,246,558 | |||||||||
1,265,525 | Alliance Boots Plc | 18,578,915 | |||||||||
366,365 | AMEC | 2,254,081 | |||||||||
1,373,622 | Anglo American Plc | 59,434,679 |
See accompanying notes to the financial statements.
10
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
318,997 | Arriva Plc | 3,615,163 | |||||||||
3,082,598 | AstraZeneca Plc | 200,041,010 | |||||||||
2,622,709 | Aviva Plc | 36,857,511 | |||||||||
2,936,188 | Barclays Plc | 36,787,028 | |||||||||
1,346,923 | Barratt Developments Plc | 25,480,414 | |||||||||
1,048,520 | BBA Group Plc | 5,327,086 | |||||||||
259,103 | Berkeley Group Holdings Plc * | 6,323,796 | |||||||||
659,336 | BP Plc * | 7,481,734 | |||||||||
623,364 | Bradford & Bingley Plc | 5,376,374 | |||||||||
258,966 | British American Tobacco Plc | 7,115,797 | |||||||||
511,082 | British Energy Plc (Deferred Shares) * (b) (c) | — | |||||||||
16,917,619 | BT Group Plc | 79,521,746 | |||||||||
1,943,886 | Cadbury Schweppes Plc | 20,732,956 | |||||||||
7,404,830 | Centrica Plc | 41,598,181 | |||||||||
3,395,729 | Cobham Plc | 11,105,379 | |||||||||
529,459 | Corus Group Plc | 3,952,925 | |||||||||
6,228,832 | DSG International Plc | 24,324,876 | |||||||||
849,437 | EMI Group Plc | 4,326,304 | |||||||||
9,815,169 | GlaxoSmithKline Plc | 278,459,731 | |||||||||
723,962 | GUS Plc | 13,448,806 | |||||||||
793,197 | Hanson Plc | 9,992,812 | |||||||||
2,985,437 | HBOS Plc | 57,013,041 | |||||||||
974,275 | IMI Plc | 9,377,741 | |||||||||
947,656 | Imperial Chemical Industries Plc | 6,721,332 | |||||||||
1,194,881 | Imperial Tobacco Group Plc | 41,189,559 | |||||||||
692,580 | Inchcape Plc | 6,544,347 | |||||||||
2,355,235 | J Sainsbury Plc | 15,981,808 | |||||||||
4,427,945 | Kingfisher Plc | 19,892,169 | |||||||||
1,257,072 | Ladbrokes Plc | 9,160,749 | |||||||||
2,865,876 | Lloyds TSB Group Plc | 28,424,321 | |||||||||
896,954 | Next Plc | 28,467,390 | |||||||||
2,824,310 | Northern Foods Plc | 4,162,821 | |||||||||
535,419 | Northern Rock Plc | 11,371,311 | |||||||||
2,221,661 | Old Mutual Plc | 6,932,376 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
138,343 | Persimmon Plc | 3,279,690 | |||||||||
1,516,974 | Rio Tinto Plc | 76,530,897 | |||||||||
9,940,572 | Royal & Sun Alliance Insurance Group | 26,212,482 | |||||||||
3,196,051 | Royal Bank of Scotland Group | 108,409,696 | |||||||||
1,344,333 | Royal Dutch Shell Group Class A | 46,356,529 | |||||||||
771,113 | Royal Dutch Shell Plc A Shares | 26,675,236 | |||||||||
1,071,189 | Royal Dutch Shell Plc B Shares | 38,288,750 | |||||||||
181,255 | Schroders Plc | 3,135,299 | |||||||||
219,745 | Scottish & Southern Energy Plc | 5,040,280 | |||||||||
2,079,166 | Scottish Power Plc | 24,564,973 | |||||||||
873,249 | Scottish Power Plc (Deferred Shares) * (c) | — | |||||||||
758,229 | Smith News Plc * | 6,857,603 | |||||||||
2,723,728 | Taylor Woodrow Plc | 17,788,891 | |||||||||
2,290,828 | Tomkins Plc | 12,420,371 | |||||||||
545,066 | United Utilities Plc | 7,130,120 | |||||||||
31,527,505 | Vodafone Group Inc | 68,326,084 | |||||||||
2,167,366 | Wimpey (George) Plc | 20,682,975 | |||||||||
1,655,322,703 | |||||||||||
TOTAL COMMON STOCKS (COST $5,191,797,387) | 6,615,478,976 | ||||||||||
PREFERRED STOCKS — 0.7% | |||||||||||
Germany — 0.4% | |||||||||||
23,939 | Fresenius Medical Care AG (Non Voting) 1.12% | 4,107,314 | |||||||||
32,886 | Henkel KGaA 1.34% | 4,198,608 | |||||||||
19,652 | RWE AG 2.74% | 1,616,900 | |||||||||
9,000 | Villeroy & Boch AG (Non Voting) 3.26% | 133,529 | |||||||||
308,783 | Volkswagen AG 2.70% | 17,438,287 | |||||||||
27,494,638 |
See accompanying notes to the financial statements.
12
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
Italy — 0.3% | |||||||||||
3,390,874 | Compagnia Assicuratrice Unipol 3.80% | 10,235,847 | |||||||||
155,430 | Fiat SPA * | 1,854,410 | |||||||||
250,956 | IFI Istituto Finanziario Industries * | 6,010,061 | |||||||||
18,100,318 | |||||||||||
TOTAL PREFERRED STOCKS (COST $31,381,504) | 45,594,956 | ||||||||||
SHORT-TERM INVESTMENTS — 6.2% | |||||||||||
227,218,574 | Boston Global Investment Trust-Enhanced Portfolio (d) | 227,218,574 | |||||||||
205,300,000 | ING Bank Time Deposit, 5.29%, due 09/01/06 | 205,300,000 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $432,518,574) | 432,518,574 | ||||||||||
TOTAL INVESTMENTS — 102.1% (Cost $5,655,697,465) | 7,093,592,506 | ||||||||||
Other Assets and Liabilities (net) — (2.1%) | (146,483,493 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 6,947,109,013 |
See accompanying notes to the financial statements.
13
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
11/22/06 | CAD | 60,017,075 | $ | 54,435,792 | $ | 498,421 | |||||||||||||
11/22/06 | CHF | 498,121,932 | 407,987,999 | 225,793 | |||||||||||||||
11/22/06 | JPY | 41,409,068,123 | 356,604,533 | (3,331,713 | ) | ||||||||||||||
11/22/06 | NOK | 1,550,521,687 | 246,431,394 | (2,026,071 | ) | ||||||||||||||
11/22/06 | SEK | 2,140,790,015 | 297,156,954 | (2,879,121 | ) | ||||||||||||||
11/22/06 | SGD | 47,776,510 | 30,476,321 | (10,774 | ) | ||||||||||||||
$ | (7,523,465 | ) | |||||||||||||||||
Sales | |||||||||||||||||||
11/22/06 | AUD | 19,240,696 | $ | 14,667,067 | $ | (20,189 | ) | ||||||||||||
11/22/06 | DKK | 66,025,048 | 11,390,188 | 718 | |||||||||||||||
11/22/06 | EUR | 469,931,053 | 604,838,390 | 345,063 | |||||||||||||||
11/22/06 | GBP | 270,442,292 | 515,483,833 | (3,999,571 | ) | ||||||||||||||
11/22/06 | HKD | 432,130,821 | 55,696,292 | 25,784 | |||||||||||||||
$ | (3,648,195 | ) |
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
894 | DAX | September 2006 | $ | 167,822,130 | $ | 11,503,700 | |||||||||||||
1,842 | MSCI Singapore | September 2006 | 69,478,075 | 1,045,668 | |||||||||||||||
1,773 | TOPIX | September 2006 | 246,856,212 | 9,162,442 | |||||||||||||||
$ | 21,711,810 | ||||||||||||||||||
Sales | |||||||||||||||||||
1,709 | FTSE 100 | September 2006 | $ | 192,101,156 | $ | (11,497,645 | ) | ||||||||||||
984 | S&P Toronto 60 | September 2006 | 121,537,754 | (10,696,095 | ) | ||||||||||||||
$ | (22,193,740 | ) |
As of August 31, 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.
14
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
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).
As of August 31, 2006, 93.3% of the Net Assets of the Fund were valued using fair value prices based on models used by a third party vendor (Note 2).
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krone EUR - Euro GBP - British Pound | HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone SEK - Swedish Krona SGD - Singapore Dollar | ||||||
See accompanying notes to the financial statements.
15
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $211,590,604 (cost $5,655,697,465) (Note 2) | $ | 7,093,592,506 | |||||
Cash | 64,533 | ||||||
Foreign currency, at value (cost $16,041,536) (Note 2) | 16,136,170 | ||||||
Receivable for investments sold | 15,582,517 | ||||||
Receivable for Fund shares sold | 16,868,075 | ||||||
Dividends and interest receivable | 18,431,443 | ||||||
Foreign taxes receivable | 2,683,376 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 1,095,779 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 38,550,000 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 4,382,595 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 242,327 | ||||||
Total assets | 7,207,629,321 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 227,218,574 | ||||||
Payable for investments purchased | 15,592,176 | ||||||
Payable for Fund shares repurchased | 1,036,358 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 3,128,985 | ||||||
Shareholder service fee | 698,878 | ||||||
Trustees and Chief Compliance Officer fees | 12,682 | ||||||
Administration fee – Class M | 2,702 | ||||||
Payable for 12b-1 fee – Class M | 6,608 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 12,267,439 | ||||||
Accrued expenses | 555,906 | ||||||
Total liabilities | 260,520,308 | ||||||
Net assets | $ | 6,947,109,013 |
See accompanying notes to the financial statements.
16
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 5,070,145,285 | |||||
Accumulated undistributed net investment income | 113,549,619 | ||||||
Accumulated net realized gain | 336,992,598 | ||||||
Net unrealized appreciation | 1,426,421,511 | ||||||
$ | 6,947,109,013 | ||||||
Net assets attributable to: | |||||||
Class II shares | $ | 505,283,981 | |||||
Class III shares | $ | 2,471,990,679 | |||||
Class IV shares | $ | 3,953,649,602 | |||||
Class M shares | $ | 16,184,751 | |||||
Shares outstanding: | |||||||
Class II | 14,858,276 | ||||||
Class III | 72,131,373 | ||||||
Class IV | 115,388,259 | ||||||
Class M | 477,223 | ||||||
Net asset value per share: | |||||||
Class II | $ | 34.01 | |||||
Class III | $ | 34.27 | |||||
Class IV | $ | 34.26 | |||||
Class M | $ | 33.91 |
See accompanying notes to the financial statements.
17
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $14,208,758) | $ | 138,816,290 | |||||
Interest (including securities lending income of $5,775,601) | 12,032,918 | ||||||
Total investment income | 150,849,208 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 18,399,947 | ||||||
Shareholder service fee – Class II (Note 3) | 589,854 | ||||||
Shareholder service fee – Class III (Note 3) | 1,887,876 | ||||||
Shareholder service fee – Class IV (Note 3) | 1,684,606 | ||||||
12b-1 fee – Class M (Note 3) | 22,283 | ||||||
Administration fee – Class M (Note 3) | 17,826 | ||||||
Custodian and fund accounting agent fees | 1,300,972 | ||||||
Transfer agent fees | 39,652 | ||||||
Audit and tax fees | 40,664 | ||||||
Legal fees | 65,355 | ||||||
Trustees fees and related expenses (Note 3) | 52,431 | ||||||
Registration fees | 21,436 | ||||||
Miscellaneous | 64,032 | ||||||
Total expenses | 24,186,934 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (1,512,940 | ) | |||||
Net expenses | 22,673,994 | ||||||
Net investment income (loss) | 128,175,214 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 354,994,039 | ||||||
Closed futures contracts | 4,036,374 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (16,825,814 | ) | |||||
Net realized gain (loss) | 342,204,599 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 121,572,456 | ||||||
Open futures contracts | (13,471,071 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (14,689,283 | ) | |||||
Net unrealized gain (loss) | 93,412,102 | ||||||
Net realized and unrealized gain (loss) | 435,616,701 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 563,791,915 |
See accompanying notes to the financial statements.
18
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 128,175,214 | $ | 124,514,198 | |||||||
Net realized gain (loss) | 342,204,599 | 339,275,091 | |||||||||
Change in net unrealized appreciation (depreciation) | 93,412,102 | 510,096,572 | |||||||||
Net increase (decrease) in net assets from operations | 563,791,915 | 973,885,861 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class II | (822,456 | ) | (5,167,158 | ) | |||||||
Class III | (4,246,848 | ) | (30,272,073 | ) | |||||||
Class IV | (7,535,402 | ) | (33,052,892 | ) | |||||||
Class M | (11,582 | ) | (236,681 | ) | |||||||
Total distributions from net investment income | (12,616,288 | ) | (68,728,804 | ) | |||||||
Net realized gains | |||||||||||
Class II | (14,097,180 | ) | (19,940,346 | ) | |||||||
Class III | (68,019,192 | ) | (115,581,160 | ) | |||||||
Class IV | (109,881,901 | ) | (123,159,753 | ) | |||||||
Class M | (452,621 | ) | (1,142,022 | ) | |||||||
Total distributions from net realized gains | (192,450,894 | ) | (259,823,281 | ) | |||||||
(205,067,182 | ) | (328,552,085 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class II | (101,940,913 | ) | 285,566,330 | ||||||||
Class III | (475,254,135 | ) | 711,856,761 | ||||||||
Class IV | 636,961,081 | 643,540,098 | |||||||||
Class M | (15,029,301 | ) | 8,835,593 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | 44,736,732 | 1,649,798,782 | |||||||||
Total increase (decrease) in net assets | 403,461,465 | 2,295,132,558 | |||||||||
Net assets: | |||||||||||
Beginning of period | 6,543,647,548 | 4,248,514,990 | |||||||||
End of period (including accumulated undistributed net investment income of $113,549,619 and distibutions in excess of net investment income of $2,009,307, respectively) | $ | 6,947,109,013 | $ | 6,543,647,548 |
See accompanying notes to the financial statements.
19
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 32.35 | $ | 29.04 | $ | 24.18 | $ | 16.04 | $ | 17.41 | $ | 20.30 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.63 | 0.65 | 0.49 | 0.44 | 0.37 | 0.28 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.07 | 4.45 | 5.07 | 8.31 | (1.05 | ) | (2.44 | ) | |||||||||||||||||||
Total from investment operations | 2.70 | 5.10 | 5.56 | 8.75 | (0.68 | ) | (2.16 | ) | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.06 | ) | (0.36 | ) | (0.66 | ) | (0.61 | ) | (0.69 | ) | (0.73 | ) | |||||||||||||||
From net realized gains | (0.98 | ) | (1.43 | ) | (0.04 | ) | — | — | — | ||||||||||||||||||
Total distributions | (1.04 | ) | (1.79 | ) | (0.70 | ) | (0.61 | ) | (0.69 | ) | (0.73 | ) | |||||||||||||||
Net asset value, end of period | $ | 34.01 | $ | 32.35 | $ | 29.04 | $ | 24.18 | $ | 16.04 | $ | 17.41 | |||||||||||||||
Total Return(a) | 8.44 | %** | 18.16 | % | 23.17 | % | 54.99 | % | (4.11 | )% | (10.71 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 505,284 | $ | 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 | % | 0.76 | % | |||||||||||||||
Net investment income to average daily net assets | 3.74 | %* | 2.16 | % | 1.88 | % | 2.15 | % | 2.06 | % | 1.56 | % | |||||||||||||||
Portfolio turnover rate | 18 | %** | 38 | % | 46 | % | 44 | % | 51 | % | 51 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* | 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
20
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 32.59 | $ | 29.23 | $ | 24.32 | $ | 16.13 | $ | 17.50 | $ | 20.37 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.64 | 0.72 | 0.59 | 0.45 | 0.40 | 0.44 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.08 | 4.44 | 5.02 | 8.36 | (1.08 | ) | (2.59 | ) | |||||||||||||||||||
Total from investment operations | 2.72 | 5.16 | 5.61 | 8.81 | (0.68 | ) | (2.15 | ) | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.06 | ) | (0.37 | ) | (0.66 | ) | (0.62 | ) | (0.69 | ) | (0.72 | ) | |||||||||||||||
From net realized gains | (0.98 | ) | (1.43 | ) | (0.04 | ) | — | — | — | ||||||||||||||||||
Total distributions | (1.04 | ) | (1.80 | ) | (0.70 | ) | (0.62 | ) | (0.69 | ) | (0.72 | ) | |||||||||||||||
Net asset value, end of period | $ | 34.27 | $ | 32.59 | $ | 29.23 | $ | 24.32 | $ | 16.13 | $ | 17.50 | |||||||||||||||
Total Return(a) | 8.45 | %** | 18.26 | % | 23.28 | % | 55.05 | % | (4.05 | )% | (10.60 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 2,471,991 | $ | 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 | % | 0.69 | % | |||||||||||||||
Net investment income to average daily net assets | 3.77 | %* | 2.39 | % | 2.30 | % | 2.22 | % | 2.26 | % | 2.37 | % | |||||||||||||||
Portfolio turnover rate | 18 | %** | 38 | % | 46 | % | 44 | % | 51 | % | 51 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* | 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
21
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 32.58 | $ | 29.22 | $ | 24.31 | $ | 16.12 | $ | 17.50 | $ | 20.37 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.64 | 0.74 | 0.54 | 0.43 | 0.38 | 0.36 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.09 | 4.43 | 5.09 | 8.39 | (1.05 | ) | (2.49 | ) | |||||||||||||||||||
Total from investment operations | 2.73 | 5.17 | 5.63 | 8.82 | (0.67 | ) | (2.13 | ) | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.07 | ) | (0.38 | ) | (0.68 | ) | (0.63 | ) | (0.71 | ) | (0.74 | ) | |||||||||||||||
From net realized gains | (0.98 | ) | (1.43 | ) | (0.04 | ) | — | — | — | ||||||||||||||||||
Total distributions | (1.05 | ) | (1.81 | ) | (0.72 | ) | (0.63 | ) | (0.71 | ) | (0.74 | ) | |||||||||||||||
Net asset value, end of period | $ | 34.26 | $ | 32.58 | $ | 29.22 | $ | 24.31 | $ | 16.12 | $ | 17.50 | |||||||||||||||
Total Return(a) | 8.47 | %** | 18.32 | % | 23.37 | % | 55.15 | % | (4.02 | )% | (10.52 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 3,953,650 | $ | 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 | % | 0.63 | % | |||||||||||||||
Net investment income to average daily net assets | 3.76 | %* | 2.45 | % | 2.06 | % | 2.08 | % | 2.13 | % | 1.97 | % | |||||||||||||||
Portfolio turnover rate | 18 | %** | 38 | % | 46 | % | 44 | % | 51 | % | 51 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* | 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
22
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class M share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 32.28 | $ | 28.98 | $ | 24.15 | $ | 20.92 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.54 | 0.61 | 0.44 | 0.01 | |||||||||||||||
Net realized and unrealized gain (loss) | 2.10 | 4.41 | 5.04 | 3.73 | |||||||||||||||
Total from investment operations | 2.64 | 5.02 | 5.48 | 3.74 | |||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.03 | ) | (0.29 | ) | (0.61 | ) | (0.51 | ) | |||||||||||
From net realized gains | (0.98 | ) | (1.43 | ) | (0.04 | ) | — | ||||||||||||
Total distributions | (1.01 | ) | (1.72 | ) | (0.65 | ) | (0.51 | ) | |||||||||||
Net asset value, end of period | $ | 33.91 | $ | 32.28 | $ | 28.98 | $ | 24.15 | |||||||||||
Total Return(b) | 8.26 | %** | 17.92 | % | 22.88 | % | 18.06 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 16,185 | $ | 29,984 | $ | 18,347 | $ | 7,408 | |||||||||||
Net expenses to average daily net assets | 0.99 | %* | 0.99 | % | 0.99 | % | 0.99 | %* | |||||||||||
Net investment income to average daily net assets | 3.23 | %* | 2.07 | % | 1.72 | % | 0.12 | %* | |||||||||||
Portfolio turnover rate | 18 | %** | 38 | % | 46 | % | 44 | %†† | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* | 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.
23
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its objective by outperforming the S&P/Citigroup Primary Market Index ("PMI") Europe, Pacific, Asia Composite ("EPAC") Value Style Index. The Fund typically makes equity investments in companies from developed countries, other than the U.S.
Throughout the six months ended August 31, 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.
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 generally 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 pursuant to procedures approved by the Trustees. 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
24
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
before the close of the NYSE. As a result, foreign equity securities are generally valued by a third party vendor using fair value prices based on models 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 including 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 lo ss 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. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. 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
25
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
26
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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. There were no swap agreements outstanding at the end of the period.
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
27
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
custodian in an amount at least equal to these commitments. There were no delayed delivery commitments outstanding at the end of the period.
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 August 31, 2006, the Fund had loaned securities having a market value of $211,590,604, collateralized by cash in the amount of $227,218,574, which was invested in the Boston Global Investment Trust – Enhanced Portfolio.
Taxes and distributions
The Fund intends to qualify each tax 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 foreign withholding 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.
28
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 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) | ||||||||||||
$ | 5,659,784,221 | $ | 1,496,411,129 | $ | (62,602,844 | ) | $ | 1,433,808,285 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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 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.
29
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in U.S. 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 up to 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 on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees (Classes II, III, and IV only), 12b-1 and administration fees (Class M only), fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $35,227 and $19,044, respectively. No remuneration was paid by the Fund to any other officer of the Trust.
30
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2006 aggregated $1,150,549,788 and $1,247,366,174, 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 August 31, 2006, 12.5% 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 August 31, 2006, 0.4% of the Fund's shares were held by eight related parties comprised of certain GMO employee accounts, and 57.1% 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class II: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,314,998 | $ | 44,760,574 | 10,781,673 | $ | 322,871,948 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 420,949 | 13,840,811 | 775,560 | 23,182,022 | |||||||||||||||
Shares repurchased | (4,411,708 | ) | (160,542,298 | ) | (2,000,773 | ) | (60,487,640 | ) | |||||||||||
Net increase (decrease) | (2,675,761 | ) | $ | (101,940,913 | ) | 9,556,460 | $ | 285,566,330 |
31
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 9,115,096 | $ | 318,812,208 | 46,072,831 | $ | 1,375,785,693 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 2,158,612 | 71,514,822 | 4,646,865 | 139,574,505 | |||||||||||||||
Shares repurchased | (24,923,608 | ) | (865,581,165 | ) | (26,670,593 | ) | (803,503,437 | ) | |||||||||||
Net increase (decrease) | (13,649,900 | ) | $ | (475,254,135 | ) | 24,049,103 | $ | 711,856,761 | |||||||||||
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 28,994,593 | $ | 1,003,741,497 | 31,247,212 | $ | 932,957,292 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 3,505,017 | 116,086,156 | 4,986,675 | 149,411,212 | |||||||||||||||
Shares repurchased | (13,819,036 | ) | (482,866,572 | ) | (14,616,668 | ) | (438,828,406 | ) | |||||||||||
Net increase (decrease) | 18,680,574 | $ | 636,961,081 | 21,617,219 | $ | 643,540,098 | |||||||||||||
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 111,842 | $ | 3,745,135 | 327,947 | $ | 9,736,006 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 14,153 | 464,202 | 46,378 | 1,378,703 | |||||||||||||||
Shares repurchased | (577,739 | ) | (19,238,638 | ) | (78,413 | ) | (2,279,116 | ) | |||||||||||
Net increase (decrease) | (451,744 | ) | $ | (15,029,301 | ) | 295,912 | $ | 8,835,593 |
32
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO International Intrinsic Value Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee
33
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
34
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
35
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 International Intrinsic Value Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 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 | $ | 1,084.40 | $ | 3.99 | |||||||||||
2) Hypothetical | 0.76 | % | $ | 1,000.00 | $ | 1,021.37 | $ | 3.87 | |||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.69 | % | $ | 1,000.00 | $ | 1,084.50 | $ | 3.63 | |||||||||||
2) Hypothetical | 0.69 | % | $ | 1,000.00 | $ | 1,021.73 | $ | 3.52 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.63 | % | $ | 1,000.00 | $ | 1,084.70 | $ | 3.31 | |||||||||||
2) Hypothetical | 0.63 | % | $ | 1,000.00 | $ | 1,022.03 | $ | 3.21 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 0.99 | % | $ | 1,000.00 | $ | 1,082.60 | $ | 5.20 | |||||||||||
2) Hypothetical | 0.99 | % | $ | 1,000.00 | $ | 1,020.21 | $ | 5.04 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
37
GMO Real Estate Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Real Estate Investments | 96.6 | % | |||||
Short-Term Investments | 23.9 | ||||||
Other | (20.5 | ) | |||||
100.0 | % | ||||||
Industry Sector Summary | % of REIT Investments | ||||||
Apartments | 17.7 | % | |||||
Shopping Centers | 14.2 | ||||||
Office Suburban | 13.3 | ||||||
Health Care | 7.8 | ||||||
Office Central Business District | 7.8 | ||||||
Regional Malls | 7.8 | ||||||
Diversified | 7.7 | ||||||
Hotels | 5.9 | ||||||
Storage | 5.5 | ||||||
Industrial | 5.3 | ||||||
Triple Net | 5.1 | ||||||
Manufactured Housing | 1.4 | ||||||
Outlets | 0.5 | ||||||
100.0 | % |
1
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
REAL ESTATE INVESTMENTS — 96.6% | |||||||||||
REAL ESTATE INVESTMENT TRUSTS — 96.6% | |||||||||||
Apartments — 17.1% | |||||||||||
37,100 | Archstone-Smith Trust | 1,972,978 | |||||||||
10,600 | Avalonbay Communities, Inc. (a) | 1,282,600 | |||||||||
2,100 | Camden Property Trust | 162,939 | |||||||||
42,000 | Equity Residential Properties Trust | 2,094,540 | |||||||||
2,700 | Essex Property Trust, Inc. | 338,769 | |||||||||
3,300 | GMH Communities Trust | 42,207 | |||||||||
4,500 | Home Properties of NY, Inc. | 255,960 | |||||||||
6,149,993 | |||||||||||
Diversified — 7.4% | |||||||||||
5,800 | Cousins Properties, Inc. | 199,346 | |||||||||
4,400 | Franklin Street Properties Corp. | 82,720 | |||||||||
3,500 | Glenborough Realty Trust, Inc. (a) | 90,335 | |||||||||
2,300 | Pennslyvania Real Estate Investment Trust (a) | 97,336 | |||||||||
20,000 | Vornado Realty Trust | 2,118,200 | |||||||||
2,100 | Washington Real Estate Investment Trust | 85,302 | |||||||||
2,673,239 | |||||||||||
Health Care — 7.5% | |||||||||||
18,800 | Health Care Property Investors, Inc. (a) | 565,692 | |||||||||
7,200 | Health Care, Inc. | 287,568 | |||||||||
2,300 | Healthcare Realty Trust, Inc. (a) | 83,168 | |||||||||
2,600 | LTC Properties, Inc. | 61,932 | |||||||||
13,600 | Medical Properties Trust, Inc. | 182,104 | |||||||||
2,300 | National Health Investors, Inc. | 62,882 | |||||||||
12,500 | Nationwide Health Properties | 325,750 | |||||||||
19,900 | Omega Healthcare Investors, Inc. | 293,923 | |||||||||
13,500 | Senior Housing Properties Trust | 274,725 | |||||||||
4,300 | Universal Health Realty Income Trust | 156,047 | |||||||||
10,400 | Ventas, Inc. | 416,520 | |||||||||
2,710,311 |
See accompanying notes to the financial statements.
2
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Hotels — 5.7% | |||||||||||
10,900 | Ashford Hospitality Trust, Inc. (a) | 130,473 | |||||||||
4,300 | Equity Inns, Inc. | 66,134 | |||||||||
3,200 | Felcor Lodging Trust, Inc. | 68,640 | |||||||||
3,900 | Highland Hospitality Corp. | 53,703 | |||||||||
15,500 | Hospitality Properties Trust | 717,960 | |||||||||
22,400 | Host Marriott Corp. | 504,896 | |||||||||
3,800 | Innkeepers USA Trust | 62,928 | |||||||||
2,900 | Lasalle Hotel Properties | 127,426 | |||||||||
3,800 | Strategic Hotel Capital | 77,520 | |||||||||
7,700 | Sunstone Hotel Investors, Inc. (a) | 230,230 | |||||||||
2,039,910 | |||||||||||
Industrial — 5.1% | |||||||||||
9,600 | AMB Property Corp. | 535,968 | |||||||||
1,800 | Eastgroup Properties, Inc. | 91,818 | |||||||||
1,800 | First Industrial Realty Trust | 77,976 | |||||||||
19,838 | Prologis | 1,120,054 | |||||||||
1,825,816 | |||||||||||
Manufactured Housing — 1.4% | |||||||||||
7,200 | Equity Lifestyle Properties, Inc. | 322,776 | |||||||||
5,200 | Sun Communities, Inc. | 167,388 | |||||||||
490,164 | |||||||||||
Office Central Business District — 7.5% | |||||||||||
6,400 | American Financial Realty Trust | 73,408 | |||||||||
6,900 | BioMed Realty Trust, Inc. | 214,866 | |||||||||
13,300 | Boston Properties, Inc. (a) | 1,351,679 | |||||||||
16,000 | Equity Office Properties Trust (a) | 593,440 | |||||||||
2,000 | Maguire Properties, Inc. | 79,820 | |||||||||
3,300 | SL Green Realty Corp. | 368,148 | |||||||||
800 | Trizec Properties, Inc. | 23,096 | |||||||||
2,704,457 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Office Suburban — 12.8% | |||||||||||
3,400 | Alexandria Real Estate Equity, Inc. (a) | 333,268 | |||||||||
10,589 | Brandywine Reality Trust | 345,519 | |||||||||
4,300 | Corporate Office Properties (a) | 201,971 | |||||||||
17,500 | Duke Realty Investments | 664,650 | |||||||||
2,100 | Highwood Properties, Inc. | 79,254 | |||||||||
62,900 | HRPT Properties Trust | 729,640 | |||||||||
2,600 | Kilroy Realty Corp. | 205,582 | |||||||||
19,300 | Liberty Property Trust (a) | 923,891 | |||||||||
11,900 | Mack-Cali Realty Corp. | 632,485 | |||||||||
1,700 | Parkway Properties, Inc. | 83,334 | |||||||||
2,300 | PS Business Parks, Inc. | 140,576 | |||||||||
6,300 | Reckson Associates Realty Corp. | 269,577 | |||||||||
4,609,747 | |||||||||||
Outlets — 0.5% | |||||||||||
5,000 | Tanger Factory Outlet Centers, Inc. | 179,000 | |||||||||
Regional Malls — 7.5% | |||||||||||
7,900 | CBL & Associates Properties, Inc. | 321,846 | |||||||||
20,400 | General Growth Properties | 924,732 | |||||||||
1,900 | Macerich Co. (a) | 141,854 | |||||||||
15,300 | Simon Property Group, Inc. | 1,297,287 | |||||||||
2,685,719 | |||||||||||
Shopping Centers — 13.7% | |||||||||||
8,800 | Developers Diversified Realty Corp. (a) | 476,080 | |||||||||
21,700 | Equity One, Inc. | 545,755 | |||||||||
4,700 | Federal Reality Investment Trust | 348,129 | |||||||||
5,800 | Heritage Property Investment Trust | 210,888 | |||||||||
16,200 | Inland Real Estate Corp. (a) | 261,630 | |||||||||
31,100 | Kimco Realty Corp. | 1,292,205 | |||||||||
15,700 | New Plan Excel Realty Trust | 433,163 | |||||||||
4,700 | Pan Pacific Retail Property, Inc. | 328,154 | |||||||||
7,400 | Regency Centers Corp. | 497,798 |
See accompanying notes to the financial statements.
4
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
Shopping Centers — continued | |||||||||||
2,000 | Saul Centers, Inc. | 87,320 | |||||||||
2,900 | Urstadt Biddle Properties, Inc. | 49,938 | |||||||||
9,200 | Weingarten Realty | 390,264 | |||||||||
4,921,324 | |||||||||||
Storage — 5.4% | |||||||||||
4,200 | Extra Space Storage, Inc. | 73,500 | |||||||||
18,414 | Public Storage, Inc. (a) | 1,595,573 | |||||||||
3,200 | Sovran Self Storage (a) | 173,056 | |||||||||
4,000 | U-Store-It Trust | 79,680 | |||||||||
1,921,809 | |||||||||||
Triple Net — 5.0% | |||||||||||
8,900 | Entertainment Properties Trust | 443,754 | |||||||||
14,200 | Getty Reality Corp. | 427,420 | |||||||||
8,900 | National Retail Properties, Inc. | 197,936 | |||||||||
14,200 | Realty Income Corp. (a) | 349,178 | |||||||||
27,100 | Spirit Finance Corp. | 307,585 | |||||||||
4,400 | Trustreet Properties, Inc. | 53,548 | |||||||||
1,779,421 | |||||||||||
TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $28,853,006) | 34,690,910 | ||||||||||
TOTAL REAL ESTATE INVESTMENTS (COST $28,853,006) | 34,690,910 | ||||||||||
SHORT-TERM INVESTMENTS — 23.9% | |||||||||||
1,257,993 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $1,258,117 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/13 and a market value, including accrued interest, of $1,283,153. | 1,257,993 |
See accompanying notes to the financial statements.
5
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — CONTINUED | |||||||||||
1,385,048 | Credit Suisse First Boston Corp. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $1,385,255 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $1,460,245. (b) | 1,385,048 | |||||||||
2,160,676 | Goldman Sachs Group Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $2,160,997 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $2,228,026. (b) | 2,160,676 | |||||||||
277,010 | Lehman Brothers Inc. Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $277,051 and an effective yield of 5.35%, collateralized by various corporate debt obligations with an aggregate market value of $324,783. (b) | 277,010 | |||||||||
2,160,676 | Merrill Lynch & Co. Tri Party Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $2,160,997 and an effective yield of 5.30%, collateralized by various U.S. government obligations with an aggregate market value of $2,224,557. (b) | 2,160,676 | |||||||||
1,340,510 | Morgan Stanley & Co. Tri Party Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $1,340,710 and an effective yield of 5.36%, collateralized by various corporate debt obligations with an aggregate market value of $1,427,605. (b) | 1,340,510 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $8,581,913) | 8,581,913 | ||||||||||
TOTAL INVESTMENTS — 120.5% (Cost $37,434,919) | 43,272,823 | ||||||||||
Other Assets and Liabilities (net) — (20.5%) | (7,353,685 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 35,919,138 |
Notes to Schedule of Investments:
(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.
6
GMO Real Estate Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments, at value, including securities on loan of $7,121,652 (cost $37,434,919) (Note 2) | $ | 43,272,823 | |||||
Dividends and interest receivable | 15,788 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 5,270 | ||||||
Total assets | 43,293,881 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 7,323,920 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 9,772 | ||||||
Shareholder service fee | 4,442 | ||||||
Accrued expenses | 36,609 | ||||||
Total liabilities | 7,374,743 | ||||||
Net assets | $ | 35,919,138 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 28,501,167 | |||||
Accumulated undistributed net investment income | 646,745 | ||||||
Accumulated net realized gain | 933,322 | ||||||
Net unrealized appreciation | 5,837,904 | ||||||
$ | 35,919,138 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 35,919,138 | |||||
Shares outstanding: | |||||||
Class III | 3,032,188 | ||||||
Net asset value per share: | |||||||
Class III | $ | 11.85 |
See accompanying notes to the financial statements.
7
GMO Real Estate Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 713,238 | |||||
Interest (including securities lending income of $4,474) | 22,891 | ||||||
Total investment income | 736,129 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 80,175 | ||||||
Shareholder service fee – Class III (Note 3) | 25,720 | ||||||
Custodian, fund accounting agent and transfer agent fees | 9,752 | ||||||
Audit and tax fees | 24,748 | ||||||
Legal fees | 1,288 | ||||||
Trustees fees and related expenses (Note 3) | 480 | ||||||
Registration fees | 2,852 | ||||||
Miscellaneous | 932 | ||||||
Total expenses | 145,947 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (39,376 | ) | |||||
Fees and expenses waived by Manager (Note 3) | (23,591 | ) | |||||
Net expenses | 82,980 | ||||||
Net investment income (loss) | 653,149 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 1,198,630 | ||||||
Net realized gain (loss) | 1,198,630 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 1,998,562 | ||||||
Net realized and unrealized gain (loss) | 3,197,192 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 3,850,341 |
See accompanying notes to the financial statements.
8
GMO Real Estate Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 653,149 | $ | 8,515,518 | |||||||
Net realized gain (loss) | 1,198,630 | 79,362,313 | |||||||||
Change in net unrealized appreciation (depreciation) | 1,998,562 | (33,161,588 | ) | ||||||||
Net increase (decrease) in net assets from operations | 3,850,341 | 54,716,243 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (185,536 | ) | (5,491,758 | ) | |||||||
Net realized gains | |||||||||||
Class III | (5,518,858 | ) | (75,846,588 | ) | |||||||
(5,704,394 | ) | (81,338,346 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (3,617,865 | ) | (167,824,324 | ) | |||||||
Total increase (decrease) in net assets | (5,471,918 | ) | (194,446,427 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 41,391,056 | 235,837,483 | |||||||||
End of period (including accumulated undistributed net investment income of $646,745 and $179,132, respectively) | $ | 35,919,138 | $ | 41,391,056 |
See accompanying notes to the financial statements.
9
GMO Real Estate Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 12.27 | $ | 14.54 | $ | 14.65 | $ | 10.49 | $ | 11.17 | $ | 10.31 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.21 | 0.61 | 0.59 | 0.58 | 0.50 | 0.56 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 1.07 | 3.24 | 1.55 | 4.01 | (0.71 | ) | 0.84 | ||||||||||||||||||||
Total from investment operations | 1.28 | 3.85 | 2.14 | 4.59 | (0.21 | ) | 1.40 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.06 | ) | (0.40 | ) | (0.87 | ) | (0.43 | ) | (0.47 | ) | (0.54 | ) | |||||||||||||||
From net realized gains | (1.64 | ) | (5.72 | ) | (1.38 | ) | — | — | — | ||||||||||||||||||
Total distributions | (1.70 | ) | (6.12 | ) | (2.25 | ) | (0.43 | ) | (0.47 | ) | (0.54 | ) | |||||||||||||||
Net asset value, end of period | $ | 11.85 | $ | 12.27 | $ | 14.54 | $ | 14.65 | $ | 10.49 | $ | 11.17 | |||||||||||||||
Total Return(a) | 11.93 | %** | 28.89 | % | 16.01 | % | 44.56 | % | (2.16 | )% | 13.73 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 35,919 | $ | 41,391 | $ | 235,837 | $ | 191,458 | $ | 142,256 | $ | 192,606 | |||||||||||||||
Net expenses to average daily net assets | 0.48 | %* | 0.48 | % | 0.48 | % | 0.52 | % | 0.69 | % | 0.69 | % | |||||||||||||||
Net investment income to average daily net assets | 3.80 | %* | 3.91 | % | 4.13 | % | 4.61 | % | 4.47 | % | 5.18 | % | |||||||||||||||
Portfolio turnover rate | 19 | %** | 52 | % | 134 | % | 56 | % | 61 | % | 6 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.37 | % | 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
10
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its objective by outperforming the MSCI U.S. REIT Index. The Fund typically makes equity investments in U.S. companies that issue stocks included in the MSCI U.S. REIT Index, and companies with similar characteristics.
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 generally 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 pursuant to procedures approved by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts. 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
11
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no futures contracts outstanding at the end of the period.
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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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 August 31, 2006, the Fund had loaned securities having a market value of $7,121,652, collateralized by cash in the amount of $7,323,920, which was invested in short-term instruments.
12
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Taxes and distributions
The Fund intends to qualify each tax 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.
At August 31, 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) | ||||||||||||
$ | 37,465,390 | $ | 5,858,086 | $ | (50,653 | ) | $ | 5,807,433 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities
13
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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.
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
Effective June 30, 2006, GMO earns a management fee paid monthly at the annual rate of 0.33% of average daily net assets. Prior to June 30, 2006, GMO earned a management fee at that annual rate of 0.54%; however the Manager waived 0.21% of the Fund's management fee. 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 Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expense (including taxes), securities lending fees and expenses, interest expense, and transfer taxes) exceed 0.33% of the Funds' average daily net assets.
14
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $273 and $196, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $6,440,437 and $8,571,716, 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 August 31, 2006, 83.9% 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 August 31, 2006, 13.8% of the Fund's shares were held by nine related parties comprised of certain GMO employee accounts, and 89.3% of the Fund's shares were held by accounts for which the Manager has investment discretion.
15
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 79,562 | $ | 850,506 | 2,850,336 | $ | 43,674,507 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 514,002 | 5,468,986 | 6,089,368 | 80,126,509 | |||||||||||||||
Shares repurchased | (934,761 | ) | (9,937,357 | ) | (21,782,410 | ) | (291,625,340 | ) | |||||||||||
Net increase (decrease) | (341,197 | ) | $ | (3,617,865 | ) | (12,842,706 | ) | $ | (167,824,324 | ) |
16
GMO Real Estate Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Real Estate Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. In particular, the Trustees considered the Manager's proposal to reduce the Fund's contractual advisory fee from 0.54% to 0.33%, effective June 30, 2006. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have
17
GMO Real Estate Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Tr ust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the amended and restated investment management agreement, that the advisory fee to be charged to the Fund under that agreement was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its
18
GMO Real Estate Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement, as amended and restated to reflect the reduction in the Fund's advisory fee discussed above, for an additional twelve-month period commencing June 30, 2006.
19
GMO Real Estate Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | $ | 1,119.30 | $ | 2.56 | |||||||||||
2) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.79 | $ | 2.45 |
* Expenses are calculated using the Class's annualized expense ratio for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
20
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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 Strategic Fixed Income Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 95.6 | % | |||||
Short-Term Investments | 2.4 | ||||||
Forward Currency Contracts | 0.6 | ||||||
Loan Assignments | 0.2 | ||||||
Loan Participations | 0.2 | ||||||
Call Options Purchased | 0.1 | ||||||
Promissory Notes | 0.0 | ||||||
Put Options Purchased | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | 0.0 | ||||||
Swaps | (0.2 | ) | |||||
Futures | (0.3 | ) | |||||
Reverse Repurchase Agreements | (1.0 | ) | |||||
Other | 2.4 | ||||||
100.0 | % | ||||||
Country/Region Summary** | % of Investments | ||||||
United States | 80.7 | % | |||||
Sweden | 20.7 | ||||||
Australia | 19.8 | ||||||
Euro Region*** | 1.1 | ||||||
United Kingdom | (0.9 | ) | |||||
Canada | (8.0 | ) | |||||
Japan | (13.4 | ) | |||||
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 the underlying fund(s). The table excludes short-term investments and any investment in the underlying fund(s) that are less than 3% of invested assets. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, Netherlands and Spain.
1
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 2.9% | |||||||||||
United States — 2.9% | |||||||||||
U.S. Government | |||||||||||
20,000,000 | U.S. Treasury Note, 4.88%, due 05/15/09 (a) | 20,068,750 | |||||||||
TOTAL DEBT OBLIGATIONS (COST $19,923,944) | 20,068,750 | ||||||||||
MUTUAL FUNDS — 94.2% | |||||||||||
Affiliated Issuers — 94.2% | |||||||||||
1,804,556 | GMO Emerging Country Debt Fund, Class III | 20,102,752 | |||||||||
19,257,718 | GMO Short-Duration Collateral Fund | 501,470,987 | |||||||||
5,009,095 | GMO World Opportunity Overlay Fund | 127,431,381 | |||||||||
TOTAL MUTUAL FUNDS (COST $646,859,855) | 649,005,120 | ||||||||||
SHORT-TERM INVESTMENTS — 0.9% | |||||||||||
Money Market Funds — 0.9% | |||||||||||
6,084,706 | Merrimac Cash Series-Premium Class | 6,084,706 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $6,084,706) | 6,084,706 | ||||||||||
TOTAL INVESTMENTS — 98.0% (Cost $672,868,505) | 675,158,576 | ||||||||||
Other Assets and Liabilities (net) — 2.0% | 14,070,334 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 689,228,910 |
See accompanying notes to the financial statements.
2
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
10/24/06 | AUD | 102,800,000 | $ | 78,412,242 | $ | 267,508 | |||||||||||||
9/19/06 | CHF | 37,100,000 | 30,185,606 | 60,998 | |||||||||||||||
9/12/06 | GBP | 44,700,000 | 85,119,380 | 1,239,075 | |||||||||||||||
10/10/06 | JPY | 1,510,000,000 | 12,924,673 | (263,543 | ) | ||||||||||||||
10/03/06 | NZD | 50,400,000 | 32,972,222 | 1,306,732 | |||||||||||||||
9/05/06 | SEK | 402,227 | 55,504 | (296 | ) | ||||||||||||||
$ | 2,610,474 | ||||||||||||||||||
Sales | |||||||||||||||||||
10/24/06 | AUD | 17,500,000 | $ | 13,348,388 | $ | (58,613 | ) | ||||||||||||
10/31/06 | CAD | 13,400,000 | 12,145,123 | (63,034 | ) | ||||||||||||||
9/19/06 | CHF | 106,700,000 | 86,814,128 | 11,670 | |||||||||||||||
9/26/06 | EUR | 39,300,000 | 50,414,666 | (126,651 | ) | ||||||||||||||
10/10/06 | JPY | 13,510,000,000 | 115,637,302 | 1,685,329 | |||||||||||||||
10/03/06 | NZD | 2,900,000 | 1,897,211 | (112,551 | ) | ||||||||||||||
$ | 1,336,150 |
Forward Cross Currency Contracts
Settlement Date | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||
9/05/06 | EUR | 18,200,000 | SEK | 167,884,860 | $ | (150,172 | ) | ||||||||||||||||
9/05/06 | SEK | 168,287,087 | EUR | 18,200,000 | 94,668 | ||||||||||||||||||
10/17/06 | EUR | 24,300,000 | NOK | 191,715,215 | (806,658 | ) | |||||||||||||||||
10/17/06 | NOK | 66,052,704 | EUR | 8,200,000 | 56,732 | ||||||||||||||||||
11/07/06 | EUR | 12,900,000 | SEK | 119,244,375 | (54,581 | ) | |||||||||||||||||
$ | (860,011 | ) |
See accompanying notes to the financial statements.
3
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
588 | Australian Government Bond 10 Yr. | September 2006 | $ | 46,012,847 | $ | 491,121 | |||||||||||||
1,030 | Australian Government Bond 3 Yr. | September 2006 | 79,089,371 | 214,518 | |||||||||||||||
16 | Euro BOBL | September 2006 | 2,264,048 | 12,904 | |||||||||||||||
28 | Euro Bund | September 2006 | 4,242,605 | 45,917 | |||||||||||||||
3 | Japanese Government Bond 10 Yr. (LIF) | September 2006 | 3,452,703 | (832 | ) | ||||||||||||||
$ | 763,628 | ||||||||||||||||||
Sales | |||||||||||||||||||
499 | Canadian Government Bond 10 Yr. | December 2006 | $ | 51,529,775 | $ | (365,925 | ) | ||||||||||||
68 | Japanese Government Bond 10 Yr. (TSE) | September 2006 | 78,185,953 | (1,706,372 | ) | ||||||||||||||
400 | U.S. Long Bond | December 2006 | 44,425,000 | (230,259 | ) | ||||||||||||||
454 | U.S. Treasury Note 10 Yr. | December 2006 | 48,748,250 | (146,113 | ) | ||||||||||||||
137 | U.S. Treasury Note 2 Yr. | December 2006 | 27,995,094 | (58,167 | ) | ||||||||||||||
279 | U.S. Treasury Note 5 Yr. | December 2006 | 29,325,516 | (70,243 | ) | ||||||||||||||
32 | UK Gilt Long Bond | December 2006 | 6,712,614 | (20,811 | ) | ||||||||||||||
$ | (2,597,890 | ) |
Swap Agreements
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
170,000,000 | SEK | 9/20/2008 | JP Morgan | Receive | 3.20 | % | 3 month | ||||||||||||||||||||||||
Chase Bank | SEK STIBOR | $ | (194,001 | ) | |||||||||||||||||||||||||||
98,000,000 | SEK | 9/20/2011 | Citigroup | Receive | 3.60 | % | 3 month SEK STIBOR | (194,372 | ) | ||||||||||||||||||||||
338,000,000 | SEK | 9/20/2011 | Deutsche Bank AG | Receive | 3.60 | % | 3 month SEK STIBOR | (670,383 | ) |
See accompanying notes to the financial statements.
4
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Interest Rate Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
185,000,000 | SEK | 9/20/2013 | JP Morgan | Receive | 3.70 | % | 3 month | ||||||||||||||||||||||||
Chase Bank | SEK STIBOR | $ | (501,311 | ) | |||||||||||||||||||||||||||
85,000,000 | SEK | 9/20/2013 | Merrill Lynch | Receive | 3.70 | % | 3 month SEK STIBOR | (230,332 | ) | ||||||||||||||||||||||
100,000,000 | SEK | 9/20/2016 | JP Morgan Chase Bank | Receive | 3.75 | % | 3 month SEK STIBOR | (411,327 | ) | ||||||||||||||||||||||
$ | (2,201,726 | ) |
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
375,000,000 | USD | 11/30/2006 | Merrill Lynch | 1 month | Merrill Lynch | ||||||||||||||||||||||
LIBOR - 0.15% | 1-3 Year | ||||||||||||||||||||||||||
Treasury Index | $ | — | |||||||||||||||||||||||||
150,000,000 | USD | 7/31/2007 | Lehman Brothers | 1 month LIBOR - 0.14% | Lehman Brothers 1-3 Year Treasury Index | 288,313 | |||||||||||||||||||||
$ | 288,313 |
Notes to Schedule of Investments:
LIBOR - London Interbank Offered Rate
STIBOR - Stockholm Interbank Offered Rate
(a) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts and collateral on open swap contracts (Note 2).
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - B ritish 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.
5
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value, (cost $26,008,650) (Note 2) | $ | 26,153,456 | |||||
Investments in affiliated issuers, at value (cost $646,859,855) (Notes 2 and 8) | 649,005,120 | ||||||
Receivable for Fund shares sold | 13,361,152 | ||||||
Interest receivable | 317,558 | ||||||
Unrealized appreciation on open forward currency and cross currency contracts (Note 2) | 4,722,712 | ||||||
Receivable for open swap contracts (Note 2) | 288,313 | ||||||
Receivable for closed swap contracts (Note 2) | 926,450 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 24,962 | ||||||
Total assets | 694,799,723 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 1,000,000 | ||||||
Foreign cash due to custodian (cost $132,157) | 127,420 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 137,612 | ||||||
Shareholder service fee | 40,923 | ||||||
Trustees and Chief Compliance Officer fees | 326 | ||||||
Unrealized depreciation on open forward currency and cross currency contracts (Note 2) | 1,636,099 | ||||||
Payable for open swap contracts (Note 2) | 2,201,726 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 389,028 | ||||||
Accrued expenses | 37,679 | ||||||
Total liabilities | 5,570,813 | ||||||
Net assets | $ | 689,228,910 |
See accompanying notes to the financial statements.
6
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 680,714,395 | |||||
Accumulated undistributed net investment income | 3,207,067 | ||||||
Accumulated net realized gain | 622,006 | ||||||
Net unrealized appreciation | 4,685,442 | ||||||
$ | 689,228,910 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 140,427,138 | |||||
Class VI shares | $ | 548,801,772 | |||||
Shares outstanding: | |||||||
Class III | 5,534,933 | ||||||
Class VI | 21,632,232 | ||||||
Net asset value per share: | |||||||
Class III | $ | 25.37 | |||||
Class VI | $ | 25.37 |
See accompanying notes to the financial statements.
7
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Statement of Operations — Period from May 31, 2006
(commencement of operations) through August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 3,284,790 | |||||
Interest | 309,329 | ||||||
Total investment income | 3,594,119 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 321,951 | ||||||
Shareholder service fee – Class III (Note 3) | 22,377 | ||||||
Shareholder service fee – Class VI (Note 3) | 62,624 | ||||||
Custodian, fund accounting agent and transfer agent fees | 18,860 | ||||||
Audit and tax fees | 22,356 | ||||||
Legal fees | 2,300 | ||||||
Trustees fees and related expenses (Note 3) | 1,792 | ||||||
Registration fees | 1,288 | ||||||
Miscellaneous | 1,379 | ||||||
Total expenses | 454,927 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (45,860 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (16,226 | ) | |||||
Shareholder service fee waived (Note 3) | (5,789 | ) | |||||
Net expenses | 387,052 | ||||||
Net investment income (loss) | 3,207,067 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 3,466 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 331,599 | ||||||
Closed futures contracts | (2,167,852 | ) | |||||
Closed swap contracts | 303,030 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 2,151,763 | ||||||
Net realized gain (loss) | 622,006 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 2,290,071 | ||||||
Open futures contracts | (1,834,262 | ) | |||||
Open swap contracts | 1,138,283 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 3,091,350 | ||||||
Net unrealized gain (loss) | 4,685,442 | ||||||
Net realized and unrealized gain (loss) | 5,307,448 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 8,514,515 |
See accompanying notes to the financial statements.
8
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Period from May 31, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||
Increase (decrease) in net assets: | |||||||
Operations: | |||||||
Net investment income (loss) | $ | 3,207,067 | |||||
Net realized gain (loss) | 622,006 | ||||||
Change in net unrealized appreciation (depreciation) | 4,685,442 | ||||||
Net increase (decrease) in net assets from operations | 8,514,515 | ||||||
Net share transactions (Note 7): | |||||||
Class III | 139,001,437 | ||||||
Class VI | 541,712,958 | ||||||
Increase (decrease) in net assets resulting from net share transactions | 680,714,395 | ||||||
Total increase (decrease) in net assets | 689,228,910 | ||||||
Net assets: | |||||||
Beginning of period | — | ||||||
End of period (including accumulated undistributed net investment income of $3,207,067) | $ | 689,228,910 |
See accompanying notes to the financial statements.
9
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
Period from July 13, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||
Net asset value, beginning of period | $ | 25.06 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)(a)† | (0.01 | ) | |||||
Net realized and unrealized gain (loss) | 0.32 | ||||||
Total from investment operations | 0.31 | ||||||
Net asset value, end of period | $ | 25.37 | |||||
Total Return(b) | 1.24 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 140,427 | |||||
Net expenses to average daily net assets(c) | 0.39 | %* | |||||
Net investment income (loss) to average daily net assets(a) | (0.18 | )%* | |||||
Portfolio turnover rate | 1 | %**†† | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* |
(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 during the period shown.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying fund(s) (See Note 3).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
†† Calculation represents portfolio turnover rate of the Fund for the period May 31, 2006 through August 31, 2006.
See accompanying notes to the financial statements.
10
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout the period)
Period from May 31, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||
Net asset value, beginning of period | $ | 25.00 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)(a)† | 0.18 | ||||||
Net realized and unrealized gain (loss) | 0.19 | ||||||
Total from investment operations | 0.37 | ||||||
Net asset value, end of period | $ | 25.37 | |||||
Total Return(b) | 1.48 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 548,802 | |||||
Net expenses to average daily net assets(c) | 0.29 | %* | |||||
Net investment income to average daily net assets(a) | 2.84 | %* | |||||
Portfolio turnover rate | 1 | %** | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* |
(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 the underlying fund(s) (See Note 3).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
11
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
1. Organization
GMO Strategic Fixed Income Fund (the "Fund"), which commenced operations on May 31, 2006, 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 Funds into classes.
The Fund seeks total return in excess of its benchmark. Effective on the close of business on September 29, 2006, the Fund's benchmark changed from the Lehman Brothers 1-3 Year U.S. Treasury Index to the JPMorgan U.S. 3 Month Cash Index, which is independently maintained and published by JPMorgan. The Manager may, in the future, depending on the Manager's assessment of interest rate conditions, change the Fund's benchmark to another nationally recognized debt index with a duration between 90 days and 15 years.
The Fund typically invests in fixed income securities included in the Fund's benchmark and in securities with similar characteristics. The Fund seeks additional returns by investing in global interest rate, currency, and emerging country debt markets. The Fund may invest in or use U.S. and foreign investment-grade bonds; shares of GMO Short-Duration Collateral Fund; shares of GMO World Opportunity Overlay Fund; futures contracts, currency forwards, swap contracts, and other types of derivatives; and sovereign debt of emerging countries, primarily through investment in shares of GMO Emerging Country Debt Fund (limited to 5% of the Fund's total assets).
For the period May 31, 2006 through August 31, 2006, the Fund offered Class VI shares and for the period July 13, 2006 through August 31, 2006, the Fund offered Class III shares. Each class of shares bears a different level of shareholder service fees.
The financial statements of the series 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 and GMO World Opportunity Overlay 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
12
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 generally 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 pursuant to procedures approved by the Trustees.
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 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 maker may differ from the value that would be realized if the securities were sold and the differences could be material. As of August 31, 2006, the total value of these securities represented 37.8% 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.
13
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may write call and put options. 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
14
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
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. There were no loan agreements outstanding at the end of the period.
15
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no indexed securities held by the Fund at the end of the period.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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. Credit default swaps may be used to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where a party 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
16
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. There were no repurchase agreements o utstanding at the end of the period.
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. There were no reverse repurchase agreements outstanding at the end of the period.
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. There were no delayed delivery commitments outstanding at the end of the period.
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
17
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 period ended August 31, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each tax 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.
As of August 31, 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) | ||||||||||||
$ | 672,868,505 | $ | 2,898,690 | $ | (608,619 | ) | $ | 2,290,071 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
18
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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, if any, 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 capit al 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 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. 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 the 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 U.S. 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 0.055% for Class VI shares. The Manager will waive the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a
19
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
class of shares of the Fund exceeds 0.15% for Class III shares and 0.055% for Class VI shares; provided, however, that the amount of this waiver will not exceed the respective Class' shareholder service fee.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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, "Excluded Fund Fees and Expenses")) exceed 0.25% of the Fund's average daily net assets. In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2007 to the extent that the sum of (a) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses) and (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in ECDF (excluding ECDF's fees and expenses of the independent trustees of the Trust, fees expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's CCO (excluding any employee benefits), and investment-related expenses such as brokerage commissions, hedging transaction fees, securities lending fees and expenses, interest expense and transfer taxes), exceeds 0.25% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.25% 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 period ended August 31, 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 | ||||||||||||
0.015 | % | 0.004 | % | 0.018 | % | 0.037 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the period ended August 31, 2006 was $1,148 and $92, respectively. No remuneration was paid by the Fund to any other officer of the Trust.
20
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
4. Purchases and sales of securities
For the period ended August 31, 2006, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 19,917,188 | $ | — | |||||||
Investments (non-U.S. Government securities) | 649,856,388 | 3,000,000 |
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 August 31, 2006, 70.8% 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 August 31, 2006, 99.99% 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 July 13, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||||||
Shares | Amount | ||||||||||
Class III: | |||||||||||
Shares sold | 5,534,933 | $ | 139,001,437 | ||||||||
Net increase (decrease) | 5,534,933 | $ | 139,001,437 |
21
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Period from May 31, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||||||
Shares | Amount | ||||||||||
Class VI: | |||||||||||
Shares sold | 21,636,178 | $ | 541,812,160 | ||||||||
Shares repurchased | (3,946 | ) | (99,202 | ) | |||||||
Net increase (decrease) | 21,632,232 | $ | 541,712,958 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the securities of affiliated issuers during the period ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class III | $ | — | $ | 19,662,903 | $ | — | $ | 131,304 | $ | 331,599 | $ | 20,102,752 | |||||||||||||||
GMO Short-Duration Collateral Fund | — | 502,153,485 | 3,000,000 | 3,153,486 | — | 501,470,987 | |||||||||||||||||||||
GMO World Opportunity Overlay Fund | — | 128,040,000 | — | — | — | 127,431,381 | |||||||||||||||||||||
Totals | $ | — | $ | 649,856,388 | $ | 3,000,000 | $ | 3,284,790 | $ | 331,599 | $ | 649,005,120 |
22
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of investment management agreement for GMO Strategic Fixed Income Fund. In determining to approve the initial investment management agreement of the Fund, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. At a meeting on March 1, 2006, the Trustees discussed materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the Manager's proposal to establish the Fund, as well as two other funds of the Trust, as new series of the Trust and the proposed new investment management agreements between the Trust, on behalf of each such fund, and the Manager. The Trustees considered separately the investment management ag reement for each fund, but noted the common interests of the funds. During the meeting, the Trustees met with a member of the Manager's Fixed Income Division – the investment division which would be responsible for the management of the Fund. As discussed below, at meetings throughout the year, the Trustees also considered other information relevant to approval of the Fund's investment management agreement.
The Trustees considered that they had met with the Fund's investment advisory personnel over the course of the year. The Trustees also considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel who will provide services under the Fund's investment management agreement. In addition, the Trustees considered information concerning the investment philosophy of, and investment process to be applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention to be devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
Since the Fund had not yet commenced operations, the Trustees were unable to consider its performance. However, the Trustees considered the qualifications and experience of the personnel responsible for managing the Trust's existing fixed income funds, the support those personnel received from the Manager, the investment techniques used to manage those funds, and the overall competence of the Manager.
The Trustees gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper Inc. ("Lipper") concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques to be used to manage the Fund. Since the Fund had not yet commenced operations, the Trustees were unable to review the Manager's profitability with respect to the Fund. The Trustees did, however, consider both the estimated dollar amount of fees to be paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value to be derived from serving as investment manager to the Fund. The Trust ees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager
23
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered that the fee to be charged under the Fund's investment management agreement is based on services to be provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which the Fund may invest, noting in particular that, pursuant to a proposed contractual expense reimbursement arrangement with respect to the Fund, the Manager would effectively reimburse the Fund for certain of the fees and expenses (including advisory fees) that the Fund would otherwise bear as a result of its investments in those other funds. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee to be charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services to be provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and res ults with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services to be provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund would be consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services to be provided by persons other than the Manager, considering, among other things, the Fund's estimated total expenses, the Manager's proposed contractual expense reimbursement arrangement wit h respect to the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services to be provided supported the approval of the Fund's investment management agreement.
At the end of the meeting on March 1, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the Fund's initial investment management agreement for an initial period ending on the second anniversary of the agreement's execution.
24
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the period ended August 31, 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, as outlined in the notes to the table below.
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.
25
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 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. 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 | $ | 1,012.40 | $ | 0.58 | (a) | ||||||||||
2) Hypothetical | 0.43 | % | $ | 1,000.00 | $ | 1,023.04 | $ | 2.19 | (b) | ||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.33 | % | $ | 1,000.00 | $ | 1,014.80 | $ | 0.84 | (c) | ||||||||||
2) Hypothetical | 0.33 | % | $ | 1,000.00 | $ | 1,023.54 | $ | 1.68 | (b) |
(a) For the period July 13, 2006 (commencement of operations) through August 31, 2006. Expense is calculated using the Class's annualized net expense ratio (including interest expense and indirect expenses incurred) for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 49 days in the period, divided by 365 days in the year.
(b) For the period March 1, 2006 through August 31, 2006. Expense is calculated using the Class's annualized net expense ratio (including interest expense and indirect expenses incurred) for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
(c) For the period May 31, 2006 (commencement of operations) through August 31, 2006. Expense is calculated using the Class's annualized net expense ratio (including interest expense and indirect expenses incurred) for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 92 days in the period, divided by 365 days in the year.
26
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 92.5 | % | |||||
Short-Term Investments | 6.4 | ||||||
Preferred Stocks | 0.6 | ||||||
Forward Currency Contracts | (0.0 | ) | |||||
Futures | (0.3 | ) | |||||
Other | 0.8 | ||||||
100.0 | % | ||||||
Country Summary** | % of Investments | ||||||
Euro Region*** | 34.6 | % | |||||
Japan | 29.3 | ||||||
United Kingdom | 20.8 | ||||||
Switzerland | 4.1 | ||||||
Australia | 3.4 | ||||||
Sweden | 2.5 | ||||||
Singapore | 1.6 | ||||||
Hong Kong | 1.1 | ||||||
Norway | 1.1 | ||||||
Austria | 0.6 | ||||||
Canada | 0.5 | ||||||
Denmark | 0.3 | ||||||
United States | 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 the 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.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, Netherlands and Spain.
1
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
MUTUAL FUNDS — 97.7% | |||||||||||
United States — 97.7% | |||||||||||
Affiliated Issuers | |||||||||||
3,250,293 | GMO International Growth Equity Fund, Class IV | 101,571,669 | |||||||||
2,975,336 | GMO International Intrinsic Value Fund, Class IV | 101,935,007 | |||||||||
203,506,676 | |||||||||||
TOTAL MUTUAL FUNDS (COST $186,135,115) | 203,506,676 | ||||||||||
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 | ||||||||||
TOTAL INVESTMENTS — 97.7% (Cost $186,135,134) | 203,506,677 | ||||||||||
Other Assets and Liabilities (net) — 2.3% | 4,877,515 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 208,384,192 |
See accompanying notes to the financial statements.
2
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
11/22/06 | CAD | 231,212 | $ | 209,710 | $ | 1,847 | |||||||||||||
11/22/06 | GBP | 521,000 | 993,066 | 3,393 | |||||||||||||||
11/22/06 | NZD | 2,435,140 | 1,588,252 | 41,444 | |||||||||||||||
11/22/06 | SGD | 8,439,417 | 5,383,449 | (1,903 | ) | ||||||||||||||
$ | 44,781 | ||||||||||||||||||
Sales | |||||||||||||||||||
11/22/06 | AUD | 12,752,255 | $ | 9,720,968 | $ | (13,381 | ) | ||||||||||||
11/22/06 | CHF | 13,535,389 | 11,086,194 | (6,136 | ) | ||||||||||||||
11/22/06 | DKK | 52,482,194 | 9,053,868 | 570 | |||||||||||||||
11/22/06 | EUR | 42,734,538 | 55,002,727 | 30,543 | |||||||||||||||
11/22/06 | GBP | 23,408,054 | 44,617,553 | (346,182 | ) | ||||||||||||||
11/22/06 | HKD | 20,411,381 | 2,630,773 | 1,227 | |||||||||||||||
11/22/06 | JPY | 5,615,314,844 | 48,357,686 | 454,513 | |||||||||||||||
11/22/06 | NOK | 14,706,437 | 2,337,360 | 19,766 | |||||||||||||||
11/22/06 | SEK | 31,451,794 | 4,365,734 | 42,299 | |||||||||||||||
$ | 183,219 |
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).
As of August 31, 2006, 89.7% of the Net Assets of the Fund, through investments in the underlying fund(s), were valued using fair value prices based on models used by a third party vendor (Note 2).
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krone 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.
3
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $19) (Note 2) | $ | 1 | |||||
Investments in affiliated issuers, at value (cost $186,135,115) (Notes 2 and 8) | 203,506,676 | ||||||
Cash | 4,570,610 | ||||||
Foreign currency, at value (cost $46,115) (Note 2) | 46,422 | ||||||
Receivable for Fund shares sold | 90,000 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 595,602 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 114,430 | ||||||
Total assets | 208,923,741 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 10,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 90,723 | ||||||
Shareholder service fee | 25,204 | ||||||
Trustees and Chief Compliance Officer fees | 453 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 367,602 | ||||||
Accrued expenses | 45,567 | ||||||
Total liabilities | 539,549 | ||||||
Net assets | $ | 208,384,192 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 170,056,275 | |||||
Accumulated undistributed net investment income | 6,248,087 | ||||||
Accumulated net realized gain | 14,479,980 | ||||||
Net unrealized appreciation | 17,599,850 | ||||||
$ | 208,384,192 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 208,384,192 | |||||
Shares outstanding: | |||||||
Class III | 26,508,725 | ||||||
Net asset value per share: | |||||||
Class III | $ | 7.86 |
See accompanying notes to the financial statements.
4
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Interest | $ | 284,606 | |||||
Dividends from affiliated issuers (Note 8) | 184,307 | ||||||
Total investment income | 468,913 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 1,009,224 | ||||||
Shareholder service fee – Class III (Note 3) | 280,340 | ||||||
Custodian and fund accounting agent fees | 39,652 | ||||||
Transfer agent fees | 13,984 | ||||||
Audit and tax fees | 31,280 | ||||||
Legal fees | 3,607 | ||||||
Trustees fees and related expenses (Note 3) | 5,513 | ||||||
Registration fees | 2,852 | ||||||
Miscellaneous | 2,760 | ||||||
Total expenses | 1,389,212 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (93,104 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (970,653 | ) | |||||
Shareholder service fee waived (Note 3) | (211,986 | ) | |||||
Net expenses | 113,469 | ||||||
Net investment income (loss) | 355,444 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 144,626,142 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 5,376,384 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (26,970,602 | ) | |||||
Net realized gain (loss) | 123,031,924 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (84,444,982 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 6,180,652 | ||||||
Net unrealized gain (loss) | (78,264,330 | ) | |||||
Net realized and unrealized gain (loss) | 44,767,594 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 45,123,038 |
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
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 355,444 | $ | 5,426,527 | |||||||
Net realized gain (loss) | 123,031,924 | 153,479,538 | |||||||||
Change in net unrealized appreciation (depreciation) | (78,264,330 | ) | 10,427,322 | ||||||||
Net increase (decrease) in net assets from operations | 45,123,038 | 169,333,387 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (9,318,611 | ) | (52,100,981 | ) | |||||||
Net realized gains | |||||||||||
Class III | (125,564,331 | ) | (66,360,906 | ) | |||||||
(134,882,942 | ) | (118,461,887 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (430,670,293 | ) | 97,037,616 | ||||||||
Total increase (decrease) in net assets | (520,430,197 | ) | 147,909,116 | ||||||||
Net assets: | |||||||||||
Beginning of period | 728,814,389 | 580,905,273 | |||||||||
End of period (including accumulated undistributed net investment income of $6,248,087 and $15,211,254, respectively) | $ | 208,384,192 | $ | 728,814,389 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 9.07 | $ | 8.38 | $ | 7.33 | $ | 5.54 | $ | 7.14 | $ | 9.25 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.01 | 0.07 | 0.21 | 0.20 | 0.22 | 0.46 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.49 | 2.17 | 0.84 | 1.59 | (1.55 | ) | (1.00 | ) | |||||||||||||||||||
Total from investment operations | 0.50 | 2.24 | 1.05 | 1.79 | (1.33 | ) | (0.54 | ) | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.12 | ) | (0.71 | )(b) | — | — | (0.27 | ) | (1.53 | ) | |||||||||||||||||
From net realized gains | (1.59 | ) | (0.84 | ) | — | — | — | (0.04 | ) | ||||||||||||||||||
Total distributions | (1.71 | ) | (1.55 | ) | — | — | (0.27 | ) | (1.57 | ) | |||||||||||||||||
Net asset value, end of period | $ | 7.86 | $ | 9.07 | $ | 8.38 | $ | 7.33 | $ | 5.54 | $ | 7.14 | |||||||||||||||
Total Return(c) | 5.21 | %** | 28.42 | % | 14.32 | % | 32.31 | % | (19.53 | )% | (5.38 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 208,384 | $ | 728,814 | $ | 580,905 | $ | 160,586 | $ | 28,923 | $ | 37,581 | |||||||||||||||
Net expenses to average daily net assets(d) | 0.06 | %* | 0.05 | % | 0.04 | % | 0.04 | % | 0.06 | % | 0.31 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 0.19 | %* | 0.82 | % | 2.64 | % | 2.98 | % | 3.32 | % | 5.33 | % | |||||||||||||||
Portfolio turnover rate | 7 | %** | 36 | % | 3 | % | 5 | % | 90 | % | 120 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.68 | %* | 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) 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.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(d) 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 the underlying fund(s) (See Note 3).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
7
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its investment objective by outperforming the MSCI EAFE Index (Europe, Australasia, and Far East) (Hedged). The Fund may invest to varying extents in GMO International Core Equity Fund, GMO International Intrinsic Value Fund, GMO International Growth Equity Fund, and GMO International Small Companies Fund. GMO attempts to hedge at least 70% of the foreign currency exposure in the underlying funds' investments relative to the U.S. dollar.
The financial statements of the series 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) 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
Shares of the underlying fund(s) and other mutual funds are valued at their net asset value.
Investments held by the underlying fund(s) are valued as follows. 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 generally 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
8
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
or procedures are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or other persons acting at their direction pursuant to procedures approved by the Trustees. 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 are generally valued by a third party vendor using fair value prices based on models 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 including 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 lo ss 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. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. 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
9
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 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. There were no futures contracts outstanding at the end of the period.
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
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
10
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no purchased option contracts outstanding at the end of the period.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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. There were no swap agreements outstanding at the end of the period.
11
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 six months ended A ugust 31, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each tax 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 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.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP.
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)
August 31, 2006 (Unaudited)
As of August 31, 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) | ||||||||||||
$ | 186,135,134 | $ | 17,371,561 | $ | (18 | ) | $ | 17,371,543 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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
13
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
expense and fee levels and the Fund may own different proportions of the 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 U.S. 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.
The Manager will waive the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by the Fund exceeds 0.15%; provided, however, that the amount of this waiver will not exceed 0.15%.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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, "Excluded Fund Fees and Expenses")) exceed 0.54% of the Fund's average daily net assets. In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2007 to the extent that the sum of (a) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses) and (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in the underlying Funds (excluding these Funds' Excluded Fund Fees and Expenses), exceeds 0.54% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 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)
August 31, 2006 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the six months ended August 31, 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 | |||||||||
0.522 | % | 0.113 | % | 0.635 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $4,501 and $1,012, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $23,510,691 and $599,100,000, 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 August 31, 2006, 50.2% 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.
As of August 31, 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.
15
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 2,862,870 | $ | 23,548,074 | 23,875,120 | $ | 209,368,988 | |||||||||||||
Shares issued to shareholders in reinvestment of distribution | 16,770,993 | 133,832,529 | 13,307,037 | 115,516,716 | |||||||||||||||
Shares repurchased | (73,499,854 | ) | (588,050,896 | ) | (26,162,473 | ) | (227,848,088 | ) | |||||||||||
Net increase (decrease) | (53,865,991 | ) | $ | (430,670,293 | ) | 11,019,684 | $ | 97,037,616 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these affiliated issuers during the six months ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO International Growth Equity Fund, Class III | $ | 353,206,539 | $ | 6,588,807 | $ | 382,475,831 | $ | — | $ | 2,688,807 | $ | — | |||||||||||||||
GMO International Growth Equity Fund, Class IV | — | 94,475,831 | 1,000,000 | — | — | 101,571,669 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 365,708,285 | 11,221,884 | 304,400,000 | 184,307 | 2,687,577 | 101,935,007 | |||||||||||||||||||||
Totals | $ | 718,914,824 | $ | 112,286,522 | $ | 687,875,831 | $ | 184,307 | $ | 5,376,384 | $ | 203,506,676 |
16
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Currency Hedged International Equity Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee
17
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests, noting in particular that, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for certain of the fees and expenses (including advisory fees) that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, and concluded that the fee payable under the agreemen t appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to
18
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
19
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | $ | 1,052.10 | $ | 3.62 | |||||||||||
2) Hypothetical | 0.70 | % | $ | 1,000.00 | $ | 1,021.68 | $ | 3.57 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
20
GMO International Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 97.6 | % | |||||
Short-Term Investments | 2.0 | ||||||
Futures | 0.9 | ||||||
Forward Currency Contracts | 0.3 | ||||||
Loan Assignments | 0.2 | ||||||
Loan Participations | 0.2 | ||||||
Call Options Purchased | 0.1 | ||||||
Swaps | 0.1 | ||||||
Promissory Notes | 0.0 | ||||||
Put Options Purchased | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | 0.0 | ||||||
Reverse Repurchase Agreements | (1.0 | ) | |||||
Other | (0.4 | ) | |||||
100.0 | % | ||||||
Country/Region Summary** | % of Investments | ||||||
Euro Region*** | 54.4 | % | |||||
Japan | 26.9 | ||||||
Sweden | 22.6 | ||||||
Australia | 20.4 | ||||||
United Kingdom | 7.8 | ||||||
Canada | (5.4 | ) | |||||
United States | (26.7 | ) | |||||
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 the underlying fund(s). The table excludes short-term investments and any investment in the underlying fund(s) that are less than 3% of invested assets. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, Netherlands and Spain.
1
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 5.2% | |||||||||||||||
Australia — 0.1% | |||||||||||||||
Asset-Backed Securities | |||||||||||||||
USD | 710,655 | Medallion Trust, Series 03-1G, Class A, Variable Rate, 3 mo. LIBOR + .19%, 5.61%, due 12/21/33 | 712,176 | ||||||||||||
Canada — 1.7% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
CAD | 2,000,000 | Government of Canada (Cayman), 7.25%, due 06/01/08 | 1,893,839 | ||||||||||||
CAD | 2,000,000 | Province of British Columbia, 7.88%, due 11/30/23 | 2,475,726 | ||||||||||||
GBP | 1,500,000 | Province of Quebec, 8.63%, due 11/04/11 | 3,281,173 | ||||||||||||
Total Canada | 7,650,738 | ||||||||||||||
United Kingdom — 0.6% | |||||||||||||||
Asset-Backed Securities | |||||||||||||||
GBP | 489,929 | RMAC, Series 03-NS1X Class A2A, 144A, AMBAC, Variable Rate, 3 mo. LIBOR + .45%, 5.04%, due 06/12/35 | 936,871 | ||||||||||||
GBP | 872,913 | RMAC, Series 03-NS2A Class A2A, 144A, AMBAC, Variable Rate, 3 mo. LIBOR + .40%, 4.98%, due 09/12/35 | 1,666,059 | ||||||||||||
Total United Kingdom | 2,602,930 | ||||||||||||||
United States — 2.8% | |||||||||||||||
U.S. Government | |||||||||||||||
USD | 7,535,040 | U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (a) (b) | 7,632,760 | ||||||||||||
USD | 5,000,000 | U.S. Treasury Note, 4.00%, due 09/30/07 (c) | 4,947,656 | ||||||||||||
Total United States | 12,580,416 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $21,209,056) | 23,546,260 |
See accompanying notes to the financial statements.
2
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 94.0% | |||||||||||||||
Affiliated Issuers — 94.0% | |||||||||||||||
1,241,748 | GMO Emerging Country Debt Fund, Class III | 13,833,073 | |||||||||||||
12,218,072 | GMO Short-Duration Collateral Fund | 318,158,602 | |||||||||||||
37,466 | GMO Special Purpose Holding Fund (d) | 182,084 | |||||||||||||
3,538,368 | GMO World Opportunity Overlay Fund | 90,016,078 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $414,303,043) | 422,189,837 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.4% | |||||||||||||||
Money Market Funds — 0.4% | |||||||||||||||
1,737,286 | Merrimac Cash Series-Premium Class | 1,737,286 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $1,737,286) | 1,737,286 | ||||||||||||||
TOTAL INVESTMENTS — 99.6% (Cost $437,249,385) | 447,473,383 | ||||||||||||||
Other Assets and Liabilities (net) — 0.4% | 1,524,808 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 448,998,191 |
See accompanying notes to the financial statements.
3
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
401 | Australian Government Bond 10 Yr. | September 2006 | $ | 31,379,509 | $ | 303,933 | |||||||||||||
702 | Australian Government Bond 3 Yr. | September 2006 | 53,903,630 | 102,884 | |||||||||||||||
497 | Euro BOBL | September 2006 | 70,327,000 | 521,854 | |||||||||||||||
869 | Euro Bund | September 2006 | 131,672,279 | 2,144,069 | |||||||||||||||
1 | Japanese Government Bond 10 Yr. (LIF) | September 2006 | 1,150,901 | (277 | ) | ||||||||||||||
85 | Japanese Government Bond 10 Yr. (TSE) | September 2006 | 97,732,442 | 1,750,451 | |||||||||||||||
187 | UK Gilt Long Bond | December 2006 | 39,226,838 | 112,346 | |||||||||||||||
$ | 4,935,260 | ||||||||||||||||||
Sales | |||||||||||||||||||
261 | Canadian Government Bond 10 Yr. | December 2006 | $ | 26,952,447 | $ | (191,376 | ) | ||||||||||||
3,040 | Federal Fund 30 day | September 2006 | 1,200,136,003 | (10,640 | ) | ||||||||||||||
266 | U.S. Long Bond | December 2006 | 29,542,625 | (154,712 | ) | ||||||||||||||
305 | U.S. Treasury Note 10 Yr. | December 2006 | 32,749,375 | (104,185 | ) | ||||||||||||||
489 | U.S. Treasury Note 2 Yr. | December 2006 | 99,924,094 | (164,451 | ) | ||||||||||||||
166 | U.S. Treasury Note 5 Yr. | December 2006 | 17,448,156 | (42,810 | ) | ||||||||||||||
$ | (668,174 | ) |
As of August 31, 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.
4
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
10/24/06 | AUD | 73,400,000 | $ | 55,986,951 | $ | 196,199 | |||||||||||||
10/31/06 | CAD | 2,400,000 | 2,175,246 | 11,954 | |||||||||||||||
9/19/06 | CHF | 41,900,000 | 34,091,021 | 40,027 | |||||||||||||||
9/26/06 | EUR | 183,500,000 | 235,396,723 | (104,472 | ) | ||||||||||||||
9/12/06 | GBP | 47,200,000 | 89,879,972 | 1,815,822 | |||||||||||||||
10/10/06 | JPY | 12,460,000,000 | 106,649,947 | (1,283,173 | ) | ||||||||||||||
10/03/06 | NZD | 35,500,000 | 23,224,482 | 977,349 | |||||||||||||||
9/05/06 | SEK | 53,373 | 7,365 | (39 | ) | ||||||||||||||
$ | 1,653,667 | ||||||||||||||||||
Sales | |||||||||||||||||||
10/24/06 | AUD | 12,500,000 | $ | 9,534,563 | $ | (42,540 | ) | ||||||||||||
10/31/06 | CAD | 3,400,000 | 3,081,598 | (14,556 | ) | ||||||||||||||
9/19/06 | CHF | 89,400,000 | 72,738,361 | (25,139 | ) | ||||||||||||||
9/26/06 | EUR | 29,500,000 | 37,843,070 | (106,950 | ) | ||||||||||||||
9/12/06 | GBP | 1,400,000 | 2,665,931 | (82,623 | ) | ||||||||||||||
10/10/06 | JPY | 1,010,000,000 | 8,644,980 | 215,321 | |||||||||||||||
10/03/06 | NZD | 3,000,000 | 1,962,632 | (116,432 | ) | ||||||||||||||
$ | (172,919 | ) |
Forward Cross Currency Contracts
Settlement Date | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | ||||||||||||
9/05/06 | EUR | 20,800,000 | SEK | 192,010,600 | $ | (152,005 | ) | ||||||||
9/05/06 | SEK | 192,063,973 | EUR | 20,800,000 | 144,640 | ||||||||||
10/17/06 | EUR | 22,200,000 | NOK | 175,147,233 | (736,947 | ) | |||||||||
10/17/06 | NOK | 95,903,712 | EUR | 12,000,000 | 203,358 | ||||||||||
11/07/06 | EUR | 11,300,000 | SEK | 104,454,375 | (47,811 | ) | |||||||||
$ | (588,765 | ) |
See accompanying notes to the financial statements.
5
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Swap Agreements
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||||||
99,000,000 | SEK | 9/20/2008 | JP Morgan | Receive | 3.20 | % | 3 month SEK STIBOR | ||||||||||||||||||||||||||||
Chase Bank | $ | (112,977 | ) | ||||||||||||||||||||||||||||||||
95,000,000 | SEK | 9/20/2011 | Citigroup | Receive | 3.60 | % | 3 month SEK STIBOR | (188,421 | ) | ||||||||||||||||||||||||||
101,000,000 | SEK | 9/20/2011 | Deutsche Bank AG | Receive | 3.60 | % | 3 month SEK STIBOR | (200,321 | ) | ||||||||||||||||||||||||||
99,000,000 | SEK | 9/20/2011 | JP Morgan Chase Bank | Receive | 3.60% | 3 month SEK STIBOR | (196,355) | ||||||||||||||||||||||||||||
73,000,000 | SEK | 9/20/2013 | Deutsche Bank AG | Receive | 3.70 | % | 3 month SEK STIBOR | (197,815 | ) | ||||||||||||||||||||||||||
41,000,000 | SEK | 9/20/2013 | JP Morgan Chase Bank | Receive | 3.70% | 3 month SEK STIBOR | (111,101) | ||||||||||||||||||||||||||||
84,000,000 | SEK | 9/20/2016 | Deutsche Bank AG | Receive | 3.75 | % | 3 month SEK STIBOR | (345,515 | ) | ||||||||||||||||||||||||||
66,000,000 | SEK | 9/20/2016 | JP Morgan Chase Bank | Receive | 3.75% | 3 month SEK STIBOR | (271,476) | ||||||||||||||||||||||||||||
5,000,000 | EUR | 3/21/2030 | UBS Warburg | Receive | 5.90 | % | 3 Month Floating Rate | ||||||||||||||||||||||||||||
EUR LIBOR | 1,578,368 | ||||||||||||||||||||||||||||||||||
$ | (45,613 | ) |
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 August 31, 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 (Note 2).
(c) All or a portion of this security has been segregated to cover collateral requirements on open swap contracts (Note 2).
(d) 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.
6
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - B ritish 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.
7
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $22,946,342) (Note 2) | $ | 25,283,546 | |||||
Investments in affiliated issuers, at value (cost $414,303,043) (Notes 2 and 8) | 422,189,837 | ||||||
Foreign currency, at value (cost $201,114) (Note 2) | 199,581 | ||||||
Interest receivable | 526,169 | ||||||
Unrealized appreciation on open forward currency and cross currency contracts (Note 2) | 3,604,670 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 348,116 | ||||||
Interest receivable for open swap contracts | 110,648 | ||||||
Receivable for open swap contracts (Note 2) | 1,578,368 | ||||||
Reimbursement for payment in respect of dividend paid under Internal Revenue Code Section 860 (Note 2) | 748,961 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 27,542 | ||||||
Total assets | 454,617,438 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 300,000 | ||||||
Payable for payment in respect of dividend paid under Internal Revenue Code Section 860 (Note 2) | 748,961 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 95,178 | ||||||
Shareholder service fee | 57,106 | ||||||
Trustees and Chief Compliance Officer fees | 739 | ||||||
Unrealized depreciation on open forward currency and cross currency contracts (Note 2) | 2,712,687 | ||||||
Payable for open swap contracts (Note 2) | 1,623,981 | ||||||
Accrued expenses | 80,595 | ||||||
Total liabilities | 5,619,247 | ||||||
Net assets | $ | 448,998,191 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 439,769,136 | |||||
Distributions in excess of net investment income | (1,581,747 | ) | |||||
Accumulated net realized loss | (4,654,392 | ) | |||||
Net unrealized appreciation | 15,465,194 | ||||||
$ | 448,998,191 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 448,998,191 | |||||
Shares outstanding: | |||||||
Class III | 44,794,911 | ||||||
Net asset value per share: | |||||||
Class III | $ | 10.02 |
See accompanying notes to the financial statements.
8
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 3,460,342 | |||||
Interest (including securities lending income of $692) | 929,674 | ||||||
Total investment income | 4,390,016 | ||||||
Expenses: | |||||||
Payment in respect of dividend paid under Internal Revenue Code Section 860 (Note 2) | 748,961 | ||||||
Management fee (Note 3) | 563,757 | ||||||
Shareholder service fee – Class III (Note 3) | 338,253 | ||||||
Custodian, fund accounting agent and transfer agent fees | 87,400 | ||||||
Audit and tax fees | 31,556 | ||||||
Legal fees | 5,336 | ||||||
Trustees fees and related expenses (Note 3) | 3,692 | ||||||
Registration fees | 4,600 | ||||||
Miscellaneous | 3,312 | ||||||
Total expenses | 1,786,867 | ||||||
Reimbursement for payment in respect of dividend paid under Internal Revenue Code Section 860 (Note 2) | (748,961 | ) | |||||
Fees and expenses reimbursed by Manager (Note 3) | (129,904 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (28,224 | ) | |||||
Shareholder service fee waived – Class III (Note 3) | (10,193 | ) | |||||
Net expenses | 869,585 | ||||||
Net investment income (loss) | 3,520,431 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (856,021 | ) | |||||
Investments in affiliated issuers | 1,307,970 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 1,901,745 | ||||||
Closed futures contracts | (2,856,129 | ) | |||||
Closed swap contracts | (2,697,794 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 10,334,100 | ||||||
Net realized gain (loss) | 7,133,871 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 4,549,169 | ||||||
Open futures contracts | 5,473,179 | ||||||
Open swap contracts | (1,471,034 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 956,394 | ||||||
Net unrealized gain (loss) | 9,507,708 | ||||||
Net realized and unrealized gain (loss) | 16,641,579 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 20,162,010 |
See accompanying notes to the financial statements.
9
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 3,520,431 | $ | 9,711,327 | |||||||
Net realized gain (loss) | 7,133,871 | (33,502,814 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 9,507,708 | (7,608,320 | ) | ||||||||
Net increase (decrease) in net assets from operations | 20,162,010 | (31,399,807 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (14,894,446 | ) | ||||||||
Net realized gains | |||||||||||
Class III | — | (287,353 | ) | ||||||||
— | (15,181,799 | ) | |||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 6,308,309 | 30,744,414 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 6,308,309 | 30,744,414 | |||||||||
Total increase (decrease) in net assets | 26,470,319 | (15,837,192 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 422,527,872 | 438,365,064 | |||||||||
End of period (including distributions in excess of net investment income of $1,581,747 and $5,102,178, respectively) | $ | 448,998,191 | $ | 422,527,872 |
See accompanying notes to the financial statements.
10
GMO International Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 9.57 | $ | 10.61 | $ | 10.38 | $ | 9.94 | $ | 9.05 | $ | 9.44 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.08 | 0.21 | 0.17 | 0.20 | 0.20 | 0.44 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.37 | (0.93 | ) | 1.02 | 1.94 | 2.00 | (0.80 | ) | |||||||||||||||||||
Total from investment operations | 0.45 | (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 | $ | 10.02 | $ | 9.57 | $ | 10.61 | $ | 10.38 | $ | 9.94 | $ | 9.05 | |||||||||||||||
Total Return(b) | 4.70 | %** | (6.83 | )% | 11.81 | % | 23.17 | % | 25.17 | % | (3.80 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 448,998 | $ | 422,528 | $ | 438,365 | $ | 271,015 | $ | 122,521 | $ | 135,048 | |||||||||||||||
Net expenses to average daily net assets(c) | 0.39 | %* | 0.39 | % | 0.39 | % | 0.39 | % | 0.38 | % | 0.38 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 1.56 | %* | 2.13 | % | 1.65 | % | 1.98 | % | 1.96 | % | 4.73 | % | |||||||||||||||
Portfolio turnover rate | 13 | %** | 36 | % | 51 | % | 26 | % | 40 | % | 36 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.41 | %* | 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 the underlying funds (See Note 3).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
11
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks total return in excess of the JPMorgan Non-U.S. Government Bond Index. The Fund typically invests in fixed income securities included in the JPMorgan Non-U.S. Government Bond Index and in securities with similar characteristics. The Fund seeks additional returns by investing in global interest rate, currency, and emerging country debt markets. The Fund may invest in or use investment-grade bonds denominated in various currencies; shares of GMO Short-Duration Collateral Fund; shares of GMO World Opportunity Overlay Fund; futures contracts, currency forwards, swap contracts, and other types of derivatives; and sovereign debt of emerging countries, primarily through investment in shares of GMO Emerging Country Debt Fund (limited to 5% of the Fund's total assets).
The financial statements of the series 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, 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 generally 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
12
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 pursuant to procedures approved by the Trustees.
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 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 maker may differ from the value that would be realized if the securities were sold and the differences could be material. As of August 31, 2006, the total value of these securities represented 37.6% 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 April of 2006, SPHF entered into a settlement agreement with a defendant in the lawsuit and the Fund indirectly received $1,300,783 in conjunction with the settlement. The outcome of the lawsuits against the 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 including 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
13
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 are unfavorable to the Fund. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may write call and put options. 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 t he
14
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
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. Indexed securities held by the Fund at the end of the period are listed in the Fund's Schedule of Investments.
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. Interest rate swap agreements involve the exchange by one party 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 party will receive a payment from or make a payment to the counterparty, respectively.
15
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Credit default swaps may be used to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where a party 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. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. There were no repurchase agreements o utstanding at the end of the period.
16
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no reverse repurchase agreements outstanding at the end of the period.
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 August 31, 2006, the Fund had no securities on loan.
Taxes and distributions
The Fund intends to qualify each tax 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.
As of February 28, 2006, the Fund elected to defer to March 1, 2006 post-October capital losses of $21,531,334.
17
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 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) | ||||||||||||
$ | 438,556,309 | $ | 8,988,208 | $ | (71,134 | ) | $ | 8,917,074 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
On October 12, 2006, the Fund paid a dividend under Code Section 860 of $0.092 per share to shareholders of record as of October 11, 2006. It is anticipated the Fund will be required to make a payment of approximately $830,768 to the Internal Revenue Service ("IRS") related to such dividend, of which $748,961 was accrued through August 31, 2006. The Fund will be fully reimbursed for this payment.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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
18
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 the 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 Manager will waive the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by the Fund exceeds 0.15%; provided, however, that the amount of this waiver will not exceed 0.15%.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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, "Excluded Fund Fees and Expenses")) exceed 0.25% of the Fund's average daily net assets. In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2007 to the extent that the sum of (a) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses) and (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in ECDF (excluding ECDF's fees and expenses of the independent trustees of the Trust, fees expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's CCO (excluding any employee benefits), and investment-related expenses such as brokerage commissions, hedging transaction fees,
19
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
securities lending fees and expenses, interest expense and transfer taxes), exceeds 0.25% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.25% 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 six months ended August 31, 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 | ||||||||||||
0.015 | % | 0.005 | % | 0.018 | % | 0.038 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $2,407 and $1,288, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $80,442,763 and $58,992,805, 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 August 31, 2006, 44.3% 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.
20
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 2006, 3.2% of the Fund's shares were held by seven related parties comprised of certain GMO employee accounts, and 50.1% 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 4,686,601 | $ | 46,395,313 | 9,855,130 | $ | 99,990,204 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 1,466,265 | 14,090,802 | |||||||||||||||
Shares repurchased | (4,054,378 | ) | (40,087,004 | ) | (8,493,772 | ) | (83,336,592 | ) | |||||||||||
Net increase (decrease) | 632,223 | $ | 6,308,309 | 2,827,623 | $ | 30,744,414 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the securities of these affiliated issuers during the six months ended August 31, 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 | $ | 12,966,615 | $ | 2,033,850 | $ | 1,000,000 | $ | 151,429 | $ | 382,421 | $ | 13,833,073 | |||||||||||||||
GMO Short-Duration Collateral Fund | 295,468,092 | 63,708,913 | 46,250,000 | 3,308,913 | — | 318,158,602 | |||||||||||||||||||||
GMO Special Purpose Holding Fund | 308,345 | — | — | — | 1,519,324 | 182,084 | |||||||||||||||||||||
GMO World Opportunity Overlay Fund | 84,234,362 | 14,700,000 | 9,650,000 | — | — | 90,016,078 | |||||||||||||||||||||
Totals | $ | 392,977,414 | $ | 80,442,763 | $ | 56,900,000 | $ | 3,460,342 | $ | 1,901,745 | $ | 422,189,837 |
21
GMO International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO International Bond Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to
22
GMO International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests, noting in particular that, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for certain of the fees and expenses (including advisory fees) that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees conside red possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's
23
GMO International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
24
GMO International Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | $ | 1,047.00 | $ | 2.22 | |||||||||||
2) Hypothetical | 0.43 | % | $ | 1,000.00 | $ | 1,023.04 | $ | 2.19 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
25
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 86.4 | % | |||||
Loan Participations | 7.5 | ||||||
Loan Assignments | 7.2 | ||||||
Swaps | 3.3 | ||||||
Call Options Purchased | 1.3 | ||||||
Rights and Warrants | 0.8 | ||||||
Short-Term Investments | 0.7 | ||||||
Promissory Notes | 0.4 | ||||||
Put Options Purchased | 0.1 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures | 0.0 | ||||||
Written Options | (0.1 | ) | |||||
Reverse Repurchase Agreements | (9.7 | ) | |||||
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 Emerging Country Debt Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Country Summary** | % of Investments | ||||||
Mexico | 17.8 | % | |||||
Brazil | 14.3 | ||||||
Russia | 9.7 | ||||||
Venezuela | 6.3 | ||||||
Colombia | 5.9 | ||||||
Philippines | 5.6 | ||||||
Turkey | 5.6 | ||||||
Uruguay | 4.6 | ||||||
Ukraine | 4.1 | ||||||
Argentina | 2.8 | ||||||
South Africa | 2.1 | ||||||
Peru | 2.0 | ||||||
Iraq | 1.7 | ||||||
El Salvador | 1.4 | ||||||
Nigeria | 1.3 | ||||||
Pakistan | 1.3 | ||||||
Vietnam | 1.2 | ||||||
Dominican Republic | 1.2 | ||||||
India | 1.1 | ||||||
Serbia | 1.0 | ||||||
Ecuador | 1.0 | ||||||
Trinidad | 1.0 | ||||||
Algeria | 0.9 | ||||||
Ivory Coast | 0.9 | ||||||
Jamaica | 0.7 | ||||||
Malaysia | 0.7 | ||||||
Panama | 0.6 | ||||||
Chile | 0.5 | ||||||
Egypt | 0.5 | ||||||
Poland | 0.5 | ||||||
Africa | 0.5 | ||||||
Indonesia | 0.5 | ||||||
Bosnia | 0.3 | ||||||
Morocco | 0.3 | ||||||
Costa Rica | 0.2 | ||||||
Tunisia | 0.2 | ||||||
Nicaragua | 0.2 | ||||||
China | 0.2 | ||||||
Thailand | 0.2 | ||||||
Belize | 0.1 | ||||||
Romania | (0.1 | ) | |||||
Bulgaria | (0.1 | ) | |||||
Lebanon | (0.2 | ) | |||||
South Korea | (0.6 | ) | |||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying fund(s). The table excludes short-term investments and any investment in the underlying fund(s) that are less than 3% of invested assets. The table includes exposure through the use of derivative contracts.
2
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 79.9% | |||||||||||||||
Argentina — 8.5% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 24,087 | Republic of Argentina, 8.28%, due 12/31/33 | 22,883 | ||||||||||||
USD | 3,433,525 | Republic of Argentina Capitalization Bond, 12.25%, due 06/19/18 (a) | 1,064,393 | ||||||||||||
USD | 45,720,000 | Republic of Argentina Capitalization Bond, 12.00%, due 06/19/31 (a) | 14,401,800 | ||||||||||||
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) | 14,400,000 | ||||||||||||
DEM | 3,830,000 | Republic of Argentina Discount Bond, Variable Rate, 6 mo. DEM LIBOR + .81%, 3.00%, due 03/31/23 (a) | 1,128,964 | ||||||||||||
ARS | 220,171,475 | Republic of Argentina GDP linked, 0.00%, due 12/15/35 (a) (b) (e) | 22,227,477 | ||||||||||||
DEM | 5,000,000 | Republic of Argentina Global Bond, 9.00%, due 11/19/08 (a) | 884,306 | ||||||||||||
ARS | 7,050,698 | Republic of Argentina Global Bond, 2.00%, due 02/04/18 (a) (e) | 2,489,406 | ||||||||||||
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 | ||||||||||||
USD | 31,390,000 | Republic of Argentina Global Bond, Reg. S, Variable Rate, 3 mo. LIBOR + .58%, 10.29%, due 04/06/49 (a) | 7,298,175 | ||||||||||||
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, 9.75%, 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) | 7,565,730 | ||||||||||||
EUR | 3,500,000 | Republic of Argentina Global Bond, Series FEB, Step Down, 8.00%, due 02/26/08 (a) | 1,425,023 | ||||||||||||
ARS | 28,000,000 | Republic of Argentina Global Bond, Step Up, 0.63%, due 12/31/38 (e) | 3,579,659 | ||||||||||||
USD | 15,000,000 | Republic of Argentina Global Par Bond, Series L-GP, Variable Rate, Step Up, 6.00%, due 03/31/23 (a) | 6,750,000 | ||||||||||||
USD | 2,000,000 | Republic of Argentina Pro 4, 2.00%, due 12/28/10 (a) | 330,400 | ||||||||||||
EUR | 244,000,000 | Republic of Argentina, Step Up, 1.20%, due 12/31/38 | 130,823,351 | ||||||||||||
USD | 10,600,000 | Republic of Argentina, Step Up, 1.33%, due 12/31/38 (b) | 4,611,000 | ||||||||||||
Total Argentina | 232,427,218 |
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)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Aruba — 1.0% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 3,500,000 | Government of Aruba, 6.71%, due 10/15/13 | 3,430,000 | ||||||||||||
USD | 12,000,000 | Government of Aruba, 144A, 6.40%, due 09/06/15 | 11,700,000 | ||||||||||||
USD | 13,000,000 | Government of Aruba, Reg S, 6.40%, due 09/06/15 | 12,740,000 | ||||||||||||
Total Aruba | 27,870,000 | ||||||||||||||
Belize — 0.1% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 4,000,000 | Belize Government International Bond, 9.50%, due 08/15/12 | 3,010,000 | ||||||||||||
Bosnia & Herzegovina — 0.5% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
DEM | 24,486,680 | Bosnia & Herzegovina, Series A, Step Up, Variable Rate, 6 mo. DEM LIBOR + .81%, 3.50%, due 12/11/17 | 14,275,417 | ||||||||||||
Brazil — 8.4% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 4,153,226 | Brazil MYDFA Trust Certificates, 144A, Variable Rate, 6 mo. LIBOR + .81%, 5.94%, due 09/15/07 | 4,153,226 | ||||||||||||
USD | 12,625,000 | Brazilian Government International Exit Bonds, 6.00%, due 09/15/13 | 12,618,688 | ||||||||||||
USD | 494,320 | Brazilian Government International Exit Bonds Odd Lot, 6.00%, due 09/15/13 | 484,187 | ||||||||||||
USD | 14,000,000 | Republic of Brazil, 8.75%, due 02/04/25 | 16,646,000 | ||||||||||||
USD | 56,000,000 | Republic of Brazil, 8.25%, due 01/20/34 (b) | 64,400,000 | ||||||||||||
USD | 101,000,000 | Republic of Brazil, 11.00%, due 08/17/40 (b) | 131,956,500 | ||||||||||||
Total Brazil | 230,258,601 | ||||||||||||||
Cayman Islands — 0.1% | |||||||||||||||
Corporate Debt | |||||||||||||||
USD | 2,151,677 | Petroleum Export/Cayman, 144A, 5.27%, due 06/15/11 | 2,070,989 | ||||||||||||
China — 0.3% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 7,500,000 | China Government International Bond, 6.80%, due 05/23/11 | 7,958,039 |
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)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Colombia — 0.5% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 8,000,000 | Republic of Colombia, 8.70%, due 02/15/16 | 8,992,000 | ||||||||||||
USD | 3,800,000 | Republic of Colombia, 11.85%, due 03/09/28 | 4,693,000 | ||||||||||||
Total Colombia | 13,685,000 | ||||||||||||||
Costa Rica — 0.3% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 3,000,000 | Republic of Costa Rica, Reg S, 8.05%, due 01/31/13 | 3,217,500 | ||||||||||||
USD | 3,710,000 | Republic of Costa Rica, Reg S, 10.00%, due 08/01/20 | 4,674,600 | ||||||||||||
Total Costa Rica | 7,892,100 | ||||||||||||||
Dominican Republic — 1.9% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 1,766,772 | Dominican Republic Bond, Variable Rate, 6 mo. LIBOR + .81%, 6.31%, due 08/30/09 | 1,762,355 | ||||||||||||
USD | 42,557,000 | Dominican Republic Bond, Variable Rate, 6 mo. LIBOR + .81%, 6.19%, due 08/30/24 | 40,854,720 | ||||||||||||
USD | 9,000,000 | Dominican Republic, Reg S, 8.63%, due 04/20/27 | 9,450,000 | ||||||||||||
Total Dominican Republic | 52,067,075 | ||||||||||||||
Ecuador — 1.4% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 2,610,566 | Republic of Ecuador PDI (Global Bearer Capitalization Bond), PIK, Variable Rate, 6 mo. LIBOR + .81%, 6.31%, due 02/27/15 (e) | 1,472,069 | ||||||||||||
USD | 2,000,000 | Republic of Ecuador, Reg S, 9.38%, due 12/15/15 | 2,050,000 | ||||||||||||
USD | 33,587,000 | Republic of Ecuador, Variable Rate, Step Up, 10.00%, due 08/15/30 | 33,419,065 | ||||||||||||
Total Ecuador | 36,941,134 | ||||||||||||||
El Salvador — 1.4% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 37,000,000 | Republic of El Salvador, 144A, 7.65%, due 06/15/35 | 38,942,500 |
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)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Grenada — 0.1% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 6,000,000 | Government of Grenada, Reg S, Step Up, 1.00%, due 09/15/25 | 3,090,000 | ||||||||||||
Indonesia — 0.5% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 10,500,000 | Republic of Indonesia, Reg S, 8.50%, due 10/12/35 | 12,113,850 | ||||||||||||
Iraq — 0.4% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 16,000,000 | Republic of Iraq, Reg S, 5.80%, due 01/15/28 | 10,320,000 | ||||||||||||
Ivory Coast — 1.3% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
FRF | 37,500,000 | Ivory Coast Discount Bond, Series FF, Variable Rate, Step Up, 4.50%, due 03/31/28 (a) | 2,453,583 | ||||||||||||
FRF | 85,905,000 | Ivory Coast FLIRB, Variable Rate, Step Up, 2.50%, due 03/29/18 (a) | 4,026,747 | ||||||||||||
USD | 69,850,000 | Ivory Coast FLIRB, Variable Rate, Step Up, 2.50%, due 03/29/18 (a) | 17,811,750 | ||||||||||||
FRF | 256,889,500 | Ivory Coast PDI, Series FF, Variable Rate, Step Up, 1.90%, due 03/30/18 (a) | 12,041,545 | ||||||||||||
Total Ivory Coast | 36,333,625 | ||||||||||||||
Jamaica — 0.8% | |||||||||||||||
Corporate Debt — 0.7% | |||||||||||||||
USD | 17,000,000 | Air Jamaica Ltd., Reg S, 9.38%, due 07/08/15 | 17,535,500 | ||||||||||||
Foreign Government Obligations — 0.1% | |||||||||||||||
USD | 3,000,000 | Government of Jamaica, 10.63%, due 06/20/17 | 3,462,000 | ||||||||||||
Total Jamaica | 20,997,500 | ||||||||||||||
Luxembourg — 0.7% | |||||||||||||||
Corporate Debt | |||||||||||||||
USD | 19,000,000 | VTB Capital SA, Reg S, 6.25%, due 06/30/35 | 19,142,500 |
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)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Malaysia — 1.3% | |||||||||||||||
Corporate Debt — 1.0% | |||||||||||||||
MYR | 45,000,000 | Transshipment Megahub Berhad, Series C, 5.45%, due 11/03/09 | 12,867,785 | ||||||||||||
MYR | 50,000,000 | Transshipment Megahub Berhad, Series F, 6.70%, due 11/03/12 | 15,029,049 | ||||||||||||
27,896,834 | |||||||||||||||
Foreign Government Obligations — 0.3% | |||||||||||||||
USD | 8,000,000 | Malaysia Global Bond, 7.50%, due 07/15/11 | 8,685,730 | ||||||||||||
Total Malaysia | 36,582,564 | ||||||||||||||
Mexico — 11.9% | |||||||||||||||
Corporate Debt — 3.9% | |||||||||||||||
USD | 12,000,000 | Pemex Project Funding Master Trust, 8.63%, due 02/01/22 | 14,400,000 | ||||||||||||
USD | 20,000,000 | Pemex Project Funding Master Trust, 144A, 8.63%, due 02/01/22 | 23,400,000 | ||||||||||||
EUR | 30,000,000 | Pemex Project Funding Master Trust, Reg S, 6.38%, due 08/05/16 | 42,470,122 | ||||||||||||
GBP | 7,689,000 | Pemex Project Funding Master Trust, Series EMTN, 7.50%, due 12/18/13 | 15,866,361 | ||||||||||||
ITL | 16,955,000,000 | Petroleos Mexicanos, Series EMTN, Variable Rate, 11.25% – 12 mo. ITL LIBOR, 8.21%, due 03/04/08 | 11,667,161 | ||||||||||||
107,803,644 | |||||||||||||||
Foreign Government Obligations — 8.0% | |||||||||||||||
USD | 29,376,000 | United Mexican States, 8.13%, due 12/30/19 | 35,398,080 | ||||||||||||
USD | 60,250,000 | United Mexican States, 8.30%, due 08/15/31 | 75,704,125 | ||||||||||||
USD | 10,000,000 | United Mexican States Global Bond, 11.50%, due 05/15/26 | 15,850,000 | ||||||||||||
ITL | 28,000,000,000 | United Mexican States, Series EMTN, 11.00%, due 05/08/17 | 28,438,094 | ||||||||||||
GBP | 29,994,000 | United Mexican States, Series GMTN, 6.75%, due 02/06/24 | 63,677,734 | ||||||||||||
219,068,033 | |||||||||||||||
Total Mexico | 326,871,677 | ||||||||||||||
Nicaragua — 0.3% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 10,194,188 | Republic of Nicaragua BPI, Series E, 5.00%, due 02/01/11 | 8,884,133 |
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)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Nigeria — 1.0% | |||||||||||||||
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 | ||||||||||||
Pakistan — 0.7% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 20,000,000 | Islamic Republic of Pakistan, 144A, 7.88%, due 03/31/36 | 18,800,000 | ||||||||||||
Panama — 0.2% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 4,000,000 | Republic of Panama, 7.13%, due 01/29/26 | 4,120,000 | ||||||||||||
Peru — 4.0% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 17,387,250 | Peru FLIRB, Series 20 Yr., Variable Rate, Step Up, 5.00%, due 03/07/17 | 17,061,239 | ||||||||||||
USD | 25,000,000 | Peru Par Bond, Series 30 Yr., Variable Rate, Step Up, 3.00%, due 03/07/27 | 18,487,500 | ||||||||||||
USD | 4,629,970 | Peru Trust II, Series 98-A LB, 0.00%, due 02/28/16 | 3,386,128 | ||||||||||||
USD | 10,244,422 | Peru Trust, Series 97-I-P Class A3, 0.00%, due 12/31/15 | 5,999,133 | ||||||||||||
USD | 5,000,000 | Republic of Peru, 7.35%, due 07/21/25 | 5,275,000 | ||||||||||||
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 | 19,789,604 | ||||||||||||
Total Peru | 108,764,364 | ||||||||||||||
Philippines — 6.0% | |||||||||||||||
Corporate Debt — 1.8% | |||||||||||||||
USD | 6,000,000 | National Power Corp., 9.88%, due 03/16/10 | 6,555,000 | ||||||||||||
USD | 31,600,000 | National Power Corp., 9.63%, due 05/15/28 | 35,115,500 | ||||||||||||
USD | 8,500,000 | National Power Corp. Global Bond, 8.40%, due 12/15/16 | 8,457,500 | ||||||||||||
50,128,000 |
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)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Foreign Government Obligations — 4.2% | |||||||||||||||
USD | 59,501,000 | Central Bank of the Philippines, Series A, 8.60%, due 06/15/27 | 65,540,351 | ||||||||||||
EUR | 12,000,000 | Republic of Philippines, 9.13%, due 02/22/10 | 17,180,221 | ||||||||||||
USD | 27,843,000 | Republic of Philippines, 8.38%, due 02/15/11 | 29,895,029 | ||||||||||||
USD | 1,400,000 | Republic of Philippines, Series 92-B, Variable Rate, 6 mo. LIBOR + .81%, 6.19%, due 12/01/09 | 1,358,000 | ||||||||||||
113,973,601 | |||||||||||||||
Total Philippines | 164,101,601 | ||||||||||||||
Poland — 0.6% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 10,000,000 | Delphes Co. No. 2 Ltd., Reg S, 7.75%, due 05/05/09 | 10,565,000 | ||||||||||||
USD | 6,000,000 | Poland Government International Bond, 6.25%, due 07/03/12 | 6,254,700 | ||||||||||||
Total Poland | 16,819,700 | ||||||||||||||
Russia — 3.8% | |||||||||||||||
Corporate Debt — 3.4% | |||||||||||||||
USD | 14,000,000 | RSHB Capital SA, 144A, 7.18%, due 05/16/13 | 14,441,000 | ||||||||||||
USD | 8,000,000 | Sberbank Capital SA, EMTN, 6.48%, due 05/15/13 | 8,060,000 | ||||||||||||
USD | 70,000,000 | Volga Investments Ltd. Notes, Variable Rate, 3 mo. LIBOR + 1.85%, 5.48%, due 04/02/08 (b) | 70,082,600 | ||||||||||||
92,583,600 | |||||||||||||||
Foreign Government Obligations — 0.4% | |||||||||||||||
USD | 10,500,000 | Russian Federation, Reg S, Variable Rate, Step Up, 5.00%, due 03/31/30 | 11,673,900 | ||||||||||||
Total Russia | 104,257,500 | ||||||||||||||
Serbia — 0.5% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 14,966,026 | Republic of Serbia, Reg S, Step Up, 3.75%, due 11/01/24 | 13,319,763 |
See accompanying notes to the financial statements.
9
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
South Africa — 1.2% | |||||||||||||||
Foreign Government Agency — 0.1% | |||||||||||||||
ZAR | 163,000,000 | Eskom Holdings Ltd., 0.00%, due 12/31/32 | 2,513,340 | ||||||||||||
Foreign Government Obligations — 1.1% | |||||||||||||||
EUR | 25,000,000 | Republic of South Africa, EMTN, 4.50%, due 04/05/16 | 31,474,653 | ||||||||||||
Total South Africa | 33,987,993 | ||||||||||||||
South Korea — 0.2% | |||||||||||||||
Foreign Government Agency | |||||||||||||||
USD | 6,000,000 | Export Import Bank of Korea, 7.10%, due 03/15/07 | 6,052,069 | ||||||||||||
Thailand — 0.2% | |||||||||||||||
Corporate Debt | |||||||||||||||
USD | 5,000,000 | PTT Public Co. Ltd., 5.75%, due 08/01/14 | 5,039,500 | ||||||||||||
Trinidad & Tobago — 0.5% | |||||||||||||||
Corporate Debt | |||||||||||||||
USD | 8,000,000 | First Citizens St. Lucia, Reg S, 5.13%, due 02/14/11 | 7,769,200 | ||||||||||||
USD | 7,000,000 | First Citizens St. Lucia, Reg S, 5.46%, due 02/01/12 | 6,852,020 | ||||||||||||
14,621,220 | |||||||||||||||
Tunisia — 0.1% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
JPY | 360,000,000 | Banque Centrale De Tunisie, Series 6RG, 4.35%, due 08/15/17 | 3,304,229 | ||||||||||||
Turkey — 1.9% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 56,500,000 | Republic of Turkey, 6.88%, due 03/17/36 | 52,403,750 | ||||||||||||
Ukraine — 0.7% | |||||||||||||||
Foreign Government Agency — 0.7% | |||||||||||||||
USD | 9,000,000 | Credit Suisse First Boston, The EXIM of Ukraine, 6.80%, due 10/04/12 | 8,550,000 | ||||||||||||
USD | 10,000,000 | Dresdner Kleinwort Wasserstein for CJSC, The EXIM of Ukraine, 7.75%, due 09/23/09 | 10,160,000 | ||||||||||||
18,710,000 |
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)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Foreign Government Obligations — 0.0% | |||||||||||||||
USD | 373,380 | Ukraine Government International Bond Series, Reg S, 11.00%, due 03/15/07 | 378,981 | ||||||||||||
Total Ukraine | 19,088,981 | ||||||||||||||
United Kingdom — 0.2% | |||||||||||||||
Asset-Backed Securities | |||||||||||||||
GBP | 979,859 | RMAC Plc, Series 03-NS1A, Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .45%, 5.17%, due 06/12/35 | 1,873,743 | ||||||||||||
GBP | 2,182,282 | RMAC Plc, Series 03-NS2A, Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .40%, 5.12%, due 09/12/35 | 4,165,146 | ||||||||||||
Total United Kingdom | 6,038,889 | ||||||||||||||
United States — 2.6% | |||||||||||||||
Asset-Backed Securities — 1.2% | |||||||||||||||
USD | 4,000,000 | Aircraft Finance Trust, Series 99-1A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .48%, 5.81%, due 05/15/24 | 2,810,000 | ||||||||||||
USD | 189,605 | California Infrastructure PG&E-1, Series 97-1, Class A7, 6.42%, due 09/25/08 | 189,707 | ||||||||||||
USD | 821,797 | Chevy Chase Mortgage Funding Corp., Series 03-4, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .34%, 5.66%, due 10/25/34 | 823,112 | ||||||||||||
USD | 3,256,332 | CHYPS CBO Series 97-1A Class A2A, 144A, 6.72%, due 01/15/10 | 1,790,983 | ||||||||||||
USD | 3,158,860 | CNL Commercial Mortgage Loan Trust, Series 03-2A, Class A1, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .44%, 5.76%, due 10/25/30 | 3,170,706 | ||||||||||||
USD | 3,586,504 | Golden Securities Corp., Series 03-A, Class A1, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .30%, 5.70%, due 12/02/13 | 3,589,230 | ||||||||||||
USD | 10,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class I, 144A, Variable Rate, 3 mo. LIBOR + .45%, 5.86%, due 12/20/09 | 10,050,000 | ||||||||||||
USD | 1,072,530 | Quest Trust, Series 03-X4A, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .43%, 5.75%, due 12/25/33 | 1,073,330 | ||||||||||||
USD | 203,841 | Rhyno CBO Delaware Corp., Series 97-1, Class A-2, 144A, Step Up, 6.33%, due 09/15/09 | 203,841 | ||||||||||||
USD | 8,107,458 | SHYPPCO Finance Co., Series II, Class A-2B, 6.64%, due 06/15/10 | 7,985,847 | ||||||||||||
31,686,756 |
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)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
U.S. Government — 1.4% | |||||||||||||||
USD | 38,928,560 | U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (c) (d) | 39,433,415 | ||||||||||||
Total United States | 71,120,171 | ||||||||||||||
Uruguay — 5.0% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 41,000,000 | Oriental Republic of Uruguay, 7.63%, due 03/21/36 | 40,795,000 | ||||||||||||
USD | 350,000 | Republic of Uruguay, 7.63%, due 01/20/12 | 339,500 | ||||||||||||
EUR | 2,000,000 | Republic of Uruguay, 7.00%, due 06/28/19 | 2,658,386 | ||||||||||||
USD | 1,000,000 | Republic of Uruguay, 7.63%, due 03/21/36 | 995,000 | ||||||||||||
USD | 28,554,740 | Republic of Uruguay, PIK Bond, 7.88%, due 01/15/33 | 29,268,608 | ||||||||||||
EUR | 3,850,000 | Republica Orient Uruguay, 7.00%, due 09/26/12 | 5,129,725 | ||||||||||||
USD | 400,000 | Republica Orient Uruguay, 7.25%, due 05/04/14 | 400,440 | ||||||||||||
EUR | 10,000,000 | Republica Orient Uruguay, 6.88%, due 01/19/16 | 13,323,960 | ||||||||||||
USD | 4,056,000 | Uruguay Government International Bond, 7.00%, due 04/07/08 | 4,111,770 | ||||||||||||
USD | 400,000 | Uruguay Government International Bond, 7.88%, due 03/25/09 | 402,000 | ||||||||||||
USD | 6,150,000 | Uruguay Government International Bond, 7.25%, due 05/04/09 | 6,042,375 | ||||||||||||
USD | 545,000 | Uruguay Government International Bond, 8.38%, due 09/26/11 | 573,825 | ||||||||||||
USD | 19,500,000 | Uruguay Government International Bond, 8.00%, due 11/18/22 | 20,304,375 | ||||||||||||
USD | 356,633 | Uruguay Government International Bond PIK, 7.88%, due 01/15/33 | 365,549 | ||||||||||||
JPY | 1,648,000,000 | Uruguay Government International Bond, Series 3BR, 2.50%, due 03/14/11 | 13,336,173 | ||||||||||||
Total Uruguay | 138,046,686 | ||||||||||||||
Venezuela — 7.9% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
EUR | 25,000,000 | Republic of Venezuela, 11.00%, due 03/05/08 | 35,103,510 | ||||||||||||
EUR | 8,400,000 | Republic of Venezuela, 11.13%, due 07/25/11 | 13,492,431 | ||||||||||||
EUR | 5,000,000 | Republic of Venezuela, 7.00%, due 03/16/15 | 6,862,480 | ||||||||||||
USD | 46,500,000 | Republic of Venezuela, 9.25%, due 09/15/27 | 57,799,500 | ||||||||||||
USD | 44,500,000 | Republic of Venezuela, 9.38%, due 01/13/34 | 55,892,000 | ||||||||||||
USD | 309,391 | Republic of Venezuela DCB DL Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 5.56%, due 12/18/07 (e) | 305,524 | ||||||||||||
USD | 3,586,957 | Republic of Venezuela DCB IL, Variable Rate, 6 mo. LIBOR + .88%, 6.44%, due 12/18/08 | 3,586,957 |
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)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Venezuela — continued | |||||||||||||||
USD | 6,617,790 | Republic of Venezuela FLIRB, Series B, Variable Rate, 6 mo. LIBOR + .88%, 6.00%, due 03/31/07 | 6,617,790 | ||||||||||||
CHF | 3,808,800 | Republic of Venezuela FLIRB, Series SFR, Variable Rate, CHF 6 mo. LIBOR + .88%, 2.31%, due 03/31/07 | 3,063,502 | ||||||||||||
USD | 6,534,930 | Republic of Venezuela Global Bond, Series DL, Variable Rate, 6 mo. LIBOR + .88%, 6.44%, due 12/18/07 | 6,530,846 | ||||||||||||
DEM | 30,190,000 | Republic of Venezuela Global Bond, Step Down, 7.38%, due 10/29/08 | 21,357,762 | ||||||||||||
USD | 5,951,250 | Republic of Venuzuela FLIRB, Series A, Variable Rate, 6 mo. LIBOR + .88%, 6.00%, due 03/31/07 | 5,936,372 | ||||||||||||
Total Venezuela | 216,548,674 | ||||||||||||||
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 | 3,840,000 | ||||||||||||
USD | 19,750,000 | Vietnam Par Bond, Series 30 Yr., Variable Rate, Step Up, 3.75%, due 03/12/28 | 16,195,000 | ||||||||||||
USD | 5,217,391 | Vietnam PDI, Series 18 Yr., Variable Rate, Step Up, 5.88%, due 03/12/16 | 5,184,783 | ||||||||||||
Total Vietnam | 25,219,783 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $2,079,806,526) | 2,189,388,796 | ||||||||||||||
LOAN ASSIGNMENTS — 7.2% | |||||||||||||||
Algeria — 0.9% | |||||||||||||||
JPY | 38,110,032 | Algeria Tranche 1 Loan Agreement, 6 mo. JPY LIBOR + .81%, (0.94%), due 09/04/10 | 324,663 | ||||||||||||
JPY | 2,425,077,571 | Algeria Tranche 3 Loan Agreement, 6 mo. JPY LIBOR + .81%, (0.94%), due 03/04/10 | 20,659,484 | ||||||||||||
JPY | 375,000,000 | Algeria Tranche 3 Loan Agreement, JPY Long Term Prime + .81%, (1.79%), due 03/04/10 | 3,194,663 | ||||||||||||
24,178,810 |
See accompanying notes to the financial statements.
13
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Congo Republic (Brazzaville) — 0.5% | |||||||||||||||
EUR | 4,976,732 | Republic of Congo Loan Agreement * | 1,386,767 | ||||||||||||
EUR | 14,565,612 | Republic of Congo Loan Agreement * | 4,058,710 | ||||||||||||
FRF | 102,097,963 | Republic of Congo Loan Agreement * | 4,337,115 | ||||||||||||
USD | 8,496,466 | Republic of Congo Loan Agreement * | 1,847,981 | ||||||||||||
EUR | 6,987,247 | Republic of Congo Loan Agreement * | 1,946,997 | ||||||||||||
13,577,570 | |||||||||||||||
Indonesia — 1.1% | |||||||||||||||
JPY | 214,920,002 | Republic of Indonesia Loan Agreement, 6 mo. JPY LIBOR + .88% (1.04%), due 03/29/13 | 1,780,397 | ||||||||||||
USD | 4,552,180 | Republic of Indonesia Loan Agreement, dated January 1, 1994, 6 mo. LIBOR + .88%, (5.95%), due 03/29/13 | 4,449,756 | ||||||||||||
USD | 3,822,000 | Republic of Indonesia Loan Agreement, dated June 14, 1995, 3 mo. LIBOR + .88%, (6.39%) due 12/14/19 | 3,535,350 | ||||||||||||
USD | 5,096,000 | Republic of Indonesia Loan Agreement, dated June 14, 1995, 3 mo. LIBOR + .88%, (6.39%) due 12/14/19 | 4,713,799 | ||||||||||||
USD | 3,822,000 | Republic of Indonesia Loan Agreement, dated June 14, 1995, 3 mo. LIBOR + .88%, (6.39%), due 12/14/19 | 3,535,350 | ||||||||||||
USD | 1,961,066 | Republic of Indonesia Loan Agreement, dated September 29, 1994, 6 mo. LIBOR, (5.52%), due 12/01/19 | 1,804,181 | ||||||||||||
USD | 3,438,334 | Republic of Indonesia Loan Agreement, dated September 29, 1994, 6 mo. LIBOR, (5.52%), due 12/01/19 | 3,163,268 | ||||||||||||
USD | 2,811,119 | Republic of Indonesia Loan Agreement, dated September 29, 1994, 6 mo. LIBOR, (5.52%), due 12/01/19 | 2,586,230 | ||||||||||||
EUR | 3,902,718 | Republic of Indonesia, Indonesia Paris Club Debt, with rates ranging from 3.50%-12.41%, due 06/01/21 * | 3,849,975 | ||||||||||||
29,418,306 | |||||||||||||||
Morocco — 0.2% | |||||||||||||||
USD | 5,113,636 | Morocco Tranche A Restructuring and Consolidating Agreement, 6 mo. LIBOR + .81%, (6.34%), due 01/01/09 | 5,107,244 | ||||||||||||
Russia — 4.5% | |||||||||||||||
USD | 12,727,607 | Russia Foreign Trade Obligations * (e) | 16,995,068 | ||||||||||||
USD | 7,489,028 | Russia Foreign Trade Obligations * (e) | 9,931,345 | ||||||||||||
USD | 1,355,208 | Russia Foreign Trade Obligations * (e) | 1,843,040 | ||||||||||||
USD | 405,117 | Russia Foreign Trade Obligations * (e) | 523,546 |
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)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Russia — continued | |||||||||||||||
USD | 269,844 | Russia Foreign Trade Obligations * (e) | 351,380 | ||||||||||||
USD | 3,281,440 | Russia Foreign Trade Obligations * (e) | 4,546,141 | ||||||||||||
USD | 3,006,950 | Russia Foreign Trade Obligations * (e) | 4,085,623 | ||||||||||||
ATS | 1,208,022 | Russia Foreign Trade Obligations * (e) | 129,612 | ||||||||||||
ATS | 964,717 | Russia Foreign Trade Obligations * (e) | 99,229 | ||||||||||||
ATS | 1,733,698 | Russia Foreign Trade Obligations * (e) | 171,734 | ||||||||||||
ATS | 447,177 | Russia Foreign Trade Obligations * (e) | 53,465 | ||||||||||||
ATS | 631,501 | Russia Foreign Trade Obligations * (e) | 57,294 | ||||||||||||
FRF | 3,660,000 | Russia Foreign Trade Obligations * (e) | 740,686 | ||||||||||||
FRF | 3,660,000 | Russia Foreign Trade Obligations * (e) | 679,063 | ||||||||||||
FRF | 3,660,000 | Russia Foreign Trade Obligations * (e) | 633,089 | ||||||||||||
FRF | 3,660,000 | Russia Foreign Trade Obligations * (e) | 589,722 | ||||||||||||
FRF | 3,660,000 | Russia Foreign Trade Obligations * (e) | 556,259 | ||||||||||||
NLG | 495,100 | Russia Foreign Trade Obligations * (e) | 334,125 | ||||||||||||
USD | 11,188,915 | Russia Foreign Trade Obligations * (e) | 14,573,377 | ||||||||||||
USD | 18,580,206 | Russia Foreign Trade Obligations * (e) | 24,449,485 | ||||||||||||
USD | 7,549,500 | Russia Foreign Trade Obligations * (e) | 10,269,870 | ||||||||||||
DEM | 2,503,894 | Russia Foreign Trade Obligations * (e) | 1,465,751 | ||||||||||||
FRF | 71,883,000 | Russia Foreign Trade Obligations * (e) | 16,850,908 | ||||||||||||
CHF | 231,420 | Russia Foreign Trade Obligations * (e) | 170,372 | ||||||||||||
USD | 10,840,000 | Russia Foreign Trade Obligations * (e) | 14,832,713 | ||||||||||||
124,932,897 | |||||||||||||||
TOTAL LOAN ASSIGNMENTS (COST $151,451,011) | 197,214,827 | ||||||||||||||
LOAN PARTICIPATIONS — 7.4% | |||||||||||||||
Algeria — 0.2% | |||||||||||||||
JPY | 100,000,000 | Algeria Tranche 3 Loan Agreement (Participation with Salomon Brothers), JPY Long Term Prime + .81%, (1.79%), due 03/04/10 | 851,911 | ||||||||||||
JPY | 672,631,578 | Algeria Tranche S1 Loan Agreement (Participation with Merrill Lynch), JPY Long Term Prime + .81%, (2.53%), due 03/04/10 | 5,730,217 | ||||||||||||
6,582,128 |
See accompanying notes to the financial statements.
15
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Egypt — 0.1% | |||||||||||||||
CHF | 6,355,120 | Egypt Paris Club Loan (Participation with Standard Chartered Bank), 0.00%, due 01/03/24 * | 3,120,796 | ||||||||||||
Indonesia — 2.1% | |||||||||||||||
USD | 27,446,594 | Republic of Indonesia Loan Agreement (Participation with Deutsche Bank), 3 mo. LIBOR + 1.25%, (6.67%), due 02/12/13 | 25,525,332 | ||||||||||||
JPY | 1,270,610,350 | Republic of Indonesia Loan Agreement (Participation with Deutsche Bank), dated January 1, 1994, 6 mo. JPY LIBOR + .88%, (1.20%), due 03/29/13 | 10,579,851 | ||||||||||||
USD | 21,714,370 | Republic of Indonesia Loan Agreement (Participation with Deutsche Bank), dated September 29, 1995, 3 mo. LIBOR + .88%, (5.94%), due 09/29/19 | 19,760,077 | ||||||||||||
USD | 470,400 | Republic of Indonesia Loan Agreement (Participation with Salomon Brothers), dated June 14, 1995, 3 mo. LIBOR + .88%, (6.39%), due 12/14/19 | 435,120 | ||||||||||||
USD | 470,400 | Republic of Indonesia Loan Agreement (Participation with Salomon Brothers), dated June 14, 1995, 3 mo. LIBOR + .88%, (6.39%), due 12/14/19 | 435,120 | ||||||||||||
USD | 627,200 | Republic of Indonesia Loan Agreement (Participation with Salomon Brothers), dated June 14, 1995, 3 mo. LIBOR + .88%, (6.39%), due 12/14/19 | 580,160 | ||||||||||||
57,315,660 | |||||||||||||||
Iraq — 0.1% | |||||||||||||||
JPY | 2,825,824,099 | Iraq Paris Club Loan (Participation with Deutsche Bank), due 01/01/28 | 2,898,158 | ||||||||||||
Poland — 0.6% | |||||||||||||||
JPY | 1,860,000,000 | Poland Paris Club Debt (Participation with Deutsche Bank), 2.22%, due 03/31/09 | 15,843,946 | ||||||||||||
Russia — 3.4% | |||||||||||||||
USD | 10,000,000 | Russia Foreign Trade Obligations (Participation with Banca Lombardi) * (e) | 13,644,612 | ||||||||||||
USD | 531,297 | Russia Foreign Trade Obligations (Participation with Deutsche Bank) * (e) | 772,141 | ||||||||||||
USD | 214,371 | Russia Foreign Trade Obligations (Participation with Deutsche Bank) * (e) | 277,902 | ||||||||||||
USD | 81,965 | Russia Foreign Trade Obligations (Participation with Deutsche Bank) * (e) | 111,758 | ||||||||||||
DEM | 2,625,598 | Russia Foreign Trade Obligations (Participation with Deutsche Bank) * (e) | 1,989,290 | ||||||||||||
DEM | 10,399,680 | Russia Foreign Trade Obligations (Participation with Deutsche Bank) * (e) | 7,287,913 | ||||||||||||
EUR | 1,907,524 | Russian Paris Club Debt (Participation with Deutsche Bank), Variable Rate, 6.47%, due 08/20/20 | 2,443,824 | ||||||||||||
EUR | 9,647,573 | Russian Paris Club Debt (Participation with Deutsche Bank), Variable Rate, 6.66%, due 08/20/20 | 12,359,988 |
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)
August 31, 2006 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Russia — continued | |||||||||||||||
EUR | 23,487,285 | Russian Paris Club Debt (Participation with Deutsche Bank), Variable Rate, 6.75%, due 08/20/20 | 30,090,735 | ||||||||||||
EUR | 8,334,743 | Russian Paris Club Debt (Participation with Deutsche Bank), Variable Rate, 6.83%, due 08/20/20 | 10,678,056 | ||||||||||||
USD | 965,249 | Russian Paris Club Debt (Participation with Mediocredito), Variable Rate, 6 mo. USD LIBOR + .50%, 5.97%, due 08/20/20 | 945,944 | ||||||||||||
EUR | 2,341,446 | Russian Paris Club Debt (Participation with Mediocredito), Variable Rate, EURIBOR + .50%, 3.94%, due 08/20/20 | 2,972,746 | ||||||||||||
USD | 8,849,042 | Russian Paris Club Debt (Participation with Standard Bank), Variable Rate, 6 mo. USD LIBOR + .05%, 5.97%, due 08/20/16 | 8,849,042 | ||||||||||||
92,423,951 | |||||||||||||||
Vietnam — 0.9% | |||||||||||||||
JPY | 3,407,242,059 | Republic of Vietnam Loan Agreement (Participation with Deutsche Bank) | 25,903,689 | ||||||||||||
TOTAL LOAN PARTICIPATIONS (COST $167,108,732) | 204,088,328 | ||||||||||||||
PROMISSORY NOTES — 0.4% | |||||||||||||||
Dominican Republic — 0.2% | |||||||||||||||
USD | 1,186,200 | Dominican Republic Promissory Notes, 0.00%, due 3/15/2007 * | 1,109,690 | ||||||||||||
USD | 1,186,200 | Dominican Republic Promissory Notes, 0.00%, due 3/15/2008 * | 1,010,050 | ||||||||||||
USD | 1,089,012 | Dominican Republic Promissory Notes, 0.00%, due 9/15/2009 * | 810,225 | ||||||||||||
USD | 817,249 | Dominican Republic Promissory Notes, 0.00%, due 9/15/2010 * | 553,686 | ||||||||||||
USD | 817,249 | Dominican Republic Promissory Notes, 0.00%, due 9/15/2011 * | 504,651 | ||||||||||||
3,988,302 | |||||||||||||||
Nigeria — 0.2% | |||||||||||||||
USD | 27,000,000 | Central Bank of Nigeria Promissory Notes, Series RC, 5.09%, due 1/5/2010 | 6,615,000 | ||||||||||||
TOTAL PROMISSORY NOTES (COST $18,760,395) | 10,603,302 |
See accompanying notes to the financial statements.
17
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Principal Amount | Description | Value ($) | |||||||||||||
CALL OPTIONS PURCHASED — 1.3% | |||||||||||||||
Currency Options — 0.8% | |||||||||||||||
USD | 40,000,000 | Republic of Brazil Real, Expires 04/25/07, Strike 3.24 | 17,327,603 | ||||||||||||
USD | 70,000,000 | Republic of Brazil Real, Expires 04/30/08, Strike 2.44 | 5,149,404 | ||||||||||||
22,477,007 | |||||||||||||||
Options on Bonds — 0.0% | |||||||||||||||
USD | 18,500,000 | United Mexican States, 8.30%, due 08/15/31, Expires 09/18/06, Strike 124.40 | 314,902 | ||||||||||||
Options on Interest Rates — 0.0% | |||||||||||||||
TWD | 1,849,200,000 | TWD Interest Rate Cap Option, 2.19%, Expires 03/16/10, Strike 2.19 | 175,323 | ||||||||||||
TWD | 1,849,200,000 | TWD Interest Rate Floor Option, 2.19%, Expires 03/16/10, Strike 2.19 | 691,656 | ||||||||||||
866,979 | |||||||||||||||
Options on Interest Rate Swaps — 0.5% | |||||||||||||||
KRW | 72,000,000,000 | KRW Swaption, Expires 02/24/09, Strike 6.05% | 3,476,160 | ||||||||||||
KRW | 50,000,000,000 | KRW Swaption, Expires 03/21/11, Strike 5.64% | 1,549,000 | ||||||||||||
KRW | 72,000,000,000 | KRW Swaption, Expires 04/08/09, Strike 6.20% | 3,836,880 | ||||||||||||
KRW | 90,000,000,000 | KRW Swaption, Expires 04/27/09, Strike 5.42% | 3,123,000 | ||||||||||||
KRW | 90,000,000,000 | KRW Swaption, Expires 05/28/07, Strike 4.79% | 756,000 | ||||||||||||
12,741,040 | |||||||||||||||
TOTAL CALL OPTIONS PURCHASED (COST $19,113,287) | 36,399,928 | ||||||||||||||
PUT OPTIONS PURCHASED — 0.1% | |||||||||||||||
Currency Options — 0.0% | |||||||||||||||
USD | 40,000,000 | Republic of Brazil Real, Expires 04/25/07, Strike 3.24 | 47,991 |
See accompanying notes to the financial statements.
18
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Principal Amount /Shares | Description | Value ($) | |||||||||||||
Options on Bonds — 0.0% | |||||||||||||||
USD | 16,000,000 | Republic of Venezuela, 9.25%, due 09/15/27, Expires 09/01/06, Strike 123.75 | 1,608 | ||||||||||||
USD | 14,000,000 | Republic of Venezuela, 9.25%, due 09/15/27, Expires 09/01/06, Strike 123.75 | 1,315 | ||||||||||||
USD | 12,000,000 | Russian Federation Step Up, 5.00%, due 03/31/30, Expire 09/13/06, Strike 109.50 | 1,391 | ||||||||||||
USD | 9,000,000 | Russian Federation Step Up, 5.00%, due 03/31/30, Expires 09/13/06, Strike 109.625 | 739 | ||||||||||||
5,053 | |||||||||||||||
Options on Interest Rate Swaps — 0.1% | |||||||||||||||
KRW | 72,000,000,000 | KRW Swaption, Expires 02/24/09, Strike 6.05% | 167,760 | ||||||||||||
KRW | 50,000,000,000 | KRW Swaption, Expires 03/21/11, Strike 5.64% | 490,500 | ||||||||||||
KRW | 72,000,000,000 | KRW Swaption, Expires 04/08/09, Strike 6.20% | 141,120 | ||||||||||||
KRW | 90,000,000,000 | KRW Swaption, Expires 04/27/09, Strike 5.42% | 879,300 | ||||||||||||
KRW | 90,000,000,000 | KRW Swaption, Expires 05/28/07, Strike 4.79% | 266,400 | ||||||||||||
1,945,080 | |||||||||||||||
TOTAL PUT OPTIONS PURCHASED (COST $11,150,537) | 1,998,124 | ||||||||||||||
MUTUAL FUNDS — 6.6% | |||||||||||||||
Affiliated Issuers — 6.6% | |||||||||||||||
5,354,166 | GMO Short-Duration Collateral Fund | 139,422,488 | |||||||||||||
21,409 | GMO Special Purpose Holding Fund (e) | 104,049 | |||||||||||||
1,645,782 | GMO World Opportunity Overlay Fund | 41,868,684 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $178,503,391) | 181,395,221 | ||||||||||||||
RIGHTS AND WARRANTS — 0.9% | |||||||||||||||
Mexico — 0.2% | |||||||||||||||
48,000 | Mexican Government International Bond Warrants, Expires 10/10/06 ** | 1,680,000 | |||||||||||||
2,942,000 | United Mexican States Value Recovery Rights, Series F, Expires 06/30/08 ** | 75,021 | |||||||||||||
36,000 | United Mexican States Warrants, Series XW20, Expires 09/01/06 ** | 2,196,000 | |||||||||||||
3,951,021 |
See accompanying notes to the financial statements.
19
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Nigeria — 0.1% | |||||||||||||||
25,000 | Central Bank of Nigeria Warrants, Expires 11/15/20 ** | 3,750,000 | |||||||||||||
Uruguay — 0.0% | |||||||||||||||
4,000,000 | Banco Central Del Uruguay Value Recovery Rights, Series VRRB, Expires 01/02/21 ** | — | |||||||||||||
Venezuela — 0.6% | |||||||||||||||
164,215 | Republic of Venezuela Bond Warrants, Expires 04/18/20 ** | 5,993,848 | |||||||||||||
262,360 | Republic of Venezuela Recovery Warrants, Expires 04/15/20 ** | 9,576,140 | |||||||||||||
15,569,988 | |||||||||||||||
TOTAL RIGHTS AND WARRANTS (COST $2,460,000) | 23,271,009 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.6% | |||||||||||||||
Money Market Funds — 0.6% | |||||||||||||||
17,141,272 | Merrimac Cash Series-Premium Class | 17,141,272 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $17,141,272) | 17,141,272 | ||||||||||||||
TOTAL INVESTMENTS — 104.4% (Cost $2,645,495,151) | 2,861,500,807 | ||||||||||||||
Other Assets and Liabilities (net) — (4.4%) | (121,315,027 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 2,740,185,780 |
See accompanying notes to the financial statements.
20
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
9/05/06 | EUR | 8,503,333 | $ | 10,894,046 | $ | 2,976 | |||||||||||||
9/26/06 | EUR | 45,000,000 | 57,726,717 | 86,217 | |||||||||||||||
9/01/06 | EUR | 4,193,877 | 5,372,985 | 2,307 | |||||||||||||||
$ | 91,500 | ||||||||||||||||||
Sales | |||||||||||||||||||
9/19/06 | CHF | 8,000,000 | $ | 6,509,026 | $ | (18,153 | ) | ||||||||||||
9/26/06 | EUR | 361,000,000 | 463,096,551 | 82,702 | |||||||||||||||
9/12/06 | GBP | 45,000,000 | 85,690,651 | (2,413,201 | ) | ||||||||||||||
10/25/06 | HKD | 382,500,000 | 49,255,692 | 744,308 | |||||||||||||||
11/01/06 | HKD | 190,000,000 | 24,471,291 | 528,709 | |||||||||||||||
10/10/06 | JPY | 12,000,000,000 | 102,712,630 | 1,102,579 | |||||||||||||||
$ | 26,944 |
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales | |||||||||||||||||||
3,800 | Federal Funds 30 day | September 2006 | $ | 1,500,170,004 | $ | (13,300 | ) |
As of August 31, 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.
21
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Reverse Repurchase Agreements
Face Value | Description | Market Value | |||||||||
USD | 70,000,000 | Deutsche Bank, 5.98%, dated 6/23/06, to be repurchased on demand at face value plus accrued interest. | $ | (70,813,944 | ) | ||||||
USD | 4,092,000 | Chase Manhattan Bank, 5.00%, dated 6/28/06, to be repurchased on demand at face value plus accrued interest. | (4,127,804 | ) | |||||||
USD | 88,108,125 | Chase Manhattan Bank, 4.80%, dated 7/19/06, to be repurchased on demand at face value plus accrued interest. | (88,601,531 | ) | |||||||
USD | 17,621,625 | Chase Manhattan Bank, 4.80%, dated 7/19/06, to be repurchased on demand at face value plus accrued interest. | (17,720,306 | ) | |||||||
USD | 14,717,240 | Lehman Brothers, 0.15%, dated 8/23/06, to be repurchased on demand at face value plus accrued interest. | (14,717,669 | ) | |||||||
USD | 26,108,889 | Chase Manhattan Bank, 5.20%, dated 8/23/06, to be repurchased on demand at face value plus accrued interest. | (26,135,288 | ) | |||||||
USD | 22,784,000 | Lehman Brothers, 5.40%, dated 8/29/06, to be repurchased on demand at face value plus accrued interest. | (22,787,418 | ) | |||||||
USD | 19,343,056 | Deutsche Bank, 5.35%, dated 8/30/06, to be repurchased on demand at face value plus accrued interest. | (19,343,056 | ) | |||||||
$ | (264,247,016 | ) |
Average balance outstanding | $ | (266,466,041 | ) | ||||
Average interest rate | 4.46 | % | |||||
Maximum balance outstanding | $ | (496,824,183 | ) | ||||
Average shares outstanding | 247,110,421 | ||||||
Average balance per share outstanding | $ | (1.08 | ) |
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund had entered into reverse repurchase agreements.
See accompanying notes to the financial statements.
22
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Written Options
A summary of open written option contracts for the Fund at August 31, 2006 is as follows:
Currency Options
Notional Amount | Expiration Date | Description | Premiums | Market Value | |||||||||||||||||||||||
$ | 70,000,000 | 4/30/2008 | USD | BRL Call/USD Put Currency Option, | |||||||||||||||||||||||
Strike 2.07% | $ | 1,470,000 | $ | (967,867 | ) |
Options on Credit Default Swaps
Notional Amount | Expiration Date | Description | Premiums | Market Value | |||||||||||||||||||||||
Call | $ | 34,000,000 | 10/23/2006 | USD | CDX Swaption, Strike 99.9% | $ | 193,800 | $ | (224,344 | ) | |||||||||||||||||
Call | 11,000,000 | 11/22/2006 | USD | CDX Swaption, Strike 99.8% | 77,000 | (85,979 | ) | ||||||||||||||||||||
Call | 11,000,000 | 11/22/2006 | USD | CDX Swaption, Strike 99.95% | 71,500 | (77,935 | ) | ||||||||||||||||||||
Put | 34,000,000 | 10/23/2006 | USD | CDX Swaption, Strike 99.9% | 265,200 | (191,395 | ) | ||||||||||||||||||||
Put | 11,000,000 | 11/22/2006 | USD | CDX Swaption, Strike 99.8% | 110,000 | (87,438 | ) | ||||||||||||||||||||
Put | 11,000,000 | 11/22/2006 | USD | CDX Swaption, Strike 99.95% | 110,000 | (89,505 | ) | ||||||||||||||||||||
827,500 | (756,596 | ) | |||||||||||||||||||||||||
Total written options | $ | 2,297,500 | $ | (1,724,463 | ) |
See accompanying notes to the financial statements.
23
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
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 | 9/27/2006 | Merrill Lynch | Receive | 5.70 | % | Dominican Republic | $ | 141,406 | ||||||||||||||||||||||||||
25,000,000 | USD | 10/19/2006 | Deutsche Bank AG | (Pay) | 2.10 | % | Government of Ukraine | (239,516 | ) | ||||||||||||||||||||||||||
15,000,000 | USD | 11/20/2006 | Deutsche Bank AG | (Pay) | 4.55 | % | Republic of Brazil | (333,789 | ) | ||||||||||||||||||||||||||
10,000,000 | USD | 11/20/2006 | Deutsche Bank AG | (Pay) | 4.40 | % | Republic of Brazil | (215,035 | ) | ||||||||||||||||||||||||||
30,000,000 | USD | 12/7/2006 | Deutsche Bank AG | (Pay) | 1.60 | % | Gazprom Loan Facility | (212,800 | ) | ||||||||||||||||||||||||||
8,000,000 | USD | 12/20/2006 | JP Morgan Chase Bank | Receive | 3.00 | % | Kingdom of Swaziland | 61,101 | |||||||||||||||||||||||||||
5,000,000 | USD | 12/20/2006 | JP Morgan Chase Bank | Receive | 3.00 | % | Kingdom of Swaziland | 38,188 | |||||||||||||||||||||||||||
20,000,000 | USD | 12/20/2006 | JP Morgan Chase Bank | (Pay) | 4.75 | % | Republic of Brazil | (461,975 | ) | ||||||||||||||||||||||||||
40,000,000 | USD | 1/20/2007 | JP Morgan Chase Bank | (Pay) | 0.45 | % | Republic of Turkey | (18,942 | ) | ||||||||||||||||||||||||||
10,000,000 | USD | 2/18/2007 | JP Morgan Chase Bank | (Pay) | 4.60 | % | Russia Federation | (216,692 | ) | ||||||||||||||||||||||||||
15,000,000 | USD | 2/20/2007 | Deutsche Bank AG | (Pay) | 1.50 | % | Republic of Ecuador | (43,874 | ) | ||||||||||||||||||||||||||
30,000,000 | USD | 2/20/2007 | Deutsche Bank AG | (Pay) | 1.50 | % | Republic of Ecuador | (87,747 | ) | ||||||||||||||||||||||||||
10,000,000 | USD | 2/20/2007 | JP Morgank Chase Bank | (Pay) | 1.25 | % | Republic of Ecuador | (16,899 | ) | ||||||||||||||||||||||||||
10,000,000 | USD | 2/26/2007 | Citigroup | (Pay) | 2.15 | % | Republic of South Africa | (98,579 | ) | ||||||||||||||||||||||||||
5,000,000 | USD | 3/20/2007 | JP Morgan Chase Bank | (Pay) | 0.33 | % | Banco Bilbao Vizcaya Argentaria SA | (30,108 | ) | ||||||||||||||||||||||||||
3,000,000 | USD | 7/2/2007 | Deutsche Bank AG | (Pay) | 0.64 | % | Bank of China Bonds or Loans | (16,451 | ) | ||||||||||||||||||||||||||
10,000,000 | USD | 7/2/2007 | Citigroup | (Pay) | 0.64 | % | Bank of China Bonds or Loans | (54,414 | ) | ||||||||||||||||||||||||||
15,000,000 | USD | 8/20/2007 | Morgan Stanley | (Pay) | 0.87 | % | Government of Ukraine | (18,758 | ) | ||||||||||||||||||||||||||
15,000,000 | USD | 9/27/2007 | JP Morgan Chase Bank | (Pay) | 0.33 | % | HSBC Bank Plc | (73,605 | ) | ||||||||||||||||||||||||||
10,000,000 | USD | 10/10/2007 | JP Morgan Chase Bank | (Pay) | 15.00 | % | Republic of Venezuela | (1,740,388 | ) |
See accompanying notes to the financial statements.
24
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||||||
5,000,000 | USD | 10/22/2007 | JP Morgan Chase Bank | (Pay) | 0.48 | % | Banco Bilbao Vizcaya Argentaria SA | $(27,336) | |||||||||||||||||||||||||||
5,000,000 | USD | 10/30/2007 | Deutsche Bank AG | (Pay) | 0.44 | % | Banco Bilbao Vizcaya Argentaria SA | (24,795 | ) | ||||||||||||||||||||||||||
10,000,000 | USD | 11/23/2007 | Deutsche Bank AG | (Pay) | 1.15 | % | Endesa SA Spain | (133,369 | ) | ||||||||||||||||||||||||||
15,000,000 | USD | 11/27/2007 | JP Morgan Chase Bank | (Pay) | 1.10 | % | Endesa SA Spain | (188,949 | ) | ||||||||||||||||||||||||||
30,000,000 | USD | 12/23/2007 | Deutsche Bank AG | (Pay) | 2.35 | % | Gazprom Loan Facility | (874,547 | ) | ||||||||||||||||||||||||||
15,000,000 | USD | 2/20/2008 | JP Morgan Chase Bank | (Pay) | 1.70 | % | Republic of Ecuador | (118,985 | ) | ||||||||||||||||||||||||||
6,500,000 | USD | 3/20/2008 | JP Morgan Chase Bank | (Pay) | 0.44 | % | Petroleos Mexicanos | (7,039 | ) | ||||||||||||||||||||||||||
100,000,000 | USD | 4/20/2008 | JP Morgan Chase Bank | (Pay) | 0.32 | % | United Mexican States | (326,180 | ) | ||||||||||||||||||||||||||
50,000,000 | USD | 5/4/2008 | Deutsche Bank AG | (Pay) | 1.80 | % | Government of Ukraine | (868,950 | ) | ||||||||||||||||||||||||||
5,000,000 | USD | 5/30/2008 | JP Morgan Chase Bank | Receive | 8.65 | % | Republic of Turkey | 765,163 | |||||||||||||||||||||||||||
2,000,000 | USD | 9/20/2008 | UBS AG | Receive | 9.20 | % | Dominican Republic | 398,593 | |||||||||||||||||||||||||||
10,000,000 | USD | 9/20/2008 | Morgan Stanley Capital Services, Inc. | Receive | 5.15 | % | Republic of Colombia | 1,157,424 | |||||||||||||||||||||||||||
18,000,000 | USD | 11/20/2008 | Deutsche Bank AG | Receive | 1.50 | % | Credit of Uttam Galva | 91,353 | |||||||||||||||||||||||||||
9,000,000 | USD | 11/20/2008 | Deutsche Bank AG | Receive | 4.77 | % | Republic of Colombia | 933,102 | |||||||||||||||||||||||||||
14,000,000 | USD | 12/20/2008 | Deutsche Bank AG | (Pay) | 0.79 | % | Korean Deposit Insurance Corporation | (220,154 | ) | ||||||||||||||||||||||||||
5,000,000 | USD | 3/20/2009 | JP Morgan Chase Bank | Receive | 2.85 | % | Republic of Peru | 343,591 | |||||||||||||||||||||||||||
10,000,000 | USD | 3/20/2009 | JP Morgan Chase Bank | Receive | 4.30 | % | Republic of Philippines | 875,806 | |||||||||||||||||||||||||||
10,000,000 | USD | 4/17/2009 | Deutsche Bank AG | Receive | 3.90 | % | Gazprom Loan Facility | 960,427 | |||||||||||||||||||||||||||
5,000,000 | USD | 5/20/2009 | JP Morgan Chase Bank | Receive | 4.40 | % | Gazprom Loan Facility | 543,076 | |||||||||||||||||||||||||||
25,000,000 | USD | 5/21/2009 | UBS AG | Receive | 4.50 | % | Gazprom Loan Facility | 2,787,304 | |||||||||||||||||||||||||||
7,000,000 | USD | 8/5/2009 | Deutsche Bank AG | Receive | 4.85 | % | Government of Ukraine | 685,337 |
See accompanying notes to the financial statements.
25
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||||||
10,000,000 | USD | 11/20/2009 | JP Morgan Chase Bank | (Pay) | 0.90 | % | United Mexican States | $ | (201,079 | ) | |||||||||||||||||||||||||
10,000,000 | USD | 11/20/2009 | JP Morgan Chase Bank | (Pay) | 0.88 | % | United Mexican States | (194,602 | ) | ||||||||||||||||||||||||||
25,000,000 | USD | 12/29/2009 | Deutsche Bank AG | Receive | 2.25 | % | Videocon Loan Facility | 247,766 | |||||||||||||||||||||||||||
7,000,000 | USD | 2/5/2010 | Deutsche Bank AG | Receive | 4.85 | % | Government of Ukraine | 750,284 | |||||||||||||||||||||||||||
20,000,000 | USD | 2/20/2010 | JP Morgan Chase Bank | Receive | 3.70 | % | Republic of Brazil | 1,876,898 | |||||||||||||||||||||||||||
10,000,000 | USD | 2/20/2010 | JP Morgan Chase Bank | Receive | 3.57 | % | Republic of Brazil | 897,102 | |||||||||||||||||||||||||||
12,000,000 | USD | 2/20/2010 | Morgan Stanley Capital Services, Inc. | Receive | 3.63 | % | Republic of Brazil | 1,099,423 | |||||||||||||||||||||||||||
10,000,000 | USD | 2/20/2010 | UBS AG | Receive | 3.62 | % | Republic of Brazil | 913,005 | |||||||||||||||||||||||||||
12,000,000 | USD | 3/5/2010 | Deutsche Bank AG | Receive | 9.10 | % | Republic of Turkey | 3,413,481 | |||||||||||||||||||||||||||
18,000,000 | USD | 3/20/2010 | Morgan Stanley Capital Services, Inc. | Receive | 0.75 | % | United Mexican States | 302,619 | |||||||||||||||||||||||||||
3,000,000 | USD | 3/29/2010 | JP Morgan Chase Bank | Receive | 4.70 | % | Arab Republic of Egypt | 438,299 | |||||||||||||||||||||||||||
85,000,000 | USD | 6/20/2010 | Deutsche Bank AG | (Pay) | 2.10 | % | Reference security within CDX Index | (4,224,500 | ) | ||||||||||||||||||||||||||
36,000,000 | USD | 6/20/2010 | Lehman Brothers | (Pay) | 2.10 | % | Reference security within CDX Index | (1,789,200 | ) | ||||||||||||||||||||||||||
12,000,000 | USD | 6/20/2010 | JP Morgan Chase Bank | (Pay) | 4.00 | % | Republic of Argentina | (975,600 | ) | ||||||||||||||||||||||||||
12,000,000 | USD | 6/20/2010 | JP Morgan Chase Bank | (Pay) | 3.87 | % | Republic of Argentina | (920,093 | ) | ||||||||||||||||||||||||||
150,000,000 | USD | 6/20/2010 | Deutsche Bank AG | (Pay) | 1.47 | % | Republic of Brazil | (3,732,597 | ) | ||||||||||||||||||||||||||
10,000,000 | USD | 7/20/2010 | Deutsche Bank AG | (Pay) | 3.77 | % | Republic of Argentina | (698,900 | ) | ||||||||||||||||||||||||||
6,000,000 | USD | 7/20/2010 | Deutsche Bank AG | (Pay) | 3.80 | % | Republic of Argentina | (425,706 | ) | ||||||||||||||||||||||||||
5,000,000 | USD | 7/23/2010 | Deutsche Bank AG | Receive | 4.56 | % | Government of Ukraine | 531,081 | |||||||||||||||||||||||||||
7,000,000 | USD | 8/5/2010 | Deutsche Bank AG | Receive | 4.90 | % | Government of Ukraine | 818,262 |
See accompanying notes to the financial statements.
26
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||||||
3,000,000 | USD | 8/25/2010 | Deutsche Bank AG | Receive | 3.40 | % | Deutsche Bank Loan to Ukrtelekom | $ | 27,743 | ||||||||||||||||||||||||||
5,000,000 | USD | 10/25/2010 | Deutsche Bank AG | Receive | 4.60 | % | Government of Ukraine | 612,852 | |||||||||||||||||||||||||||
10,000,000 | USD | 12/20/2010 | JP Morgan Chase Bank | (Pay) | 3.57 | % | Republic of Argentina | (625,637 | ) | ||||||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | JP Morgan Chase Bank | (Pay) | 3.43 | % | Republic of Argentina | (285,355 | ) | ||||||||||||||||||||||||||
5,000,000 | USD | 1/25/2011 | Deutsche Bank AG | Receive | 4.63 | % | Government of Ukraine | 576,921 | |||||||||||||||||||||||||||
7,000,000 | USD | 2/7/2011 | Deutsche Bank AG | Receive | 4.95 | % | Government of Ukraine | 886,463 | |||||||||||||||||||||||||||
5,000,000 | USD | 2/20/2011 | Morgan Stanley Capital Services, Inc. | (Pay) | 2.80 | % | Republic of Argentina | (124,901 | ) | ||||||||||||||||||||||||||
3,000,000 | USD | 2/25/2011 | Deutsche Bank AG | Receive | 3.50 | % | Deutsche Bank Loan to Ukrtelekom | 24,384 | |||||||||||||||||||||||||||
8,000,000 | USD | 3/20/2011 | Citigroup | (Pay) | 3.70 | % | Republic of Iraq | 70,588 | |||||||||||||||||||||||||||
8,000,000 | USD | 3/20/2011 | UBS AG | (Pay) | 3.55 | % | Republic of Iraq | 36,250 | |||||||||||||||||||||||||||
5,000,000 | USD | 4/26/2011 | Deutsche Bank AG | Receive | 4.66 | % | Government of Ukraine | 657,002 | |||||||||||||||||||||||||||
10,000,000 | USD | 6/20/2011 | Deutsche Bank AG | (Pay) | 1.89 | % | Islamic Republic of Pakistan | 91,383 | |||||||||||||||||||||||||||
5,000,000 | USD | 6/20/2011 | Lehman Brothers | Receive | 1.35 | % | Reference security within CDX index | 15,063 | |||||||||||||||||||||||||||
20,000,000 | USD | 6/20/2011 | Lehman Brothers | (Pay) | 1.35 | % | Reference security within CDX index | (44,500 | ) | ||||||||||||||||||||||||||
10,000,000 | USD | 6/20/2011 | Lehman Brothers | (Pay) | 1.35 | % | Reference security within CDX index | (22,250 | ) | ||||||||||||||||||||||||||
150,000,000 | USD | 6/20/2011 | Deutsche Bank AG | Receive | 1.86 | % | Republic of Brazil | 5,060,104 | |||||||||||||||||||||||||||
9,000,000 | USD | 7/17/2011 | UBS AG | Receive | 5.05 | % | Government of Ukraine | 1,261,655 | |||||||||||||||||||||||||||
5,000,000 | USD | 7/25/2011 | Deutsche Bank AG | Receive | 4.68 | % | Government of Ukraine | 618,357 | |||||||||||||||||||||||||||
7,000,000 | USD | 8/5/2011 | Deutsche Bank AG | Receive | 5.00 | % | Government of Ukraine | 951,466 | |||||||||||||||||||||||||||
20,000,000 | USD | 8/20/2011 | Deutsche Bank AG | (Pay) | 0.57 | % | United Mexican States | (82,052 | ) | ||||||||||||||||||||||||||
620,000,000 | MXN | 8/20/2011 | Deutsche Bank AG | Receive | 0.40 | % | United Mexican States | 139,142 | |||||||||||||||||||||||||||
3,000,000 | USD | 8/25/2011 | Deutsche Bank AG | Receive | 3.60 | % | Deutsche Bank Loan to Ukrtelekom | 23,672 |
See accompanying notes to the financial statements.
27
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||||||
15,000,000 | USD | 10/17/2011 | Deutsche Bank AG | Receive | 3.55 | % | Gazprom Loan Facility | $ | 1,949,610 | ||||||||||||||||||||||||||
5,000,000 | USD | 10/25/2011 | Deutsche Bank AG | Receive | 4.70 | % | Government of Ukraine | 697,393 | |||||||||||||||||||||||||||
19,000,000 | USD | 10/30/2011 | Deutsche Bank AG | Receive | 4.00 | % | Naftofaz Ukraine | 162,388 | |||||||||||||||||||||||||||
9,687,520 | USD | 12/20/2011 | Deutsche Bank AG | Receive | 1.60 | % | Stemcor UK Ltd. | 160,244 | |||||||||||||||||||||||||||
3,000,000 | USD | 2/25/2012 | Deutsche Bank AG | Receive | 3.68 | % | Deutsche Bank Loan to Ukrtelekom | 17,601 | |||||||||||||||||||||||||||
19,000,000 | USD | 5/5/2012 | Deutsche Bank AG | Receive | 4.00 | % | Naftofaz Ukraine | 155,826 | |||||||||||||||||||||||||||
10,000,000 | USD | 6/20/2012 | Morgan Stanley Capital Services, Inc. | Receive | 2.10 | % | Republic of Panama | 412,822 | |||||||||||||||||||||||||||
5,000,000 | USD | 7/30/2012 | JP Morgan Chase Bank | Receive | 3.05 | % | Republic of Chile | 719,805 | |||||||||||||||||||||||||||
3,000,000 | USD | 8/28/2012 | Deutsche Bank AG | Receive | 3.75 | % | Deutsche Bank Loan to Ukrtelekom | 12,396 | |||||||||||||||||||||||||||
10,000,000 | USD | 10/4/2012 | JP Morgan Chase Bank | Receive | 2.95 | % | Republic of Chile | 1,517,451 | |||||||||||||||||||||||||||
5,000,000 | USD | 11/5/2012 | Deutsche Bank AG | Receive | 6.50 | % | Republic of Jamaica | 596,790 | |||||||||||||||||||||||||||
10,000,000 | USD | 1/8/2013 | Deutsche Bank AG | Receive | 7.15 | % | Republic of Colombia | 3,010,739 | |||||||||||||||||||||||||||
10,000,000 | USD | 1/9/2013 | Deutsche Bank AG | Receive | 8.25 | % | Republic of Turkey | 3,176,011 | |||||||||||||||||||||||||||
7,000,000 | USD | 1/10/2013 | JP Morgan Chase Bank | Receive | 7.50 | % | Republic of Colombia | 2,240,027 | |||||||||||||||||||||||||||
10,000,000 | USD | 2/7/2013 | JP Morgan Chase Bank | Receive | 8.30 | % | Republic of Colombia | 3,590,672 | |||||||||||||||||||||||||||
15,000,000 | USD | 2/11/2013 | JP Morgan Chase Bank | Receive | 3.05 | % | United Mexican States | 2,026,740 | |||||||||||||||||||||||||||
10,000,000 | USD | 6/6/2013 | Deutsche Bank AG | Receive | 9.40 | % | Republic of Brazil | 4,499,750 | |||||||||||||||||||||||||||
20,000,000 | USD | 6/12/2013 | Deutsche Bank AG | Receive | 9.08 | % | Republic of Brazil | 8,615,809 | |||||||||||||||||||||||||||
130,000,000 | USD | 10/20/2013 | Deutsche Bank AG | Receive | 3.30 | % | Republic of Brazil | 12,919,317 | |||||||||||||||||||||||||||
80,000,000 | USD | 10/20/2013 | Deutsche Bank AG | Receive | 4.05 | % | Republic of Brazil | 11,442,605 | |||||||||||||||||||||||||||
15,000,000,000 | JPY | 10/20/2013 | Deutsche Bank AG | (Pay) | 3.20 | % | Republic of Brazil | (14,496,729 | ) | ||||||||||||||||||||||||||
9,000,000,000 | JPY | 10/20/2013 | Deutsche Bank AG | (Pay) | 3.95 | % | Republic of Brazil | (12,538,162 | ) | ||||||||||||||||||||||||||
10,000,000 | USD | 12/20/2013 | Deutsche Bank AG | Receive | 10.50 | % | Republic of Ecuador | 3,839,699 |
See accompanying notes to the financial statements.
28
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||||||
10,000,000 | USD | 12/24/2013 | JP Morgan Chase Bank | Receive | 3.80 | % | Republic of Turkey | $ | 848,299 | ||||||||||||||||||||||||||
10,000,000 | USD | 1/20/2014 | Deutsche Bank AG | Receive | 4.28 | % | Republic of Brazil | 1,568,173 | |||||||||||||||||||||||||||
10,000,000 | USD | 1/20/2014 | Citigroup | Receive | 4.94 | % | Republic of Colombia | 1,922,141 | |||||||||||||||||||||||||||
10,000,000 | USD | 1/20/2014 | Deutsche Bank AG | Receive | 1.77 | % | United Mexican States | 701,944 | |||||||||||||||||||||||||||
15,000,000 | USD | 3/20/2014 | JP Morgan Chase Bank | Receive | 4.30 | % | Republic of Brazil | 2,605,167 | |||||||||||||||||||||||||||
5,000,000 | USD | 3/20/2014 | JP Morgan Chase Bank | Receive | 4.32 | % | Republic of Brazil | 874,773 | |||||||||||||||||||||||||||
5,000,000 | USD | 3/20/2014 | JP Morgan Chase Bank | Receive | 4.90 | % | Republic of Colombia | 1,039,949 | |||||||||||||||||||||||||||
20,000,000 | USD | 4/20/2014 | Goldman Sachs | Receive | 1.59 | % | United Mexican States | 1,269,320 | |||||||||||||||||||||||||||
20,000,000 | USD | 4/20/2014 | Lehman Brothers | Receive | 1.58 | % | United Mexican States | 1,256,217 | |||||||||||||||||||||||||||
10,000,000 | USD | 5/14/2014 | Deutsche Bank AG | Receive | 6.64 | % | Republic of Turkey | 2,633,111 | |||||||||||||||||||||||||||
5,000,000 | USD | 5/19/2014 | Deutsche Bank AG | Receive | 6.42 | % | Republic of Turkey | 1,246,170 | |||||||||||||||||||||||||||
7,000,000 | USD | 5/20/2014 | JP Morgan Chase Bank | Receive | 6.25 | % | Republic of Turkey | 1,668,133 | |||||||||||||||||||||||||||
5,000,000 | USD | 5/20/2014 | Deutsche Bank AG | Receive | 2.03 | % | United Mexican States | 454,053 | |||||||||||||||||||||||||||
10,000,000 | USD | 5/20/2014 | JP Morgan Chase Bank | Receive | 2.10 | % | United Mexican States | 953,704 | |||||||||||||||||||||||||||
10,000,000 | USD | 5/20/2014 | JP Morgan Chase Bank | Receive | 2.10 | % | United Mexican States | 953,704 | |||||||||||||||||||||||||||
10,000,000 | USD | 5/20/2014 | UBS AG | Receive | 2.10 | % | United Mexican States | 953,704 | |||||||||||||||||||||||||||
15,000,000 | USD | 6/7/2014 | Deutsche Bank AG | Receive | 3.10 | % | Gazprom Loan Facility | 1,890,160 | |||||||||||||||||||||||||||
10,000,000 | USD | 6/16/2014 | Deutsche Bank AG | Receive | 6.22 | % | Republic of Turkey | 2,329,450 | |||||||||||||||||||||||||||
10,000,000 | USD | 6/20/2014 | JP Morgan Chase Bank | Receive | 2.10 | % | United Mexican States | 940,495 | |||||||||||||||||||||||||||
10,000,000 | USD | 6/20/2014 | JP Morgan Chase Bank | Receive | 2.10 | % | United Mexican States | 940,495 | |||||||||||||||||||||||||||
10,000,000 | USD | 6/20/2014 | JP Morgan Chase Bank | Receive | 2.15 | % | United Mexican States | 972,925 | |||||||||||||||||||||||||||
10,000,000 | USD | 7/20/2014 | JP Morgan Chase Bank | Receive | 2.00 | % | United Mexican States | 862,088 |
See accompanying notes to the financial statements.
29
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
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 Chase Bank | Receive | 2.01 | % | United Mexican States | $ | 3,039,896 | ||||||||||||||||||||||||||
2,000,000 | USD | 8/24/2014 | Deutsche Bank AG | (Pay) | 4.25 | % | Lebanese Republic | (36,272 | ) | ||||||||||||||||||||||||||
15,000,000 | USD | 12/7/2014 | Deutsche Bank AG | Receive | 3.10 | % | Gazprom Loan Facility | 1,945,224 | |||||||||||||||||||||||||||
50,000,000 | USD | 12/23/2014 | Deutsche Bank AG | Receive | 3.35 | % | Gazprom Loan Facility | 7,256,025 | |||||||||||||||||||||||||||
600,000,000 | EUR | 3/20/2015 | Deutsche Bank AG | (Pay) | 3.72 | % | Bolivarian Republic of Venezuela | (101,716,987 | ) | ||||||||||||||||||||||||||
800,000,000 | USD | 3/20/2015 | Deutsche Bank AG | Receive | 3.80 | % | Bolivarian Republic of Venezuela | 100,755,665 | |||||||||||||||||||||||||||
412,500,000 | USD | 4/20/2015 | Deutsche Bank AG | Receive | 4.40 | % | Bolivarian Republic of Venezuela | 66,288,714 | |||||||||||||||||||||||||||
300,000,000 | EUR | 4/20/2015 | Deutsche Bank AG | (Pay) | 4.32 | % | Bolivarian Republic of Venezuela | (65,504,243 | ) | ||||||||||||||||||||||||||
10,000,000 | USD | 4/20/2015 | JP Morgan Chase Bank | Receive | 4.65 | % | Republic of Colombia | 1,956,709 | |||||||||||||||||||||||||||
15,000,000 | USD | 5/20/2015 | Deutsche Bank AG | Receive | 3.85 | % | Republic of Turkey | 1,339,293 | |||||||||||||||||||||||||||
25,000,000 | USD | 11/20/2015 | Deutsche Bank AG | Receive | 3.83 | % | Republic of Brazil | 3,548,402 | |||||||||||||||||||||||||||
56,950,000,000 | COP | 11/20/2015 | Citigroup | Receive | 1.81 | % | Republic of Colombia | 554,230 | |||||||||||||||||||||||||||
15,000,000 | USD | 2/20/2016 | Citigroup | (Pay) | 2.16 | % | Republic of Colombia | (174,048 | ) | ||||||||||||||||||||||||||
56,700,000,000 | COP | 2/20/2016 | Citigroup | Receive | 1.46 | % | Republic of Colombia | (54,479 | ) | ||||||||||||||||||||||||||
25,000,000 | USD | 4/20/2016 | Citigroup | (Pay) | 1.90 | % | Republic of Colombia | 12,783 | |||||||||||||||||||||||||||
114,800,000,000 | COP | 4/20/2016 | Citigroup | Receive | 1.33 | % | Republic of Colombia | (275,628 | ) | ||||||||||||||||||||||||||
22,000,000 | USD | 8/20/2016 | JP Morgan Chase Bank | Receive | 1.99 | % | Republic of Brazil | 45,605 | |||||||||||||||||||||||||||
40,000,000 | USD | 8/20/2016 | Lehman Brothers | Receive | 1.98 | % | Republic of Brazil | 68,530 | |||||||||||||||||||||||||||
20,000,000 | USD | 8/20/2016 | Citigroup | (Pay) | 2.15 | % | Republic of Colombia | (181,643 | ) | ||||||||||||||||||||||||||
97,680,000,000 | COP | 8/20/2016 | Citigroup | Receive | 1.51 | % | Republic of Colombia | (57,022 | ) | ||||||||||||||||||||||||||
20,000,000 | USD | 8/20/2016 | Deutsche Bank AG | (Pay) | 0.87 | % | United Mexican States | (131,500 | ) | ||||||||||||||||||||||||||
620,000,000 | MXN | 8/20/2016 | Deutsche Bank AG | Receive | 0.61 | % | United Mexican States | 134,840 | |||||||||||||||||||||||||||
10,000,000 | USD | 10/7/2017 | JP Morgan Chase Bank | Receive | 4.20 | % | United Mexican States | 2,908,422 | |||||||||||||||||||||||||||
20,000,000 | USD | 3/20/2019 | JP Morgan Chase Bank | Receive | 1.90 | % | United Mexican States | 2,019,651 |
See accompanying notes to the financial statements.
30
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||||||
30,000,000 | USD | 8/15/2031 | Goldman Sachs | (Pay) | 1.84 | % | United Mexican States | $ | (3,384,147 | ) | |||||||||||||||||||||||||
20,000,000 | USD | 8/15/2031 | Goldman Sachs | (Pay) | 1.89 | % | United Mexican States | (2,380,589 | ) | ||||||||||||||||||||||||||
$ | 92,534,725 |
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||||||
1,813,645 | USD | 12/1/2008 | Citigroup | (Pay) | 7.10 | % | 6 month LIBOR | $ | (70,351 | ) | |||||||||||||||||||||||||
900,000,000 | TWD | 5/23/2011 | JP Morgan Chase Bank | (Pay) | 2.49 | % | 90 Day TWD- BA-TELERATE | (557,928 | ) | ||||||||||||||||||||||||||
2,500,000,000 | TWD | 6/12/2011 | JP Morgan Chase Bank | (Pay) | 2.35 | % | 90 Day TWD- BA-TELERATE | (1,065,803 | ) | ||||||||||||||||||||||||||
3,000,000,000 | TWD | 7/5/2011 | JP Morgan Chase Bank | (Pay) | 2.32 | % | 90 Day TWD- BA-TELERATE | (1,138,848 | ) | ||||||||||||||||||||||||||
2,500,000,000 | TWD | 8/1/2011 | JP Morgan Chase Bank | (Pay) | 2.29 | % | 90 Day TWD- BA-TELERATE | (833,258 | ) | ||||||||||||||||||||||||||
3,325,015 | USD | 12/1/2011 | Citigroup | (Pay) | 6.32 | % | 6 month LIBOR | (174,340 | ) | ||||||||||||||||||||||||||
36,000,000,000 | KRW | 3/16/2014 | Deutsche Bank AG | (Pay) | 4.80 | % | Korean bond rate for 91 day certificates of deposit | (192,977 | ) | ||||||||||||||||||||||||||
36,000,000,000 | KRW | 3/16/2014 | Deutsche Bank AG | (Pay) | 5.03 | % | Korean bond rate for 91 day certificates of deposit | 146,257 | |||||||||||||||||||||||||||
20,000,000 | USD | 10/3/2015 | JP Morgan Chase Bank | Receive | 4.64 | % | 3 month LIBOR | (1,013,455 | ) | ||||||||||||||||||||||||||
100,000,000 | USD | 4/25/2016 | Deutsche Bank AG | Receive | 5.56 | % | 3 month USD LIBOR | 1,994,863 | |||||||||||||||||||||||||||
25,000,000 | USD | 12/2/2023 | JP Morgan Chase Bank | Receive | 5.34 | % | 3 month LIBOR | (238,812 | ) | ||||||||||||||||||||||||||
70,000,000 | EUR | 9/4/2026 | JP Morgan Chase Bank | (Pay) | 4.28 | % | 6 month EUR LIBOR | (678,787 | ) | ||||||||||||||||||||||||||
$ | (3,823,439 | ) |
See accompanying notes to the financial statements.
31
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
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 | $ | 509,854 |
Notes to Schedule of Investments:
* 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) 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 collateral on open swap contracts (Note 2).
(e) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
Variable and step up rates - The rates shown on variable and step up rate notes are the current interest rates at August 31, 2006 which are subject to change based on the terms of the security, including varying reset dates.
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.
BPI - Indemnification payment bonds
CBO - Collateralized Bond Obligation
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
See accompanying notes to the financial statements.
32
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Currency Abbreviations:
ARS - Argentine Peso ATS - Austrian Schilling BRL - Brazilian Real CHF - Swiss Franc COP - Columbian Peso DEM - German Mark EUR - Euro FRF - French Franc GBP - British Pound HKD - Hong Kong Dollar | ITL - Italian Lira JPY - Japanese Yen KRW - South Korean Won MXN - Mexican Peso MY R - Malaysian Ringgit NLG - Netherlands Guilder RUB - Russian Ruble TWD - Taiwan Dollar USD - United States Dollar ZAR - South African Rand | ||||||
See accompanying notes to the financial statements.
33
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $2,466,991,760) (Note 2) | $ | 2,680,105,586 | |||||
Investments in affiliated issuers, at value (cost $178,503,391) (Notes 2 and 8) | 181,395,221 | ||||||
Foreign currency, at value (cost $616,469) (Note 2) | 582,585 | ||||||
Receivable for investments sold | 55,540,264 | ||||||
Interest receivable | 40,588,537 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 2,549,798 | ||||||
Receivable for open swap contracts (Note 2) | 317,295,969 | ||||||
Total assets | 3,278,057,960 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 39,773,499 | ||||||
Payable for Fund shares repurchased | 13,067 | ||||||
Written options outstanding, at value (premiums $2,297,500) (Note 2) | 1,724,463 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 817,221 | ||||||
Shareholder service fee | 272,240 | ||||||
Trustees and Chief Compliance Officer fees | 5,150 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 2,431,354 | ||||||
Payable for open swap contracts (Note 2) | 228,074,829 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 13,300 | ||||||
Payable for reverse repurchase agreements (Note 2) | 264,247,016 | ||||||
Accrued expenses | 500,041 | ||||||
Total liabilities | 537,872,180 | ||||||
Net assets | $ | 2,740,185,780 |
See accompanying notes to the financial statements.
34
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 2,337,779,909 | |||||
Accumulated undistributed net investment income | 6,945,113 | ||||||
Accumulated net realized gain | 95,700,636 | ||||||
Net unrealized appreciation | 299,760,122 | ||||||
$ | 2,740,185,780 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 886,184,770 | |||||
Class IV shares | $ | 1,854,001,010 | |||||
Shares outstanding: | |||||||
Class III | 79,539,252 | ||||||
Class IV | 166,364,256 | ||||||
Net asset value per share: | |||||||
Class III | $ | 11.14 | |||||
Class IV | $ | 11.14 |
See accompanying notes to the financial statements.
35
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Interest (including securities lending income of $9,138) | $ | 96,923,713 | |||||
Dividends | 2,030,283 | ||||||
Dividends from affiliated issuers (Note 8) | 1,378,898 | ||||||
Total investment income | 100,332,894 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 4,800,199 | ||||||
Shareholder service fee – Class III (Note 3) | 683,646 | ||||||
Shareholder service fee – Class IV (Note 3) | 915,723 | ||||||
Custodian, fund accounting agent and transfer agent fees | 786,784 | ||||||
Audit and tax fees | 60,996 | ||||||
Legal fees | 95,128 | ||||||
Trustees fees and related expenses (Note 3) | 22,049 | ||||||
Registration fees | 6,532 | ||||||
Interest expense (Note 2) | 5,998,232 | ||||||
Miscellaneous | 20,516 | ||||||
Total expenses | 13,389,805 | ||||||
Net investment income (loss) | 86,943,089 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 51,003,161 | ||||||
Investments in affiliated issuers | 107,333 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 868,193 | ||||||
Closed futures contracts | (81,011 | ) | |||||
Closed swap contracts | 27,091,421 | ||||||
Written options | 356,000 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 16,926,577 | ||||||
Net realized gain (loss) | 96,271,674 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (123,628,192 | ) | |||||
Open futures contracts | 95,942 | ||||||
Open swap contracts | (33,929,007 | ) | |||||
Written options | 40,832,967 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (2,528,717 | ) | |||||
Net unrealized gain (loss) | (119,157,007 | ) | |||||
Net realized and unrealized gain (loss) | (22,885,333 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | 64,057,756 |
See accompanying notes to the financial statements.
36
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 86,943,089 | $ | 208,004,114 | |||||||
Net realized gain (loss) | 96,271,674 | 217,840,500 | |||||||||
Change in net unrealized appreciation (depreciation) | (119,157,007 | ) | 55,446,942 | ||||||||
Net increase (decrease) in net assets from operations | 64,057,756 | 481,291,556 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (9,390,592 | ) | (109,362,466 | ) | |||||||
Class IV | (19,285,696 | ) | (171,688,730 | ) | |||||||
Total distributions from net investment income | (28,676,288 | ) | (281,051,196 | ) | |||||||
Net realized gains | |||||||||||
Class III | (23,715,225 | ) | (50,025,113 | ) | |||||||
Class IV | (48,295,272 | ) | (74,287,587 | ) | |||||||
Total distributions from net realized gains | (72,010,497 | ) | (124,312,700 | ) | |||||||
(100,686,785 | ) | (405,363,896 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (122,610,820 | ) | (100,779,282 | ) | |||||||
Class IV | 77,766,710 | 205,303,225 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | (44,844,110 | ) | 104,523,943 | ||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 696,661 | 839,203 | |||||||||
Class IV | 194,206 | 466,801 | |||||||||
Increase in net assets resulting from net purchase premiums and redemption fees | 890,867 | 1,306,004 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | (43,953,243 | ) | 105,829,947 | ||||||||
Total increase (decrease) in net assets | (80,582,272 | ) | 181,757,607 | ||||||||
Net assets: | |||||||||||
Beginning of period | 2,820,768,052 | 2,639,010,445 | |||||||||
End of period (including accumulated undistributed net investment income of $6,945,113 and distributions in excess of net investment income of $51,321,688, respectively) | $ | 2,740,185,780 | $ | 2,820,768,052 |
See accompanying notes to the financial statements.
37
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.30 | $ | 11.09 | $ | 10.51 | $ | 9.51 | $ | 9.30 | $ | 8.96 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.35 | 0.88 | 0.89 | 1.01 | 0.90 | 0.97 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.09 | ) | 1.14 | 1.16 | 1.81 | 0.49 | 0.56 | ||||||||||||||||||||
Total from investment operations | 0.26 | 2.02 | 2.05 | 2.82 | 1.39 | 1.53 | |||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.12 | ) | (1.26 | ) | (1.18 | ) | (1.06 | ) | (0.99 | ) | (1.19 | ) | |||||||||||||||
From net realized gains | (0.30 | ) | (0.55 | ) | (0.29 | ) | (0.76 | ) | (0.19 | ) | — | ||||||||||||||||
Total distributions | (0.42 | ) | (1.81 | ) | (1.47 | ) | (1.82 | ) | (1.18 | ) | (1.19 | ) | |||||||||||||||
Net asset value, end of period | $ | 11.14 | $ | 11.30 | $ | 11.09 | $ | 10.51 | $ | 9.51 | $ | 9.30 | |||||||||||||||
Total Return(a) | 2.46 | %** | 19.50 | % | 20.58 | % | 30.46 | % | 15.94 | %(b) | 18.53 | %(b) | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 886,185 | $ | 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 | % | 0.57 | % | |||||||||||||||
Interest expense to average daily net assets(d) | 0.44 | %* | 0.22 | % | 0.08 | % | 0.08 | % | 0.08 | % | 0.14 | % | |||||||||||||||
Total net expenses to average daily net assets | 1.01 | %* | 0.79 | % | 0.65 | % | 0.65 | % | 0.65 | % | 0.71 | % | |||||||||||||||
Net investment income to average daily net assets | 6.30 | %* | 7.75 | % | 8.22 | % | 9.44 | % | 9.78 | % | 10.78 | % | |||||||||||||||
Portfolio turnover rate | 47 | %** | 144 | % | 121 | % | 119 | % | 121 | % | 130 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | — | (e) | — | (e) | — | (e) | — | (e) | 0.01 | %(e) | 0.02 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.01 | $ | 0.01 | $ | 0.03 | $ | 0.01 | 0.00 | (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 investment in the 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 premiums and redemption 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.
38
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.30 | $ | 11.09 | $ | 10.51 | $ | 9.52 | $ | 9.29 | $ | 8.95 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.35 | 0.88 | 0.90 | 1.06 | 0.91 | 0.98 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.09 | ) | 1.15 | 1.16 | 1.75 | 0.50 | 0.55 | ||||||||||||||||||||
Total from investment operations | 0.26 | 2.03 | 2.06 | 2.81 | 1.41 | 1.53 | |||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.12 | ) | (1.27 | ) | (1.19 | ) | (1.06 | ) | (0.99 | ) | (1.19 | ) | |||||||||||||||
From net realized gains | (0.30 | ) | (0.55 | ) | (0.29 | ) | (0.76 | ) | (0.19 | ) | — | ||||||||||||||||
Total distributions | (0.42 | ) | (1.82 | ) | (1.48 | ) | (1.82 | ) | (1.18 | ) | (1.19 | ) | |||||||||||||||
Net asset value, end of period | $ | 11.14 | $ | 11.30 | $ | 11.09 | $ | 10.51 | $ | 9.52 | $ | 9.29 | |||||||||||||||
Total Return(a) | 2.47 | %** | 19.57 | % | 20.64 | % | 30.38 | % | 16.25 | %(b) | 18.60 | %(b) | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,854,001 | $ | 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 | % | 0.52 | % | |||||||||||||||
Interest expense to average daily net assets(d) | 0.44 | %* | 0.22 | % | 0.08 | % | 0.08 | % | 0.08 | % | 0.14 | % | |||||||||||||||
Total net expenses to average daily net assets | 0.96 | %* | 0.74 | % | 0.60 | % | 0.60 | % | 0.60 | % | 0.66 | % | |||||||||||||||
Net investment income to average daily net assets | 6.36 | %* | 7.75 | % | 8.29 | % | 9.95 | % | 9.89 | % | 10.83 | % | |||||||||||||||
Portfolio turnover rate | 47 | %** | 144 | % | 121 | % | 119 | % | 121 | % | 130 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | — | (e) | — | (e) | — | (e) | — | (e) | 0.01 | %(e) | 0.02 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.00 | (f) | $ | 0.01 | $ | 0.04 | $ | 0.01 | 0.00 | (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 the 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 premiums and redemption 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.
39
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high total return. The Fund invests primarily in sovereign debt of emerging countries. In addition, the Fund may invest a portion of its assets in debt investments issued by companies tied economically to emerging countries and other foreign fixed income securities, including asset-backed securities issued by foreign governments and private issuers. A substantial portion of the Fund's holdings are typically below investment grade. Generally, at least 75% of the Fund's assets are denominated in, or hedged into, U.S. dollars. The Fund's benchmark is the JPMorgan Emerging Markets Bond Index Global (EMBIG).
Throughout the six months ended August 31, 2006, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different level of shareholder service fees.
The financial statements of the series 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.
40
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 generally 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 pursuant to procedures approved by the Trustees.
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 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 maker may differ from the value that would be realized if the securities were sold and the differences could be material. As of August 31, 2006, the total value of these securities represented 36.5% 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 April of 2006, SPHF entered into a settlement agreement with a defendant and the Fund indirectly received $743,312 in conjunction with the settlement. The outcome of the remaining lawsuits against the 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
41
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
of 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 including 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 lo ss 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. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may write call and put options. 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
42
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 writt en 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. Written options outstanding at the end of the period are listed in the Fund's Schedule of Investments.
For the six months ended August 31, 2006, the Fund's investment activity in written options contracts was as follows:
Puts | Calls | ||||||||||||||||||
Principal Amount of Contracts | Premiums | Principal Amount of Contracts | Premiums | ||||||||||||||||
Outstanding, beginning of period | $ | 300,000,000 | $ | 5,344,500 | $ | — | $ | — | |||||||||||
Options written | 86,000,000 | 865,200 | 156,000,000 | 2,096,300 | |||||||||||||||
Options exercised | (330,000,000 | ) | (5,724,500 | ) | (30,000,000 | ) | (284,000 | ) | |||||||||||
Options expired | — | — | — | — | |||||||||||||||
Options sold | — | — | — | — | |||||||||||||||
Outstanding, end of period | $ | 56,000,000 | $ | 485,200 | $ | 126,000,000 | $ | 1,812,300 |
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. Purc hased options outstanding at the end of the period are listed in the Fund's Schedule of Investments.
43
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Loan agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. Indexed securities held by the Fund at the end of the period are listed in the Fund's Schedule of Investments.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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
44
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
party on its obligation. Credit default swaps may be used to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where a party 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. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. There were no repurchase agreements o utstanding at the end of the period.
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
45
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, the Fund had entered into reverse repurchase agreements having a market value plus accrued interest of $264,247,016, collateralized by securities with a market value of $275,762,100. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. There were no delayed delivery commitments outstanding at the end of the period.
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 August 31, 2006, the Fund had no securities on loan.
Taxes and distributions
The Fund intends to qualify each tax 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.
46
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP.
As of August 31, 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) | ||||||||||||
$ | 2,651,155,006 | $ | 322,137,903 | $ | (111,792,102 | ) | $ | 210,345,801 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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 income, common expenses and realized and unrealized gains and losses are allocated pro rata among the classes of shares of the Fund
47
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 the 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 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 six months ended August 31, 2006 and the year ended February 28, 2006, the Fund received $354,511 and $394,550 in purchase premiums and $536,356 and $911,454 in redemption fees, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
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 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 August 31, 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 n ot
48
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 instruments 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 2.09% of the net assets of the Fund as of August 31, 2006. The outcome of this litigation can not be predicted. 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 six months ended August 31, 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 six months ended August 31, 2006 was $14,597 and $7,820, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $1,320,917,246 and $1,365,007,645, respectively.
49
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 41.7% 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 August 31, 2006, 0.3% of the Fund's shares were held by twenty-three related parties comprised of certain GMO employee accounts, and 18.2% 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 16,339,976 | $ | 179,208,041 | 7,279,052 | $ | 82,133,042 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 3,054,379 | 32,284,788 | 14,206,621 | 151,317,024 | |||||||||||||||
Shares repurchased | (30,178,274 | ) | (334,103,649 | ) | (29,288,921 | ) | (334,229,348 | ) | |||||||||||
Purchase premiums and redemption fees | — | 696,661 | — | 839,203 | |||||||||||||||
Net increase (decrease) | (10,783,919 | ) | $ | (121,914,159 | ) | (7,803,248 | ) | $ | (99,940,079 | ) |
50
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 8,662,929 | $ | 95,831,806 | 12,753,479 | $ | 144,733,629 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 6,367,181 | 67,301,103 | 22,808,057 | 243,099,656 | |||||||||||||||
Shares repurchased | (7,872,909 | ) | (85,366,199 | ) | (16,093,592 | ) | (182,530,060 | ) | |||||||||||
Purchase premiums and redemption fees | — | 194,206 | — | 466,801 | |||||||||||||||
Net increase (decrease) | 7,157,201 | $ | 77,960,916 | 19,467,944 | $ | 205,770,026 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these affiliated issuers during the six months ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Short-Duration Collateral Fund | $ | 98,479,942 | $ | 64,878,898 | $ | 26,000,000 | $ | 1,378,898 | $ | — | $ | 139,422,488 | |||||||||||||||
GMO Special Purpose Holding Fund | 176,198 | — | — | — | 868,193 | 104,049 | |||||||||||||||||||||
GMO World Opportunity Overlay Fund | 29,650,120 | 12,000,000 | — | — | — | 41,868,684 | |||||||||||||||||||||
Totals | $ | 128,306,260 | $ | 76,878,898 | $ | 26,000,000 | $ | 1,378,898 | $ | 868,193 | $ | 181,395,221 |
51
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Emerging Country Debt Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to
52
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses and the reputation of the Fund's other service providers.
53
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
54
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | 1.01 | % | $ | 1,000.00 | $ | 1,024.60 | $ | 5.15 | |||||||||||
2) Hypothetical | 1.01 | % | $ | 1,000.00 | $ | 1,020.11 | $ | 5.14 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.96 | % | $ | 1,000.00 | $ | 1,024.70 | $ | 4.90 | |||||||||||
2) Hypothetical | 0.96 | % | $ | 1,000.00 | $ | 1,020.36 | $ | 4.89 |
* Expenses are calculated using each Class's annualized expense ratio (including interest expense and indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
55
GMO Emerging Markets Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 79.7 | % | |||||
Preferred Stocks | 14.3 | ||||||
Private Equity Securities | 0.7 | ||||||
Debt Obligations | 0.6 | ||||||
Investment Funds | 0.4 | ||||||
Rights and Warrants | 0.1 | ||||||
Convertible Securities | 0.0 | ||||||
Mutual Funds | 0.0 | ||||||
Short-Term Investments | 3.9 | ||||||
Other | 0.3 | ||||||
100.0 | % | ||||||
Country Summary** | % of Investments | ||||||
South Korea | 23.0 | % | |||||
Taiwan | 18.1 | ||||||
Brazil | 15.4 | ||||||
Russia | 10.1 | ||||||
China | 9.3 | ||||||
South Africa | 6.6 | ||||||
Mexico | 6.1 | ||||||
India | 3.1 | ||||||
Malaysia | 2.1 | ||||||
Thailand | 1.7 | ||||||
Israel | 1.6 | ||||||
Poland | 1.0 | ||||||
Philippines | 0.7 | ||||||
United States | 0.6 | ||||||
Indonesia | 0.3 | ||||||
Turkey | 0.2 | ||||||
Chile | 0.1 | ||||||
Sri Lanka | 0.0 | ||||||
Lebanon | 0.0 | ||||||
Ukraine | 0.0 | ||||||
Hungary | 0.0 | ||||||
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 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)
August 31, 2006 (Unaudited)
Industry Sector Summary | % of Investments* | ||||||
Information Technology | 18.7 | % | |||||
Energy | 18.6 | ||||||
Financials | 17.4 | ||||||
Materials | 11.3 | ||||||
Telecommunication Services | 10.9 | ||||||
Industrials | 7.9 | ||||||
Consumer Discretionary | 7.2 | ||||||
Consumer Staples | 3.1 | ||||||
Utilities | 2.6 | ||||||
Health Care | 1.1 | ||||||
Miscellaneous | 1.2 | ||||||
100.0 | % |
* The table excludes short-term investments.
2
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 79.7% | |||||||||||
Brazil — 3.6% | |||||||||||
241,128,620 | Aes Tiete SA | 6,295,886 | |||||||||
4,433,820 | Banco do Brasil SA | 99,264,627 | |||||||||
378,724,498 | Companhia Saneamento Basico SAO PA | 41,514,847 | |||||||||
1,464,772 | Companhia Siderurgica Nacional SA | 42,768,063 | |||||||||
735,500 | CSU Cardsystem SA * | 3,718,666 | |||||||||
141,060 | Cyrela Brazil Realty SA | 2,486,972 | |||||||||
1,711,151,300 | Electrobras (Centro) | 37,351,624 | |||||||||
255,000 | Gol-Linhas Aereas Intel | 8,802,495 | |||||||||
346,085,146 | Light SA * | 2,539,142 | |||||||||
1,386,200 | Localiza Rent A Car | 28,894,253 | |||||||||
1,478,400 | Petroleo Brasileiro SA (Petrobras) | 32,767,522 | |||||||||
196,600 | Petroleo Brasileiro SA (Petrobras) ADR | 17,627,156 | |||||||||
2,268,904 | Souza Cruz SA (Registered) | 37,091,924 | |||||||||
653,900 | Unibanco-Uniao de Bancos Brasileiros SA GDR | 47,309,665 | |||||||||
408,432,842 | |||||||||||
Chile — 0.1% | |||||||||||
65,297 | Banco De Chile ADR | 2,590,985 | |||||||||
89,500 | Banco Santander Chile SA ADR | 3,898,620 | |||||||||
56,000 | Compania Cervecerias Unidas ADR | 1,392,160 | |||||||||
214,500 | Compania de Telecommunicaciones de Chile ADR | 1,574,430 | |||||||||
86,481 | Enersis SA ADR | 1,068,905 | |||||||||
34,400 | Lan Airlines SA | 1,199,184 | |||||||||
11,724,284 | |||||||||||
China — 8.8% | |||||||||||
18,629,990 | Advanced Semiconductor Manufacturing Co * | 2,826,627 | |||||||||
48,682,700 | Bank of Communications Co Ltd | 30,633,373 | |||||||||
25,361,000 | China Construction Bank Class H | 10,979,522 | |||||||||
37,264,100 | China Cosco Holdings Co Ltd | 16,865,811 | |||||||||
277,700 | China Finance Online Co ADR * | 1,499,580 | |||||||||
46,452,442 | China Mobile Ltd * | 312,380,689 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
China — continued | |||||||||||
375,649 | China Mobile Ltd ADR | 12,512,868 | |||||||||
8,368,600 | China Paradise Eletronics | 2,109,461 | |||||||||
231,548,401 | China Petroleum & Chemical Corp Class H | 137,075,701 | |||||||||
8,265,400 | China Resources Enterprise Ltd | 18,792,154 | |||||||||
966,000 | China Telecom Corp Ltd ADR | 32,602,500 | |||||||||
231,616,700 | China Telecom Corp Ltd Class H | 78,012,144 | |||||||||
36,273,416 | Denway Motors Ltd | 11,557,028 | |||||||||
7,072,600 | Foxconn International Holdings * | 18,673,901 | |||||||||
33,226,700 | Guangdong Investments Ltd | 12,888,230 | |||||||||
5,893,350 | Hengan International Group Co Ltd Class H | 11,076,065 | |||||||||
2,703,100 | Parkson Retail Group Ltd | 9,030,434 | |||||||||
2,859,600 | Peace Mark Holdings Ltd | 1,745,488 | |||||||||
187,765,101 | PetroChina Co Ltd Class H | 210,759,973 | |||||||||
33,832,789 | Pico Far East Holdings Ltd | 7,173,086 | |||||||||
1,042,000 | Shandong Molong Petroleum Machinery Co Ltd | 321,071 | |||||||||
13,099,700 | Shanghai Industrial Holdings Ltd | 25,558,332 | |||||||||
33,315,500 | Sinochem Hong Kong Holding | 12,197,870 | |||||||||
10,064,187 | Weiqiao Textile Co | 11,164,845 | |||||||||
11,155,600 | Xinao Gas Holdings Ltd | 10,609,600 | |||||||||
999,046,353 | |||||||||||
Hungary — 0.0% | |||||||||||
100 | Magyar Telekom * | 2,014 | |||||||||
India — 2.9% | |||||||||||
870,800 | Amtek Auto Ltd | 5,467,947 | |||||||||
551,263 | Bharat Electronics Ltd | 13,732,285 | |||||||||
243,900 | Bombay Dyeing & Manufacturing Co Ltd | 3,355,789 | |||||||||
251,858 | Bombay Rayon Fashions Ltd | 863,178 | |||||||||
5,948,177 | CBAY Systems Ltd * (a) (b) | 11,046,954 | |||||||||
2,974,088 | CBAY Systems Ltd INR * (a) (b) | 5,523,476 | |||||||||
21,797,849 | Centurion Bank Ltd * | 11,953,896 | |||||||||
3,000 | Cipla Ltd (Shares Under Objection) * (a) | 1 | |||||||||
184,105 | Galaxy Entertainment Corp Ltd * | 651,470 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
India — continued | |||||||||||
1,840,111 | Gammon India Ltd * | 13,517,325 | |||||||||
839,820 | Geodesic Information Systems Ltd | 2,964,251 | |||||||||
200 | HCL Infosystems Ltd (Shares Under Objection) * (a) | — | |||||||||
1,120,500 | HCL Technologies Ltd | 13,997,803 | |||||||||
1,482,625 | Hexaware Technologies Ltd | 4,857,517 | |||||||||
2,256,683 | Himachal Futuristic Communications * | 1,262,671 | |||||||||
257,100 | ICICI Bank Ltd | 3,284,349 | |||||||||
39,600 | Infosys Technologies Inc | 1,538,433 | |||||||||
1,500 | ITC Ltd (Shares Under Objection) * (a) | — | |||||||||
9,283,970 | IVRCL Infrastructures & Projects Ltd | 45,996,859 | |||||||||
49,957 | Jain Irrigation Systems Ltd * | 269,496 | |||||||||
2,043,508 | Jaiprakash Associates Ltd | 19,010,333 | |||||||||
333,102 | Jindal Steel & Power Ltd | 10,601,711 | |||||||||
440,338 | KEI Industries | 2,827,388 | |||||||||
1,327,429 | Kirloskar Brothers Ltd | 10,547,000 | |||||||||
108,913 | Kotak Mahindra Bank Ltd | 730,669 | |||||||||
2,005,994 | Mahanagar Telephone Nigam | 6,762,888 | |||||||||
11,007 | Maharashtra Seamless * | 83,959 | |||||||||
87 | Mahind GESCO Developers Ltd | 1,312 | |||||||||
904,719 | Mahindra & Mahindra Ltd | 12,560,805 | |||||||||
5,046 | Nepc-Micon Ltd GDR 144A * | — | |||||||||
15,956 | NIIT Technologies Ltd | 64,069 | |||||||||
700 | NTPC Limited | 1,869 | |||||||||
334,672 | Raymond Ltd | 3,103,786 | |||||||||
359,979 | Reliance Capital Ltd | 3,590,429 | |||||||||
1,019,200 | Reliance Communication Venture * | 6,523,732 | |||||||||
640,482 | Reliance Energy Ltd | 6,038,671 | |||||||||
900 | Reliance Energy Ltd (Shares Under Objection) * | — | |||||||||
1,615,808 | Reliance Industries Ltd | 38,805,507 | |||||||||
7,133 | Reliance Industries Ltd (Shares Under Objection) * | 2 | |||||||||
2,026,656 | Rolta India Ltd | 9,571,352 | |||||||||
627,130 | Ruchi Soya Industries GDR 144A * | 3,537,578 | |||||||||
174,899 | Sakthi Sugars Ltd * | 475,199 | |||||||||
28,949 | SAW Pipes Ltd | 180,832 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
India — continued | |||||||||||
2,889,220 | Shasun Chemicals | 4,995,125 | |||||||||
1,196,500 | Shree Precoated Steels Ltd * | 4,564,264 | |||||||||
358,420 | Siemens India Ltd | 8,063,613 | |||||||||
2,524,600 | Sintex Industries Ltd | 9,127,730 | |||||||||
1,548,763 | Spicejet Ltd * | 1,448,409 | |||||||||
665,736 | Tasc Pharmaceuticals Ltd * | 1,641,742 | |||||||||
228,070 | Tata Motors Ltd | 4,145,639 | |||||||||
1,850,100 | Union Bank of India | 4,643,789 | |||||||||
3,177,711 | United Phosphorous | 16,022,533 | |||||||||
262,100 | UTV Software Communications Ltd * | 1,054,539 | |||||||||
31,473 | Voltas Ltd | 636,169 | |||||||||
67,166 | Welspun India Ltd * | 126,605 | |||||||||
600 | Wockhardt Ltd | 4,695 | |||||||||
331,777,643 | |||||||||||
Indonesia — 0.3% | |||||||||||
2,728,000 | Astra International Tbk PT | 3,327,810 | |||||||||
16,525,000 | Bank Mandiri Persero Tbk PT | 3,814,994 | |||||||||
10,244,400 | Bank Rakyat Indonesia | 4,899,723 | |||||||||
14,220,000 | Bumi Resources Tbk PT | 1,174,889 | |||||||||
20,433,800 | Indah Kiat Pulp & Paper Tbk PT * | 2,065,596 | |||||||||
5,307,500 | Indosat Tbk PT | 2,573,154 | |||||||||
59,579,100 | Matahari Putra Prima Tbk PT | 4,974,683 | |||||||||
11,004,300 | Telekomunikasi Indonesia Tbk PT | 9,585,456 | |||||||||
8,217,920 | United Tractors Tbk PT | 5,192,175 | |||||||||
37,608,480 | |||||||||||
Israel — 1.5% | |||||||||||
9,332,700 | Bank Hapoalim B.M. | 41,040,153 | |||||||||
4,253,200 | Bank Leumi Le | 15,160,135 | |||||||||
1,240,000 | Check Point Software Technologies Ltd * | 23,051,600 | |||||||||
3,414,800 | Israel Discount Bank Class A * | 5,572,240 | |||||||||
2,900 | Teva Pharmaceutical Industries | 101,057 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Israel — continued | |||||||||||
2,126,800 | Teva Pharmaceutical Industries ADR | 73,927,568 | |||||||||
29,000 | The Israel Corp Ltd | 11,561,322 | |||||||||
170,414,075 | |||||||||||
Lebanon — 0.0% | |||||||||||
12,059 | Banque Libanaise pour le Commerce Sal * | 35,695 | |||||||||
Malaysia — 2.0% | |||||||||||
2,528,160 | AmcorpGroup Berhad * | 858,448 | |||||||||
18,023,700 | Berjaya Sports Toto | 21,834,089 | |||||||||
47,249,630 | Bumiputra-Commerce Holdings Berhad | 82,116,289 | |||||||||
8,974,531 | Highlands and Lowlands Berhad | 11,517,924 | |||||||||
10,726,740 | IJM Corp Berhad | 17,365,021 | |||||||||
8,969,860 | Maxis Communications Berhad | 21,460,652 | |||||||||
8,539,000 | RHB Capital Berhad | 6,346,836 | |||||||||
11,370,000 | Scomi Marine Berhad | 2,987,830 | |||||||||
418,000 | Shangri-La Hotels | 195,385 | |||||||||
11,586,900 | Sunway City Berhad | 5,649,283 | |||||||||
3,338,628 | Top Glove Corp Berhad | 7,856,161 | |||||||||
19,802,000 | UEM Builders Berhad | 6,592,597 | |||||||||
17,918,000 | UEM World Berhad | 7,043,560 | |||||||||
12,923,400 | UMW Holdings Berhard | 26,183,841 | |||||||||
9,066,700 | WCT Engineering Berhad | 8,261,510 | |||||||||
226,269,426 | |||||||||||
Mexico — 5.9% | |||||||||||
4,874,900 | Alfa SA de CV Class A | 23,675,514 | |||||||||
495,066 | Alsea SA | 1,977,914 | |||||||||
2,610,530 | America Movil SA de CV Class L ADR | 97,398,874 | |||||||||
3,943,289 | Carso Global Telecom Class A * | 10,912,478 | |||||||||
156,532 | Cemex SA de CV ADR (Participating Certificates) * | 4,522,210 | |||||||||
16,516,596 | Cemex SA de CV CPO * | 47,614,267 | |||||||||
24,079,500 | Corporacion GEO SA de CV Series B * | 97,086,306 | |||||||||
1,263,854 | Fomento Economico Mexicano SA de CV | 11,905,506 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Mexico — continued | |||||||||||
5,731,000 | Grupo Cementos de Chihuahua SA de CV | 20,596,614 | |||||||||
17,324,600 | Grupo Financiero Banorte SA de CV | 50,705,604 | |||||||||
16,470,800 | Grupo Mexico SA Class B | 52,538,365 | |||||||||
3,638,532 | Sare Holding SA de CV * | 4,100,994 | |||||||||
8,783,000 | Telefonos de Mexico SA de CV Class L ADR | 212,021,620 | |||||||||
10,064,809 | Wal-Mart de Mexico SA de CV Class V | 34,308,862 | |||||||||
669,365,128 | |||||||||||
Philippines — 0.6% | |||||||||||
88,961,950 | Ayala Land Inc | 23,561,257 | |||||||||
3,358,888 | Bank of the Philippine Islands | 3,495,875 | |||||||||
116,163,000 | Filinvest Land Inc * | 3,096,384 | |||||||||
5,227,823 | First Philippine Holdings | 4,313,016 | |||||||||
177,995,400 | Megaworld Corp | 5,868,592 | |||||||||
6,219,000 | Paxys Inc * | 1,252,100 | |||||||||
297,517 | Philippine Long Distance Telephone | 11,184,221 | |||||||||
249,300 | Philippine Long Distance Telephone ADR (c) | 9,333,792 | |||||||||
3,617,876 | San Miguel Corp Class B | 5,051,780 | |||||||||
31,360,999 | SM Prime Holdings | 4,859,967 | |||||||||
72,016,984 | |||||||||||
Poland — 0.2% | |||||||||||
54,400 | BRE Bank * | 4,172,329 | |||||||||
193,300 | KGHM Polska Miedz SA | 6,725,896 | |||||||||
614,700 | Polski Koncern Naftowy Orlen SA | 10,262,943 | |||||||||
21,161,168 | |||||||||||
Russia — 9.4% | |||||||||||
562,700 | JSC Mining & Smelting Co ADR | 76,527,200 | |||||||||
4,170,100 | Lukoil ADR | 348,203,350 | |||||||||
1,637,300 | Mobile Telesystems ADR | 59,925,180 | |||||||||
9,918,131 | OAO Gazprom ADR | 467,143,970 | |||||||||
356,400 | Oao Mechel ADR (c) | 7,520,040 | |||||||||
292,500 | Polyus Gold ADR * | 12,431,250 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Russia — continued | |||||||||||
135,000 | Rusia Petroleum * | 945,000 | |||||||||
24,000 | Sberbank RF | 52,080,000 | |||||||||
625,700 | Unified Energy Systems GDR | 46,301,800 | |||||||||
1,071,077,790 | |||||||||||
South Africa — 6.3% | |||||||||||
1,902,075 | ABSA Group Ltd | 27,194,505 | |||||||||
1,788,800 | AECI Ltd | 13,877,419 | |||||||||
7,461,530 | African Bank Investments Ltd | 26,294,577 | |||||||||
79,400 | Anglo American Platinum Corp | 8,908,252 | |||||||||
384,400 | AngloGold Ashanti Ltd | 17,601,860 | |||||||||
4,537,600 | Aveng Ltd | 16,784,906 | |||||||||
1,940,800 | Barloworld Ltd | 36,509,474 | |||||||||
825,902 | City Lodge Hotels Ltd | 6,067,489 | |||||||||
1,219,600 | Ellerine Holdings Ltd | 11,327,946 | |||||||||
4,821,490 | Foschini Ltd | 30,064,513 | |||||||||
1,134,100 | Gold Fields Ltd | 22,288,107 | |||||||||
494,200 | Harmony Gold Mining Co Ltd * | 6,757,437 | |||||||||
703,500 | Impala Platinum Holdings Ltd | 130,310,558 | |||||||||
964,200 | Imperial Holdings Ltd * | 19,061,265 | |||||||||
1,877,900 | Massmart Holdings Ltd | 14,347,911 | |||||||||
5,129,800 | Mr. Price Group Ltd | 13,873,781 | |||||||||
4,398,400 | Murray & Roberts Holdings | 17,779,656 | |||||||||
562,200 | Naspers Ltd Class N | 9,691,253 | |||||||||
1,396,783 | Nedcor Ltd | 21,369,483 | |||||||||
2,939,042 | Remgro Ltd | 58,330,798 | |||||||||
2,190,798 | Reunert Ltd | 21,919,063 | |||||||||
10,256,171 | Sanlam Ltd | 21,531,989 | |||||||||
949,010 | Sasol Ltd | 32,963,557 | |||||||||
3,086,100 | Standard Bank Group Ltd | 33,287,791 | |||||||||
3,681,300 | Steinhoff International Holdings | 12,007,263 | |||||||||
908,500 | Sun International Ltd | 11,963,188 | |||||||||
2,826,841 | Telkom SA Ltd | 53,386,704 |
See accompanying notes to the financial statements.
9
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
South Africa — continued | |||||||||||
827,648 | Tiger Brands Ltd | 17,485,811 | |||||||||
454,500 | Tongaat-Hulett Group | 5,906,598 | |||||||||
718,893,154 | |||||||||||
South Korea — 18.9% | |||||||||||
25,261 | Amorepacific Corp * | 10,984,186 | |||||||||
216,800 | CDNetworks Co Ltd * | 7,335,957 | |||||||||
978,300 | Cheil Industries Inc | 37,437,598 | |||||||||
2,497,100 | Dacom Corp | 54,472,650 | |||||||||
1,444,700 | Dae Han Pulp Industries * | 6,063,057 | |||||||||
3,909,580 | Daegu Bank | 65,171,428 | |||||||||
228,320 | Daelim Industrial Co Ltd | 14,610,077 | |||||||||
24,669 | Daesun Shipbuilding * | 3,551,355 | |||||||||
387,830 | DC Chemical Co Ltd | 17,364,322 | |||||||||
2,207,610 | Doosan Infracore Co Ltd | 38,004,626 | |||||||||
337,616 | DPI Co Ltd | 3,041,047 | |||||||||
482,679 | Hana Financial Group Inc | 20,743,382 | |||||||||
356,400 | Hana Tour Service Inc | 22,758,117 | |||||||||
214,265 | Hanil Cement Manufacturing | 15,977,210 | |||||||||
956,500 | Hanjin Heavy Industry & Construction | 25,956,235 | |||||||||
637,900 | Hanjin Shipping | 14,562,219 | |||||||||
286,700 | Hanjin Transportation Co | 7,344,043 | |||||||||
3,014,078 | Hanwha Corp | 88,233,668 | |||||||||
147,800 | Honam Petrochemical Co | 7,663,223 | |||||||||
874,040 | Hynix Semiconductor Inc * | 33,324,571 | |||||||||
1,511,080 | Hyundai Development Co | 61,680,072 | |||||||||
121,760 | Hyundai Elevator Co Ltd | 9,231,517 | |||||||||
260,700 | Hyundai Mobis | 23,876,270 | |||||||||
1,656,820 | Hyundai Motor Co | 139,357,326 | |||||||||
2,693,800 | Industrial Bank of Korea | 48,018,968 | |||||||||
532,460 | Inzi Controls Co Ltd | 4,655,732 | |||||||||
169,736 | JVM Co Ltd * | 6,118,124 | |||||||||
86,534 | KCC Engineering & Construction Co | 3,087,032 | |||||||||
1,309,000 | KIA Motors Corp | 20,760,631 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
South Korea — continued | |||||||||||
2,427,370 | Kolon Construction | 38,069,599 | |||||||||
3,150,110 | Kookmin Bank | 254,026,615 | |||||||||
40,200 | Kookmin Bank ADR | 3,239,316 | |||||||||
769,500 | Korea Electric Power Corp | 29,534,526 | |||||||||
201,500 | Korea Electric Terminal Co | 2,931,892 | |||||||||
704,500 | Korea Investment Holdings Co Ltd | 28,381,731 | |||||||||
9,249,900 | Korea Real Estate * | 7,969,854 | |||||||||
1,056,700 | Korean Air Lines Co Ltd | 33,175,438 | |||||||||
1,588,600 | KT&G Corp | 93,074,315 | |||||||||
566,000 | KT&G Corp GDR 144A | 16,668,700 | |||||||||
2,329,634 | LG Corp | 69,220,715 | |||||||||
3,613,000 | LG Telecom Ltd * | 41,005,954 | |||||||||
542,448 | Maeil Dairy Industry | 12,111,911 | |||||||||
252,100 | Megastudy Co Ltd | 22,719,882 | |||||||||
747,360 | Nasan Co Ltd * | 10,511,518 | |||||||||
358,142 | NHN Corp * | 33,692,031 | |||||||||
998,300 | Poongsan Corp | 21,686,068 | |||||||||
273,149 | POSCO | 68,398,802 | |||||||||
794,190 | Pumyang Construction Co Ltd | 10,427,725 | |||||||||
304,993 | Pyung Hwa Industrial Co Ltd * | 991,473 | |||||||||
462,224 | Samsung Electronics Co Ltd | 311,536,803 | |||||||||
215,900 | Samsung SDI Co Ltd | 17,836,242 | |||||||||
188,690 | Samsung Securities | 10,966,983 | |||||||||
256,310 | Sejong Industrial Co | 1,159,913 | |||||||||
1,015,570 | Shinhan Financial Group Co Ltd | 45,662,323 | |||||||||
1,523,620 | Simm Tech Co Ltd | 17,676,689 | |||||||||
227,260 | SK Chemicals Co Ltd | 8,820,012 | |||||||||
680,120 | SK Corp | 43,687,027 | |||||||||
1,006,200 | SSCP Co Ltd * | 19,125,016 | |||||||||
829,696 | Taewoong Co Ltd | 19,095,333 | |||||||||
643,300 | Techno Semichem Co Ltd | 9,395,448 | |||||||||
360,800 | Woongjin Coway Co Ltd | 8,235,451 | |||||||||
1,863,700 | Woori Finance Holdings Co Ltd | 36,559,215 | |||||||||
2,158,979,163 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Sri Lanka — 0.0% | |||||||||||
417,000 | Lanka Walltile Ltd | 232,904 | |||||||||
Taiwan — 17.3% | |||||||||||
16,454,884 | Acer Inc | 25,387,335 | |||||||||
13,843,000 | Advanced Semiconductor Engineering Inc * | 14,156,920 | |||||||||
30,307,762 | Asustek Computer Inc | 67,845,109 | |||||||||
18,266,020 | AU Optronics Corp | 26,745,409 | |||||||||
1,134,389 | Catcher Technology Co | 8,868,152 | |||||||||
27,470,820 | Cheng Loong Corp | 8,762,287 | |||||||||
70,039,000 | China Bills Finance Corp | 17,045,346 | |||||||||
76,592,651 | China Development Financial Holding Corp * | 29,542,996 | |||||||||
83,591,854 | China Steel Corp | 67,758,787 | |||||||||
26,749,387 | Chinatrust Financial Holding Co | 17,519,297 | |||||||||
45,848,499 | Chung Hung Steel Corp * | 17,859,403 | |||||||||
42,152,520 | Chunghwa Telecom Co Ltd | 69,558,674 | |||||||||
847,232 | Chunghwa Telecom Co Ltd ADR | 14,665,586 | |||||||||
25,283,277 | Compal Electronics Inc | 22,081,489 | |||||||||
19,834,100 | Delta Electronics Inc | 55,089,075 | |||||||||
2,438,820 | DFI | 4,198,731 | |||||||||
9,777,804 | Dimerco Express Taiwan Corp | 10,718,000 | |||||||||
25,386,071 | Evergreen Marine Corp | 14,049,560 | |||||||||
25,671,305 | Far Eastern International Bank * | 8,150,219 | |||||||||
35,337,080 | Far Eastern Textile Co Ltd | 24,790,471 | |||||||||
7,479,000 | Far Eastone Telecommunications Co Ltd | 8,093,162 | |||||||||
18,720,208 | Formosa Chemicals & Fibre Co | 26,985,348 | |||||||||
4,425,044 | Formosa Petrochemical Corp | 8,741,280 | |||||||||
21,270,107 | Formosa Plastics Corp | 28,950,015 | |||||||||
21,184,000 | Fubon Financial Holding Co Ltd | 15,772,039 | |||||||||
3,562,920 | High Tech Computer Corp | 89,592,657 | |||||||||
49,898,772 | Hon Hai Precision Industry Co Ltd | 280,801,314 | |||||||||
55,251,671 | Inventec Co Ltd | 33,569,213 | |||||||||
12,583,883 | Les Enphants Co Ltd | 8,673,666 | |||||||||
33,539,842 | Lite-On Technology Corp * | 41,550,090 | |||||||||
11,014,300 | MediaTek Inc | 100,213,506 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Taiwan — continued | |||||||||||
102,717,000 | Mega Financial Holdings Co Ltd | 68,241,008 | |||||||||
22,846,835 | Micro-Star International Co Ltd | 10,657,064 | |||||||||
7,197,405 | Nan Ya Plastics Corp | 9,728,207 | |||||||||
270,000 | Novatek Microelectronics | 1,328,481 | |||||||||
15,236,235 | Oriental Union Chemical | 8,140,304 | |||||||||
4,552,850 | Powertech Technology Inc | 12,727,621 | |||||||||
21,578,083 | Realtek Semiconductor Corp | 27,231,945 | |||||||||
1,282,000 | Richtek Technology Corp | 9,806,262 | |||||||||
19,798,525 | Shin Kong Financial Holdings | 17,113,583 | |||||||||
11,841,485 | Siliconware Precision Industries Co | 13,989,017 | |||||||||
38,126,128 | Sinopac Holdings Co | 16,691,285 | |||||||||
54,321,125 | Taishin Financial Holdings Co Ltd * | 25,867,533 | |||||||||
50,061,000 | Taiwan Cellular Corp | 46,579,032 | |||||||||
66,396,307 | Taiwan Cement Corp | 44,237,764 | |||||||||
5,708,000 | Taiwan FU Hsing Ind Co Ltd | 5,326,426 | |||||||||
178,542,448 | Taiwan Semiconductor Manufacturing Co Ltd | 316,098,803 | |||||||||
1,693,652 | Taiwan Semiconductor Manufacturing Co Ltd ADR | 15,767,900 | |||||||||
12,891,438 | Tsann Kuen Enterprises Co Ltd | 13,985,054 | |||||||||
8,657,992 | TXC Corp | 12,783,872 | |||||||||
13,304,000 | U-Ming Marine Transport Co | 13,974,690 | |||||||||
34,504,000 | Uni-President Enterprises Corp | 26,271,246 | |||||||||
80,720 | Waffer Technology Co Ltd | 77,169 | |||||||||
75,702,450 | Walsin Lihwa Corp * | 30,792,083 | |||||||||
25,697,873 | Wan Hai Lines Ltd | 13,869,344 | |||||||||
43,237,000 | Waterland Financial Holdings | 12,215,423 | |||||||||
28,497,600 | Yang Ming Marine Transport | 14,322,131 | |||||||||
35,196,659 | Yieh Phui Enterprise | 13,028,536 | |||||||||
1,968,586,919 | |||||||||||
Thailand — 1.7% | |||||||||||
4,021,700 | Advanced Info Service Pcl (Foreign Registered) (a) | 9,573,080 | |||||||||
11,537,600 | Airports of Thailand Pcl (a) | 17,192,805 | |||||||||
26,905,900 | Bangkok Dusit Medical Service Pcl (Foreign Registered) (a) | 20,565,974 | |||||||||
17,569,200 | Central Pattana Pcl (Foreign Registered) (a) | 9,118,733 |
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)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Thailand — continued | |||||||||||
13,162,400 | Home Product Center Pcl (Foreign Registered) (a) | 2,889,564 | |||||||||
19,280,600 | Kasikornbank Pcl NVDR (a) | 32,028,268 | |||||||||
20,169,900 | Major Cineplex Group (a) | 8,426,488 | |||||||||
8,604,700 | PTT Pcl (Foreign Registered) (a) | 54,016,176 | |||||||||
24,219,786 | Rojana Industrial Park Pcl (a) | 8,120,524 | |||||||||
13,251,400 | Saha Pathana International Holding Pcl (Foreign Registered) (a) | 7,991,673 | |||||||||
2,802,138 | Siam Cement Pcl (Foreign Registered) NVDR (a) | 16,242,506 | |||||||||
3,108,050 | Star Block Co Ltd (Foreign Registered) * (a) (d) | 827 | |||||||||
17,804,400 | Yarnapund Pcl (a) | 2,912,284 | |||||||||
189,078,902 | |||||||||||
Turkey — 0.2% | |||||||||||
870,900 | Akbank TAS | 4,732,424 | |||||||||
2,813,195 | Doktas Dokumculuk Ticaret | 7,786,752 | |||||||||
80,188 | Galatasaray Sportif Sinai ve Ticari Yatirimlar AS | 4,149,246 | |||||||||
42,150 | Medya Holding AS * (a) (d) | 288 | |||||||||
2,816,100 | Petkim Petrokimya Holding * | 10,057,363 | |||||||||
26,726,073 | |||||||||||
TOTAL COMMON STOCKS (COST $6,921,517,708) | 9,081,428,997 | ||||||||||
PREFERRED STOCKS — 14.3% | |||||||||||
Brazil — 11.1% | |||||||||||
1,934,606 | Banco Bradesco SA 6.08% | 63,398,049 | |||||||||
2,976,970 | Banco Itau Holding Financeira SA 3.02% | 89,572,917 | |||||||||
1,272,562,200 | Companhia Energetica de Minas Gerais 0.53% | 52,528,804 | |||||||||
2,447,409,800 | Companhia Paranaense de Energia 2.00% | 26,311,938 | |||||||||
1,194,404 | Companhia Vale do Rio Doce Class A 0.61% | 22,439,642 | |||||||||
1,431,113,760 | Electrobras (Centro) SA Class B 6.62% | 28,568,875 | |||||||||
741,656,700 | Geracao Tiete 5.75% | 19,302,446 | |||||||||
7,999,531 | Gerdau SA 4.58% | 115,478,304 | |||||||||
45,612,081 | Investimentos Itau SA 3.18% | 192,532,338 |
See accompanying notes to the financial statements.
14
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
Brazil — continued | |||||||||||
1,200,564 | Iochpe Maxion SA 3.16% | 9,687,387 | |||||||||
5,506,587 | Net Servicos de Comunicacoa SA * | 49,441,138 | |||||||||
26,068,752 | Petroleo Brasileiro SA (Petrobras) 0.93% | 526,724,971 | |||||||||
512,700 | Petroleo Brasileiro SA ADR 2.91% | 41,333,874 | |||||||||
7,728,823 | Sadia SA 2.58% | 20,727,954 | |||||||||
363,200 | Saraiva SA Livreiros 0.17% | 3,472,761 | |||||||||
11,719,994 | Unipar, Class B 0.69% | 8,855,593 | |||||||||
1,270,376,991 | |||||||||||
South Africa — 0.1% | |||||||||||
1,781,898 | Allied Electronics Corp 2.99% | 6,171,665 | |||||||||
South Korea — 3.1% | |||||||||||
658,900 | Hyundai Motor Co 2.73% | 31,851,250 | |||||||||
405,360 | LG Electronics Inc 3.42% | 15,652,311 | |||||||||
585,353 | Samsung Electronics Co Ltd (Non Voting) 1.13% | 303,683,091 | |||||||||
351,186,652 | |||||||||||
TOTAL PREFERRED STOCKS (COST $565,290,177) | 1,627,735,308 | ||||||||||
PRIVATE EQUITY SECURITIES — 0.7% | |||||||||||
Poland — 0.7% | |||||||||||
18,179,075 | CHP Investors (Multimedia) * (a) (b) | 42,295,436 | |||||||||
18,340,378 | MHP Investors (Tri Media Holdings Ltd) * (a) (b) | 39,633,557 | |||||||||
81,928,993 | |||||||||||
Russia — 0.0% | |||||||||||
90,000 | Divot Holdings NV-Class D * (a) (b) (d) | 900 | |||||||||
124,330 | Divot Holdings NV-Class E * (a) (b) (d) | 1,243 | |||||||||
46,624 | Divot Holdings NV, Convertible Securities-Class F * (a) (b) (d) | 466 | |||||||||
2,609 |
See accompanying notes to the financial statements.
15
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
Sri Lanka — 0.0% | |||||||||||
2,545,869 | Millenium Information Technology * (a) (b) | 787,470 | |||||||||
TOTAL PRIVATE EQUITY SECURITIES (COST $50,257,567) | 82,719,072 | ||||||||||
DEBT OBLIGATIONS — 0.6% | |||||||||||
United States — 0.6% | |||||||||||
USD | 59,986,375 | U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (e) (f) | 61,982,782 | ||||||||
TOTAL DEBT OBLIGATIONS (COST $64,657,232) | 61,982,782 | ||||||||||
INVESTMENT FUNDS — 0.4% | |||||||||||
China — 0.1% | |||||||||||
692,433 | Martin Currie Sino-American Class B Series January 2007 * (a) (b) | 9,740,451 | |||||||||
500,000 | Martin Currie Sino-American Class B Series June 2006 * (a) (b) | 6,642,750 | |||||||||
16,383,201 | |||||||||||
India — 0.0% | |||||||||||
1,379,237 | Fire Capital Mauritius Private Fund * (a) (b) | 827,542 | |||||||||
170 | SPG Infinity Technology Fund I * (a) (b) | 102,910 | |||||||||
1,371,900 | TDA India Technology Fund II LP * (a) (b) | 1,106,273 | |||||||||
100 | UTI Masterplus 1991 Units (Shares Under Objection) * (a) | — | |||||||||
2,036,725 | |||||||||||
Poland — 0.0% | |||||||||||
1,749,150 | The Emerging European Fund II LP * (a) (b) | 470,399 | |||||||||
Russia — 0.3% | |||||||||||
9,500,000 | NCH Eagle Fund LP * (a) (b) | 29,973,450 | |||||||||
Ukraine — 0.0% | |||||||||||
16,667 | Societe Generale Thalmann Ukraine Fund * (a) (b) | 16,667 | |||||||||
TOTAL INVESTMENT FUNDS (COST $26,877,282) | 48,880,442 |
See accompanying notes to the financial statements.
16
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
RIGHTS AND WARRANTS — 0.1% | |||||||||||
India — 0.0% | |||||||||||
126,997 | Arvind Mills Ltd Warrants, 144A, Expires 06/12/07 (Goldman Sachs) * (a) (g) | 169,884 | |||||||||
107,835 | Hero Honda Motor Ltd Warrants,144A, Expires 05/02/11 (Merrill Lynch) * (a) (g) | 1,670,765 | |||||||||
32,542 | Uniphos Enterprises Ltd Warrants, 144A, Expires 01/28/09 (Merrill Lynch) * (a) (g) | 18,601 | |||||||||
711,650 | United Phosphorus Ltd Warrants, 144A, Expires 01/28/09 (Merrill Lynch) * (a) (g) | 3,616,745 | |||||||||
5,475,995 | |||||||||||
Taiwan — 0.1% | |||||||||||
10,100,889 | Shin Kong Financial Warrants,144A, Expires 05/11/07 (Merrill Lynch) * (a) (g) | 8,978,926 | |||||||||
Thailand — 0.0% | |||||||||||
2,689,393 | True Corp Pcl Warrants, Expires 04/03/08 * (a) | — | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $14,022,109) | 14,454,921 | ||||||||||
MUTUAL FUNDS — 0.0% | |||||||||||
United States — 0.0% | |||||||||||
Affiliated Issuer | |||||||||||
8,064 | GMO Special Purpose Holding Fund (a) | 39,193 | |||||||||
TOTAL MUTUAL FUNDS (COST $0) | 39,193 | ||||||||||
CONVERTIBLE SECURITIES — 0.0% | |||||||||||
India — 0.0% | |||||||||||
USD | 182,000 | Jaiprakash, 0.01%, due 02/17/10 | 303,712 |
See accompanying notes to the financial statements.
17
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
Russia — 0.0% | |||||||||||
USD | 56,000 | Lukinter Finance BV, 0.03%, due 11/29/07 * | 232,008 | ||||||||
TOTAL CONVERTIBLE SECURITIES (COST $373,240) | 535,720 | ||||||||||
SHORT-TERM INVESTMENTS — 3.9% | |||||||||||
434,600,000 | Bank Nationale de Paris Time Deposit, 5.27%, due 09/01/06 | 434,600,000 | |||||||||
13,515,000 | Boston Global Investment Trust - Enhanced Portfolio (h) | 13,515,000 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $448,115,000) | 448,115,000 | ||||||||||
TOTAL INVESTMENTS — 99.7% (Cost $8,091,110,315) | 11,365,891,435 | ||||||||||
Other Assets and Liabilities (net) — 0.3% | 38,291,659 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 11,404,183,094 |
See accompanying notes to the financial statements.
18
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Additional information on each restricted security is as follows:
Acquisition Issuer, Description | Acquisition Date | Market Value as a Percentage of Fund's Cost | Market Value as of Net Assets | August 31, 2006 | |||||||||||||||
CBAY Systems Ltd | 5/06/03-8/04/05 | $ | 6,100,570 | 0.10 | % | $ | 11,046,954 | ||||||||||||
CBAY Systems Ltd INR | 3/10/06 | — | 0.05 | % | 5,523,476 | ||||||||||||||
CHP Investors (Multimedia) | 12/13/99-3/05/01 | 18,178,923 | 0.37 | % | 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 | ||||||||||||||
Fire Capital Mauritius Private Fund | 5/15/06 | 1,379,237 | 0.01 | % | 827,542 | ||||||||||||||
Martin Currie Sino-American Class B Series June 2006 | 3/17/05 | 5,000,000 | 0.06 | % | 6,642,750 | ||||||||||||||
Martin Currie Sino-American Class B Series January 2007 | 1/20/06 | 7,500,000 | 0.09 | % | 9,740,451 | ||||||||||||||
MHP Investors (Tri Media Holdings Ltd) | 11/27/01 | 27,983,521 | 0.35 | % | 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 | 0.26 | % | 29,973,450 | ||||||||||||||
Societe Generale Thalmann Ukraine Fund | 7/15/97 | 260,172 | 0.00 | % | 16,667 | ||||||||||||||
SPG Infinity Technology Fund I | 12/23/99 | 189,555 | 0.00 | % | 102,910 | ||||||||||||||
TDA India Technology Fund II LP | 2/23/00-3/23/04 | 1,371,900 | 0.01 | % | 1,106,273 | ||||||||||||||
The Emerging European Fund II, LP | 12/05/97-3/17/00 | 1,749,150 | 0.00 | % | 470,399 | ||||||||||||||
$ | 148,169,942 |
See accompanying notes to the financial statements.
19
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Swap Agreements
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
14,336,138 | USD | 9/11/2006 | Merrill Lynch | 3 month LIBOR -3.10% | MSCI Taiwan Index | $ | 37,930 | ||||||||||||||||||||
16,421,192 | USD | 5/18/2007 | Merrill Lynch | 3 month LIBOR -4.00% | MSCI Turkey Index | (157,076 | ) | ||||||||||||||||||||
$ | (119,146 | ) |
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
* 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) Direct placement securities are restricted as to resale.
(c) All or a portion of this security is out on loan (Note 2).
(d) Bankrupt issuer.
(e) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(f) All or a portion of this security has been segregated to cover collateral requirements on open swap contracts (Note 2).
(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 August 31, 2006, 58.2% of the Net Assets of the Fund were valued using fair value prices based on models used by a third party vendor (Note 2).
Currency Abbreviations:
USD - United States Dollar
See accompanying notes to the financial statements.
20
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value, including securities on loan of $13,163,400 (cost $8,091,110,315) (Note 2) | $ | 11,365,852,242 | |||||
Investments in affiliated issuers, at value (cost $0) (Notes 2 and 8) | 39,193 | ||||||
Cash | 182,723 | ||||||
Foreign currency, at value (cost $53,611,459) (Note 2) | 53,404,407 | ||||||
Receivable for investments sold | 26,167,482 | ||||||
Receivable for Fund shares sold | 1,563,000 | ||||||
Dividends and interest receivable | 42,622,168 | ||||||
Foreign taxes receivable | 1,377,530 | ||||||
Receivable for open swap contracts (Note 2) | 37,930 | ||||||
Receivable for closed swap contracts (Note 2) | 941,329 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 51,150 | ||||||
Total assets | 11,492,239,154 | ||||||
Liabilities: | |||||||
Collateral on securities loaned, at value (Note 2) | 13,515,000 | ||||||
Payable for investments purchased | 16,598,892 | ||||||
Payable for Fund shares repurchased | 43,019,635 | ||||||
Distribution payable | 400 | ||||||
Accrued capital gain and repatriation taxes payable (Note 2) | 1,345,518 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 7,820,106 | ||||||
Shareholder service fee | 1,019,087 | ||||||
Trustees and Chief Compliance Officer fees | 26,366 | ||||||
Payable for open swap contracts (Note 2) | 157,076 | ||||||
Accrued expenses | 4,553,980 | ||||||
Total liabilities | 88,056,060 | ||||||
Net assets | $ | 11,404,183,094 |
See accompanying notes to the financial statements.
21
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 6,784,119,378 | |||||
Accumulated undistributed net investment income | 103,800,880 | ||||||
Accumulated net realized gain | 1,243,260,630 | ||||||
Net unrealized appreciation | 3,273,002,206 | ||||||
$ | 11,404,183,094 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 4,155,031,269 | |||||
Class IV shares | $ | 2,890,517,811 | |||||
Class V shares | $ | 1,239,927,471 | |||||
Class VI shares | $ | 3,118,706,543 | |||||
Shares outstanding: | |||||||
Class III | 203,742,741 | ||||||
Class IV | 142,048,867 | ||||||
Class V | 60,958,850 | ||||||
Class VI | 153,177,291 | ||||||
Net asset value per share: | |||||||
Class III | $ | 20.39 | |||||
Class IV | $ | 20.35 | |||||
Class V | $ | 20.34 | |||||
Class VI | $ | 20.36 |
See accompanying notes to the financial statements.
22
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $28,927,057) | $ | 216,683,974 | |||||
Interest (including securities lending income of $35,540) | 12,733,979 | ||||||
Total investment income | 229,417,953 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 48,310,194 | ||||||
Shareholder service fee – Class III (Note 3) | 3,269,290 | ||||||
Shareholder service fee – Class IV (Note 3) | 1,561,754 | ||||||
Shareholder service fee – Class V (Note 3) | 571,076 | ||||||
Shareholder service fee – Class VI (Note 3) | 894,001 | ||||||
Custodian and fund accounting agent fees | 7,432,864 | ||||||
Transfer agent fees | 31,096 | ||||||
Audit and tax fees | 85,928 | ||||||
Legal fees | 144,808 | ||||||
Trustees fees and related expenses (Note 3) | 105,937 | ||||||
Registration fees | 6,256 | ||||||
Miscellaneous | 53,379 | ||||||
Total expenses | 62,466,583 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (309,212 | ) | |||||
Net expenses | 62,157,371 | ||||||
Net investment income (loss) | 167,260,582 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of foreign capital gains tax and CPMF tax of $279,914 and $222,341, respectively) (Note 2) | 1,178,722,242 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 327,027 | ||||||
Closed swap contracts | 80,844,964 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (1,769,971 | ) | |||||
Net realized gain (loss) | 1,258,124,262 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments (net of foreign capital gains tax accrual of ($2,067,349)) (Note 2) | (1,365,860,501 | ) | |||||
Open swap contracts | (11,538,371 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (2,165,863 | ) | |||||
Net unrealized gain (loss) | (1,379,564,735 | ) | |||||
Net realized and unrealized gain (loss) | (121,440,473 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | 45,820,109 |
See accompanying notes to the financial statements.
23
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 167,260,582 | $ | 196,278,705 | |||||||
Net realized gain (loss) | 1,258,124,262 | 2,083,998,397 | |||||||||
Change in net unrealized appreciation (depreciation) | (1,379,564,735 | ) | 1,333,369,890 | ||||||||
Net increase (decrease) in net assets from operations | 45,820,109 | 3,613,646,992 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (21,118,909 | ) | (94,886,366 | ) | |||||||
Class IV | (15,008,739 | ) | (59,321,922 | ) | |||||||
Class V | (6,564,187 | ) | (24,130,575 | ) | |||||||
Class VI | (16,368,202 | ) | (48,705,197 | ) | |||||||
Total distributions from net investment income | (59,060,037 | ) | (227,044,060 | ) | |||||||
Net realized gains | |||||||||||
Class III | (377,150,077 | ) | (605,236,149 | ) | |||||||
Class IV | (261,100,298 | ) | (364,582,631 | ) | |||||||
Class V | (115,187,206 | ) | (160,197,509 | ) | |||||||
Class VI | (279,924,001 | ) | (297,291,532 | ) | |||||||
Total distributions from net realized gains | (1,033,361,582 | ) | (1,427,307,821 | ) | |||||||
(1,092,421,619 | ) | (1,654,351,881 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (272,570,950 | ) | (459,485,882 | ) | |||||||
Class IV | 80,733,973 | (618,210,434 | ) | ||||||||
Class V | (97,585,379 | ) | 1,113,485,811 | ||||||||
Class VI | 211,990,547 | 706,806,874 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | (77,431,809 | ) | 742,596,369 | ||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 2,101,114 | 2,889,096 | |||||||||
Class IV | 2,662,793 | 1,273,937 | |||||||||
Class V | 1,534,912 | 611,195 | |||||||||
Class VI | 2,007,458 | 2,341,043 | |||||||||
Increase in net assets resulting from net purchase premiums and redemption fees | 8,306,277 | 7,115,271 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | (69,125,532 | ) | 749,711,640 | ||||||||
Total increase (decrease) in net assets | (1,115,727,042 | ) | 2,709,006,751 | ||||||||
Net assets: | |||||||||||
Beginning of period | 12,519,910,136 | 9,810,903,385 | |||||||||
End of period (including accumulated undistributed net investment income of $103,800,880 and distributions in excess of net investment income of $4,399,665, respectively) | $ | 11,404,183,094 | $ | 12,519,910,136 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 22.49 | $ | 19.05 | $ | 15.78 | $ | 8.82 | $ | 9.84 | $ | 9.04 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.30 | 0.37 | 0.34 | 0.23 | 0.11 | 0.18 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.27 | ) | 6.24 | 4.40 | 6.97 | (1.00 | ) | 0.80 | |||||||||||||||||||
Total from investment operations | 0.03 | 6.61 | 4.74 | 7.20 | (0.89 | ) | 0.98 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.11 | ) | (0.43 | ) | (0.32 | ) | (0.24 | ) | (0.13 | ) | (0.18 | ) | |||||||||||||||
From net realized gains | (2.02 | ) | (2.74 | ) | (1.15 | ) | — | — | — | ||||||||||||||||||
Total distributions | (2.13 | ) | (3.17 | ) | (1.47 | ) | (0.24 | ) | (0.13 | ) | (0.18 | ) | |||||||||||||||
Net asset value, end of period | $ | 20.39 | $ | 22.49 | $ | 19.05 | $ | 15.78 | $ | 8.82 | $ | 9.84 | |||||||||||||||
Total Return(a) | 0.40 | %** | 37.99 | % | 31.45 | % | 82.10 | % | (9.14 | )% | 11.15 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 4,155,031 | $ | 4,788,395 | $ | 4,433,098 | $ | 4,079,172 | $ | 1,215,653 | $ | 826,960 | |||||||||||||||
Net expenses to average daily net assets | 1.09 | %* | 1.10 | % | 1.11 | % | 1.12 | % | 1.16 | % | 1.19 | %(b) | |||||||||||||||
Net investment income to average daily net assets | 2.76 | %* | 1.88 | % | 2.17 | % | 1.85 | % | 1.12 | % | 2.32 | % | |||||||||||||||
Portfolio turnover rate | 17 | %** | 41 | % | 57 | % | 46 | % | 59 | % | 74 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 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 | $ | 0.01 | $ | 0.06 | $ | 0.05 | $ | 0.05 |
(a) The total returns would have been lower had certain expenses not been reimbursed on the Fund and the 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.
* Annualized.
** Not annualized.
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 22.45 | $ | 19.02 | $ | 15.75 | $ | 8.81 | $ | 9.83 | $ | 9.03 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.31 | 0.40 | 0.34 | 0.24 | 0.11 | 0.17 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.27 | ) | 6.20 | 4.41 | 6.94 | (0.99 | ) | 0.82 | |||||||||||||||||||
Total from investment operations | 0.04 | 6.60 | 4.75 | 7.18 | (0.88 | ) | 0.99 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.12 | ) | (0.43 | ) | (0.33 | ) | (0.24 | ) | (0.14 | ) | (0.19 | ) | |||||||||||||||
From net realized gains | (2.02 | ) | (2.74 | ) | (1.15 | ) | — | — | — | ||||||||||||||||||
Total distributions | (2.14 | ) | (3.17 | ) | (1.48 | ) | (0.24 | ) | (0.14 | ) | (0.19 | ) | |||||||||||||||
Net asset value, end of period | $ | 20.35 | $ | 22.45 | $ | 19.02 | $ | 15.75 | $ | 8.81 | $ | 9.83 | |||||||||||||||
Total Return(a) | 0.41 | %** | 38.05 | % | 31.59 | % | 81.97 | % | (9.09 | )% | 11.22 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 2,890,518 | $ | 3,081,021 | $ | 3,255,865 | $ | 1,799,736 | $ | 1,003,594 | $ | 735,455 | |||||||||||||||
Net expenses to average daily net assets | 1.04 | %* | 1.05 | % | 1.06 | % | 1.08 | % | 1.12 | % | 1.14 | %(b) | |||||||||||||||
Net investment income to average daily net assets | 2.81 | %* | 2.03 | % | 2.13 | % | 2.05 | % | 1.16 | % | 2.27 | % | |||||||||||||||
Portfolio turnover rate | 17 | %** | 41 | % | 57 | % | 46 | % | 59 | % | 74 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.01 | % | 0.02 | % | 0.02 | % | 0.02 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.02 | $ | 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 the 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.
* Annualized.
** Not annualized.
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)
Six Months Ended August 31, 2006 (Unaudited) | 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 | $ | 22.44 | $ | 19.02 | $ | 17.88 | $ | 15.77 | $ | 10.81 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.31 | 0.22 | (0.01 | ) | 0.25 | 0.13 | |||||||||||||||||
Net realized and unrealized gain (loss) | (0.27 | ) | 6.39 | 1.15 | (0.09 | ) | 5.02 | ||||||||||||||||
Total from investment operations | 0.04 | 6.61 | 1.14 | 0.16 | 5.15 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.12 | ) | (0.45 | ) | — | (0.07 | ) | (0.19 | ) | ||||||||||||||
From net realized gains | (2.02 | ) | (2.74 | ) | — | (0.00 | )(b) | — | |||||||||||||||
Total distributions | (2.14 | ) | (3.19 | ) | — | (0.07 | ) | (0.19 | ) | ||||||||||||||
Net asset value, end of period | $ | 20.34 | $ | 22.44 | $ | 19.02 | $ | 15.86 | $ | 15.77 | |||||||||||||
Total Return(c) | 0.41 | %** | 38.12 | % | 6.38 | %** | 1.10 | %** | 47.82 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,239,927 | $ | 1,447,059 | $ | 38,564 | $ | 116,417 | $ | 382,193 | |||||||||||||
Net expenses to average daily net assets | 1.02 | %* | 1.04 | % | 1.03 | %* | 1.05 | %* | 1.07 | %* | |||||||||||||
Net investment income to average daily net assets | 2.83 | %* | 1.06 | % | (0.05 | )%(d)** | 1.70 | %(d)** | 1.69 | %* | |||||||||||||
Portfolio turnover rate | 17 | %** | 41 | % | 57 | %*** | 57 | %*** | 46 | %**** | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.02 | %* | 0.01 | %* | 0.02 | %* | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.03 | $ | 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 the 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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 22.45 | $ | 19.03 | $ | 15.76 | $ | 10.45 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.31 | 0.38 | 0.34 | 0.14 | |||||||||||||||
Net realized and unrealized gain (loss) | (0.26 | ) | 6.23 | 4.41 | 5.42 | ||||||||||||||
Total from investment operations | 0.05 | 6.61 | 4.75 | 5.56 | |||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.12 | ) | (0.45 | ) | (0.33 | ) | (0.25 | ) | |||||||||||
From net realized gains | (2.02 | ) | (2.74 | ) | (1.15 | ) | — | ||||||||||||
Total distributions | (2.14 | ) | (3.19 | ) | (1.48 | ) | (0.25 | ) | |||||||||||
Net asset value, end of period | $ | 20.36 | $ | 22.45 | $ | 19.03 | $ | 15.76 | |||||||||||
Total Return(b) | 0.46 | %** | 38.07 | % | 31.63 | % | 53.62 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 3,118,707 | $ | 3,203,435 | $ | 2,083,376 | $ | 879,837 | |||||||||||
Net expenses to average daily net assets | 0.99 | %* | 1.00 | % | 1.01 | % | 1.04 | %* | |||||||||||
Net investment income to average daily net assets | 2.85 | %* | 1.94 | % | 2.15 | % | 1.54 | %* | |||||||||||
Portfolio turnover rate | 17 | %** | 41 | % | 57 | % | 46 | %*** | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.01 | % | 0.02 | %* | |||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 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 the 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
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its investment objective by outperforming the S&P/IFCI (Investable) Composite Index. The Fund typically makes equity investments in companies whose stocks are traded in the securities markets of the world's non-developed markets, which excludes countries that are included in the MSCI EAFE Index.
Throughout the six months ended August 31, 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. Each class of shares bears a different level of shareholder service fees.
The financial statements of the series 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 generally 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
29
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 pursuant to procedures approved by the Trustees. 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 are generally valued by a third party vendor using fair value prices based on models 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 including 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 lo ss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk
30
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. There were no futures contracts outstanding at the end of the period.
Options
The Fund may write call and put options. 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 t he 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. There were no written option contracts outstanding at the end of the period.
31
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Ther e were no purchased option contracts outstanding at the end of the period.
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. Indexed securities held by the Fund at the end of the period are listed in the Fund's Schedule of Investments.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 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.
32
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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 August 31, 2006, the Fund had loaned securities having a market value of $13,163,400 collateralized by cash in the amount of $13,515,000, which was invested in the Boston Global Investment Trust – Enhanced Portfolio.
Taxes and distributions
The Fund intends to qualify each tax 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 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
33
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 $1,345,518 for potential capital gains and repatriation taxes as of August 31, 2006. The accrual for capital gains and repatriation taxes is included in net unrealized gain (loss) in the Statement of Operations. For the six months ended August 31, 2006, the Fund incurred $279,914 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 six months ended August 31, 2006, the Fund incurred $222,341 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.
As of August 31, 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) | ||||||||||||
$ | 8,099,021,041 | $ | 3,573,766,948 | $ | (306,896,554 | ) | $ | 3,266,870,394 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
For the period ended August 31, 2006, the Fund had gross gains attributed to redemption in-kind transactions of $18,377,059
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal
34
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
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, if any, 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 capit al 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 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. 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 the 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 0.80% 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 six months ended August 31, 2006 and the year ended February 28, 2006, the Fund received $346,598 and $1,258,611 in
35
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
purchase premiums and $7,959,679 and $5,856,660 in redemption fees, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
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 0.81% 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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 custodial fees) exceed 0.81% of the Fund's average daily net assets.
36
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder in the GMO Special Purpose Holding Fund. For the six months ended August 31, 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 six months ended August 31, 2006 was $72,817 and $36,340, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $2,006,029,625 and $2,903,044,375, 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 August 31, 2006, 0.7% of the Fund's shares were held by twenty-nine related parties comprised of certain GMO employee accounts, and 27.1% of the Fund's shares were held by accounts for which the Manager has investment discretion.
37
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 688,986 | $ | 15,273,274 | 11,031,646 | $ | 215,401,452 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 18,992,945 | 377,009,961 | 33,704,110 | 653,183,451 | |||||||||||||||
Shares repurchased | (28,819,262 | ) | (664,854,185 | ) | (64,515,411 | ) | (1,328,070,785 | ) | |||||||||||
Purchase premiums and redemption fees | — | 2,101,114 | — | 2,889,096 | |||||||||||||||
Net increase (decrease) | (9,137,331 | ) | $ | (270,469,836 | ) | (19,779,655 | ) | $ | (456,596,786 | ) | |||||||||
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 5,596,892 | $ | 141,699,131 | 44,751,392 | $ | 920,854,601 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 13,842,879 | 274,227,434 | 21,481,005 | 412,298,040 | |||||||||||||||
Shares repurchased | (14,651,188 | ) | (335,192,592 | ) | (100,173,580 | ) | (1,951,363,075 | ) | |||||||||||
Purchase premiums and redemption fees | — | 2,662,793 | — | 1,273,937 | |||||||||||||||
Net increase (decrease) | 4,788,583 | $ | 83,396,766 | (33,941,183 | ) | $ | (616,936,497 | ) |
38
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class V: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | 89,416,484 | $ | 1,733,477,556 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 6,076,441 | 120,313,533 | 9,153,541 | 184,328,084 | |||||||||||||||
Shares repurchased | (9,617,622 | ) | (217,898,912 | ) | (36,097,525 | ) | (804,319,829 | ) | |||||||||||
Purchase premiums and redemption fees | — | 1,534,912 | — | 611,195 | |||||||||||||||
Net increase (decrease) | (3,541,181 | ) | $ | (96,050,467 | ) | 62,472,500 | $ | 1,114,097,006 | |||||||||||
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 10,569,541 | $ | 239,054,742 | 35,580,099 | $ | 780,535,719 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 14,723,931 | 291,828,314 | 16,848,581 | 326,739,274 | |||||||||||||||
Shares repurchased | (14,783,931 | ) | (318,892,509 | ) | (19,260,319 | ) | (400,468,119 | ) | |||||||||||
Purchase premiums and redemption fees | — | 2,007,458 | — | 2,341,043 | |||||||||||||||
Net increase (decrease) | 10,509,541 | $ | 213,998,005 | 33,168,361 | $ | 709,147,917 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of this affiliated issuer during the six months ended August 31, 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 | $ | 45,402 | $ | — | $ | — | $ | — | $ | 327,027 | $ | 39,193 | |||||||||||||||
Totals | $ | 45,402 | $ | — | $ | — | $ | — | $ | 327,027 | $ | 39,193 |
39
GMO Emerging Markets Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Emerging Markets Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee
40
GMO Emerging Markets Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
41
GMO Emerging Markets Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
42
GMO Emerging Markets Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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.
43
GMO Emerging Markets Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 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 | 1.09 | % | $ | 1,000.00 | $ | 1,004.00 | $ | 5.51 | ||||||||||
2 | ) Hypothetical | 1.09 | % | $ | 1,000.00 | $ | 1,019.71 | $ | 5.55 | ||||||||||
Class IV | |||||||||||||||||||
1 | ) Actual | 1.04 | % | $ | 1,000.00 | $ | 1,004.10 | $ | 5.25 | ||||||||||
2 | ) Hypothetical | 1.04 | % | $ | 1,000.00 | $ | 1,019.96 | $ | 5.30 | ||||||||||
Class V | |||||||||||||||||||
1 | ) Actual | 1.02 | % | $ | 1,000.00 | $ | 1,004.10 | $ | 5.15 | ||||||||||
2 | ) Hypothetical | 1.02 | % | $ | 1,000.00 | $ | 1,020.06 | $ | 5.19 | ||||||||||
Class VI | |||||||||||||||||||
1 | ) Actual | 0.99 | % | $ | 1,000.00 | $ | 1,004.60 | $ | 5.00 | ||||||||||
2 | ) Hypothetical | 0.99 | % | $ | 1,000.00 | $ | 1,020.21 | $ | 5.04 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
44
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Semiannual Report
August 31, 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 also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com.
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Investments Concentration Summary (a)
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 80.1 | % | |||||
Short-Term Investments | 20.4 | ||||||
Futures | 0.4 | ||||||
Call Options Purchased | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Swaps | (0.2 | ) | |||||
Reverse Repurchase Agreements | (0.7 | ) | |||||
Other | 0.0 | ||||||
100.0 | % |
(a) GMO Alternative Asset SPC Ltd. is a 100% owned subsidiary of GMO Alternative Asset Opportunity Fund.
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
1
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 7.6% | |||||||||||
U.S. Government — 7.6% | |||||||||||
15,000,000 | U.S. Treasury Note, 3.75%, due 03/31/07 (a) (b) | 14,879,098 | |||||||||
TOTAL DEBT OBLIGATIONS (COST $15,000,940) | 14,879,098 | ||||||||||
MUTUAL FUNDS — 72.3% | |||||||||||
Affiliated Issuers — 72.3% | |||||||||||
5,409,170 | GMO Short-Duration Collateral Fund | 140,854,778 | |||||||||
TOTAL MUTUAL FUNDS (COST $138,353,824) | 140,854,778 | ||||||||||
SHORT-TERM INVESTMENTS — 20.2% | |||||||||||
Money Market Funds — 3.6% | |||||||||||
6,939,602 | Merrimac U.S. Dollar Cash Fund-Premium Class (b) | 6,939,602 | |||||||||
Other Short-Term Investments — 16.6% | |||||||||||
8,700,000 | Fannie Mae Discount Note, 5.19%, due 09/08/06 (b) | 8,691,220 | |||||||||
7,800,000 | Federal Farm Credit Bank Commercial Paper, 5.10%, due 09/25/06 (b) | 7,773,480 | |||||||||
3,100,000 | Federal Home Loan Bank Discount Note, 5.09%, due 09/29/06 (b) | 3,087,727 | |||||||||
4,800,000 | Federal Home Loan Bank Discount Note, 5.11%, due 09/29/06 (b) | 4,780,923 | |||||||||
8,100,000 | Freddie Mac Discount Note, 5.13%, due 09/19/06 (b) | 8,079,224 | |||||||||
32,412,574 | |||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $39,352,176) | 39,352,176 | ||||||||||
TOTAL INVESTMENTS — 100.1% (Cost $192,706,940) | 195,086,052 | ||||||||||
Other Assets and Liabilities (net) — (0.1)% | (200,561 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 194,885,491 |
See accompanying notes to the financial statements.
2
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Futures Contracts (b)
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
10 | Crude Oil | October 2006 | $ | 702,600 | $ | (36,845 | ) | ||||||||||||
5 | Gasoline NY Unleaded | October 2006 | 374,451 | (32,731 | ) | ||||||||||||||
93 | Gold 100 OZ | December 2006 | 5,898,060 | (108,328 | ) | ||||||||||||||
32 | Lean Hogs | October 2006 | 856,320 | 19,696 | |||||||||||||||
95 | Live Cattle | October 2006 | 3,538,750 | 46,250 | |||||||||||||||
56 | Silver | December 2006 | 3,648,400 | 126,156 | |||||||||||||||
147 | Soybean Oil | December 2006 | 2,270,268 | (86,750 | ) | ||||||||||||||
$ | (72,552 | ) | |||||||||||||||||
Sales | |||||||||||||||||||
29 | Cocoa | December 2006 | $ | 430,650 | $ | 28,541 | |||||||||||||
14 | Coffee "C" | December 2006 | 567,000 | (70 | ) | ||||||||||||||
17 | Copper | December 2006 | 1,468,800 | (6,877 | ) | ||||||||||||||
214 | Corn | December 2006 | 2,653,600 | (50,985 | ) | ||||||||||||||
88 | Cotton No. 2 | December 2006 | 2,423,520 | 44,348 | |||||||||||||||
7 | Heating Oil | October 2006 | 591,263 | 14,915 | |||||||||||||||
24 | Natural Gas | October 2006 | 1,451,520 | 357,570 | |||||||||||||||
112 | Soybean | November 2006 | 3,112,200 | 201,496 | |||||||||||||||
192 | Soybean Meal | December 2006 | 3,098,880 | 263,596 | |||||||||||||||
47 | Sugar (World) | October 2006 | 621,152 | 3,216 | |||||||||||||||
18 | Wheat | December 2006 | 380,025 | (19,431 | ) | ||||||||||||||
$ | 836,319 |
At August 31, 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)
August 31, 2006 (Unaudited)
Swap Agreements
Total Return Swaps (b)
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||||||
96,448,052 | USD | 4/12/2007 | AIG | 3 month | Return on | ||||||||||||||||||||||||||
T-Bill + 0.30% | DJ-AIG | ||||||||||||||||||||||||||||||
Commodity | |||||||||||||||||||||||||||||||
Total Return Index | $ | (552,814 | ) | ||||||||||||||||||||||||||||
$ | (552,814 | ) |
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) 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 — August 31, 2006 (Unaudited)
GMO Alternative Asset Opportunity Fund | GMO Alternative Asset SPC Ltd. | Eliminations | Consolidated Totals | ||||||||||||||||
Assets: | |||||||||||||||||||
Investments in unaffiliated issuers, at value (consolidated cost $54,353,116) (Note 2) | $ | — | $ | 54,231,274 | $ | — | $ | 54,231,274 | |||||||||||
Investments in affiliated issuers, at value (consolidated cost $138,353,824) (Note 2) | 194,924,032 | — | (54,069,254 | ) | 140,854,778 | ||||||||||||||
Cash | 88,150 | — | — | 88,150 | |||||||||||||||
Interest receivable | 748 | 276,243 | — | 276,991 | |||||||||||||||
Receivable for variation margin on open futures contracts (Note 2) | — | 148,886 | — | 148,886 | |||||||||||||||
Receivable for expenses reimbursed by Manager (Note 3) | 9,083 | 7,626 | — | 16,709 | |||||||||||||||
Total assets | 195,022,013 | 54,664,029 | (54,069,254 | ) | 195,616,788 | ||||||||||||||
Liabilities: | |||||||||||||||||||
Payable to affiliate for (Note 3): | |||||||||||||||||||
Management fee | 74,904 | — | — | 74,904 | |||||||||||||||
Shareholder service fee | 24,968 | — | — | 24,968 | |||||||||||||||
Trustees and Chief Compliance Officer fees | 305 | — | — | 305 | |||||||||||||||
Payable for open swap contracts (Note 2) | — | 552,814 | — | 552,814 | |||||||||||||||
Accrued expenses | 36,345 | 41,961 | — | 78,306 | |||||||||||||||
Total liabilities | 136,522 | 594,775 | — | 731,297 | |||||||||||||||
Net assets | $ | 194,885,491 | $ | 54,069,254 | $ | (54,069,254 | ) | $ | 194,885,491 | ||||||||||
Net assets consist of: | |||||||||||||||||||
Net capital(1) | $ | 192,295,426 | $ | 192,295,426 | |||||||||||||||
Net unrealized appreciation | 2,590,065 | 2,590,065 | |||||||||||||||||
$ | 194,885,491 | $ | 194,885,491 | ||||||||||||||||
Shareholders' capital | |||||||||||||||||||
Class III | $ | 194,885,491 | $ | 194,885,491 | |||||||||||||||
Shares outstanding | |||||||||||||||||||
Class III | 6,960,203 | 6,960,203 | |||||||||||||||||
Net asset value per share | |||||||||||||||||||
Class III | $ | 28.00 | $ | 28.00 |
(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 Six Months Ended August 31, 2006 (Unaudited)
GMO Alternative Asset Opportunity Fund | GMO Alternative Asset SPC Ltd. | Eliminations | Consolidated Totals | ||||||||||||||||
Investment Income: | |||||||||||||||||||
Dividend from affiliated issuers (Note 8) | $ | 1,408,261 | $ | — | $ | — | $ | 1,408,261 | |||||||||||
Interest | 5,767 | 1,247,112 | — | 1,252,879 | |||||||||||||||
Total income | 1,414,028 | 1,247,112 | — | 2,661,140 | |||||||||||||||
Expenses: | |||||||||||||||||||
Management fee (Note 3) | 433,592 | — | — | 433,592 | |||||||||||||||
Shareholder service fee – Class III (Note 3) | 144,531 | — | — | 144,531 | |||||||||||||||
Custodian and transfer agent fees | 9,844 | 37,536 | — | 47,380 | |||||||||||||||
Audit and tax fees | 38,364 | 10,120 | — | 48,484 | |||||||||||||||
Legal fees | 2,300 | 2,208 | — | 4,508 | |||||||||||||||
Trustees fees and related expenses (Note 3) | 2,575 | 2,208 | — | 4,783 | |||||||||||||||
Miscellaneous | 1,748 | 460 | — | 2,208 | |||||||||||||||
Total expenses | 632,954 | 52,532 | — | 685,486 | |||||||||||||||
Fees and expenses reimbursed by Manager (Note 3) | (51,704 | ) | (52,532 | ) | — | (104,236 | ) | ||||||||||||
Net expenses | 581,250 | — | — | 581,250 | |||||||||||||||
Net investment income | 832,778 | 1,247,112 | — | 2,079,890 | |||||||||||||||
Realized and unrealized gain (loss): | |||||||||||||||||||
Net realized gain (loss) on: | |||||||||||||||||||
Investments in affiliated issuers | 15,507 | — | — | 15,507 | |||||||||||||||
Closed futures contracts | — | (262,505 | ) | — | (262,505 | ) | |||||||||||||
Closed swap contracts | — | 5,016,523 | — | 5,016,523 | |||||||||||||||
Net realized gain (loss) | 15,507 | 4,754,018 | — | �� | 4,769,525 | ||||||||||||||
Change in net unrealized appreciation (depreciation) on: | |||||||||||||||||||
Investments | 2,489,456 | 45,450 | (200,509 | ) | 2,334,397 | ||||||||||||||
Open futures contracts | — | 539,446 | — | 539,446 | |||||||||||||||
Open swap contracts | — | (384,387 | ) | — | (384,387 | ) | |||||||||||||
Net unrealized gain (loss) | 2,489,456 | 200,509 | (200,509 | ) | 2,489,456 | ||||||||||||||
Net realized and unrealized gain (loss) | 2,504,963 | 4,954,527 | (200,509 | ) | 7,258,981 | ||||||||||||||
Net increase (decrease) in net assets resulting from operations | $ | 3,337,741 | $ | 6,201,639 | $ | (200,509 | ) | $ | 9,338,871 |
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
Six Months Ended August 31, 2006 (Unaudited) | Period from April 11, 2005 (commencement of operations) to February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 2,079,890 | $ | 4,182,122 | |||||||
Net realized gain (loss) | 4,769,525 | 4,551,795 | |||||||||
Change in net unrealized appreciation (depreciation) | 2,489,456 | 100,609 | |||||||||
Net increase (decrease) in net assets from operations | 9,338,871 | 8,834,526 | |||||||||
Fund share transactions: (Note 7) | |||||||||||
Proceeds from sale of shares | |||||||||||
Class III | 4,000,000 | 173,438,589 | |||||||||
Cost of shares repurchased | |||||||||||
Class III | (400,000 | ) | (326,495 | ) | |||||||
Net increase (decrease) in Fund share transactions | 3,600,000 | 173,112,094 | |||||||||
Total increase (decrease) in net assets | 12,938,871 | 181,946,620 | |||||||||
Net assets: | |||||||||||
Beginning of period | 181,946,620 | — | |||||||||
End of period | $ | 194,885,491 | $ | 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 each period)
Six Months Ended August 31, 2006 (Unaudited) | Period from April 11, 2005 (commencement of operations) to February 28, 2006 | ||||||||||
Net asset value, beginning of period | $ | 26.63 | $ | 25.00 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)(a)† | 0.30 | 0.73 | |||||||||
Net realized and unrealized gain (loss) | 1.07 | 0.90 | |||||||||
Total from investment operations | 1.37 | 1.63 | |||||||||
Net asset value, end of period | $ | 28.00 | $ | 26.63 | |||||||
Total Return(b) | 5.14 | %** | 6.52 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 194,885 | $ | 181,947 | |||||||
Net expenses to average daily net assets(c) | 0.60 | %* | 0.61 | %* | |||||||
Net investment income to average daily net assets(a) | 2.16 | %* | 3.12 | %* | |||||||
Portfolio turnover rate | 0 | %** | 13 | %** | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.11 | %* | 0.15 | %* |
(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) 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 the underlying fund(s) (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
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks total return in excess of its benchmark. The Fund's benchmark is a composite of the Dow Jones-AIG Commodity Index (50%) and the JPMorgan 3 Month Cash Index (50%). The Fund seeks indirect exposure to investment returns of commodities and, from time to time, other alternative asset classes. The Fund's investment program has two primary components. One component is intended to gain indirect exposure to the commodity markets through the Fund's investments in a wholly owned subsidiary company, which, in turn, invests in various commodity-related derivatives. The second component of the fund's investment program consists of direct and indirect investments in high quality U.S. and foreign fixed income securities. Normally, the Fund gains exposure to fixed income securities indirectly by investing in GMO Short-Duration Collateral Fund.
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 series 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).
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.
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements include the accounts of the GMO Alternative Asset Opportunity Fund and its wholly owned investment in GMO Alternative Asset SPC Ltd. The consolidated
9
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Unlisted securities for which market quotations are readily available are generally 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 pursuant to procedures approved by the Trustees.
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 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 maker may differ from the value that would be realized if the securities were sold and the differences could be material. As of August 31, 2006, the total value of these securities represented 30.2% of net assets.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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
10
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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. Credit default swaps may be used to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where a party 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. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
11
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no repurchase agreements o utstanding at the end of the period.
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 August 31, 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) | ||||||||||||
$ | 185,966,971 | $ | 9,240,923 | $ | (121,842 | ) | $ | 9,119,081 |
Distributions
The Fund does not intend to make any distributions to its shareholders but may do so in the sole discretion of the Trustees.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No.48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
12
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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, if any, 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 capit al 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 the 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 U.S. 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. Addition ally, 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,
13
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2006 (Unaudited)
the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 Fund's average daily net assets.
The Fund incurs fees and expenses indirectly as a shareholder in the GMO Short-Duration Collateral Fund. For the six months ended August 31, 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 | % | 0.005 | % | 0.006 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $1,011 and $552, 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 manager but does not receive any additional management or other fees for such services.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2006 aggregated $15,408,262 and $700,000, respectively.
14
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 65.9% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. 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 August 31, 2006, all 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:
Six Months Ended August 31, 2006 (Unaudited) | Period from April 11, 2005 (commencement of operations) through February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 142,197 | $ | 4,000,000 | 6,844,512 | $ | 173,438,589 | |||||||||||||
Shares repurchased | (14,441 | ) | (400,000 | ) | (12,065 | ) | (326,495 | ) | |||||||||||
Net Increase (decrease) | 127,756 | $ | 3,600,000 | 6,832,447 | $ | 173,112,094 |
15
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2006 (Unaudited)
8. Investment in affiliated issuer
A summary of the Fund's transactions in the shares of this affiliated issuer during the six months ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Short-Duration Collateral Fund | $ | 123,842,063 | $ | 15,408,262 | $ | 700,000 | $ | 1,408,261 | $ | — | $ | 140,854,778 | |||||||||||||||
Totals | $ | 123,842,063 | $ | 15,408,262 | $ | 700,000 | $ | 1,408,261 | $ | — | $ | 140,854,778 |
16
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Alternative Asset Opportunity Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee arrangement, the Trustees also took into account the sophistication of the investment techniques used to
17
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manag er to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
18
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
19
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.61 | % | $ | 1,000.00 | $ | 1,051.40 | $ | 3.15 | |||||||||||
2) Hypothetical | 0.61 | % | $ | 1,000.00 | $ | 1,022.13 | $ | 3.11 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
20
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 86.4 | % | |||||
Loan Participations | 8.0 | ||||||
Loan Assignments | 6.7 | ||||||
Swaps | 3.3 | ||||||
Call Options Purchased | 1.3 | ||||||
Rights and Warrants | 0.8 | ||||||
Short-Term Investments | 0.7 | ||||||
Promissory Notes | 0.4 | ||||||
Put Options Purchased | 0.1 | ||||||
Single Currency | 0.0 | ||||||
Futures | 0.0 | ||||||
Written Options | (0.1 | ) | |||||
Reverse Repurchase Agreements | (9.7 | ) | |||||
Other | 2.1 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in GMO Emerging Country Debt Fund.
1
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Country Summary** | % of Investments | ||||||
Mexico | 17.8 | % | |||||
Brazil | 14.3 | ||||||
Russia | 9.7 | ||||||
Venezuela | 6.3 | ||||||
Colombia | 5.9 | ||||||
Philippines | 5.6 | ||||||
Turkey | 5.6 | ||||||
Uruguay | 4.6 | ||||||
Ukraine | 4.1 | ||||||
Argentina | 2.8 | ||||||
South Africa | 2.1 | ||||||
Peru | 2.0 | ||||||
Iraq | 1.7 | ||||||
El Salvador | 1.4 | ||||||
Nigeria | 1.3 | ||||||
Pakistan | 1.3 | ||||||
Vietnam | 1.2 | ||||||
Dominican Republic | 1.2 | ||||||
India | 1.1 | ||||||
Serbia | 1.0 | ||||||
Ecuador | 1.0 | ||||||
Trinidad | 1.0 | ||||||
Algeria | 0.9 | ||||||
Ivory Coast | 0.9 | ||||||
Jamaica | 0.7 | ||||||
Malaysia | 0.7 | ||||||
Panama | 0.6 | ||||||
Chile | 0.5 | ||||||
Egypt | 0.5 | ||||||
Poland | 0.5 | ||||||
Africa | 0.5 | ||||||
Indonesia | 0.5 | ||||||
Bosnia | 0.3 | ||||||
Morocco | 0.3 | ||||||
Costa Rica | 0.2 | ||||||
Tunisia | 0.2 | ||||||
Nicaragua | 0.2 | ||||||
China | 0.2 | ||||||
Thailand | 0.2 | ||||||
Belize | 0.1 | ||||||
Romania | (0.1 | ) | |||||
Bulgaria | (0.1 | ) | |||||
Lebanon | (0.2 | ) | |||||
South Korea | (0.6 | ) | |||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in GMO Emerging Country Debt Fund. The table excludes short-term investments and any investment in GMO Emerging Country Debt Fund that are less than 3% of invested assets. The table includes exposure through the use of derivative contracts.
2
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.3% | |||||||||||
Affiliated Issuers — 100.3% | |||||||||||
9,194,108 | GMO Emerging Country Debt Fund, Class III | 102,422,365 | |||||||||
TOTAL MUTUAL FUNDS (COST $101,883,760) | 102,422,365 | ||||||||||
TOTAL INVESTMENTS — 100.3% (Cost $101,883,760) | 102,422,365 | ||||||||||
Other Assets and Liabilities (net) — (0.3%) | (341,722 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 102,080,643 |
See accompanying notes to the financial statements.
3
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in affiliated issuers, at value (cost $101,883,760) (Notes 2 and 8) | $ | 102,422,365 | |||||
Cash | 99,999 | ||||||
Interest receivable | 558 | ||||||
Total assets | 102,522,922 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 427,701 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 190 | ||||||
Accrued expenses | 14,388 | ||||||
Total liabilities | 442,279 | ||||||
Net assets | $ | 102,080,643 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 91,898,441 | |||||
Accumulated undistributed net investment income | 1,008,159 | ||||||
Accumulated net realized gain | 8,635,438 | ||||||
Net unrealized appreciation | 538,605 | ||||||
$ | 102,080,643 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 102,080,643 | |||||
Shares outstanding: | |||||||
Class III | 9,743,599 | ||||||
Net asset value per share: | |||||||
Class III | $ | 10.48 |
See accompanying notes to the financial statements.
4
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 1,037,533 | |||||
Interest | 5,876 | ||||||
Total investment income | 1,043,409 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 10,764 | ||||||
Audit and tax fees | 9,476 | ||||||
Legal fees | 1,196 | ||||||
Trustees fees and related expenses (Note 3) | 1,026 | ||||||
Registration fees | 11,776 | ||||||
Miscellaneous | 1,012 | ||||||
Total expenses | 35,250 | ||||||
Net investment income (loss) | 1,008,159 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 6,384,377 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 2,620,211 | ||||||
Net realized gain (loss) | 9,004,588 | ||||||
Change in net unrealized appreciation (depreciation) on investments | (9,648,448 | ) | |||||
Net realized and unrealized gain (loss) | (643,860 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | 364,299 |
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
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,008,159 | $ | 16,813,503 | |||||||
Net realized gain (loss) | 9,004,588 | 11,837,278 | |||||||||
Change in net unrealized appreciation (depreciation) | (9,648,448 | ) | (714,732 | ) | |||||||
Net increase (decrease) in net assets from operations | 364,299 | 27,936,049 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (18,779,578 | ) | ||||||||
Net realized gains | |||||||||||
Class III | (1,697,427 | ) | (10,909,948 | ) | |||||||
(1,697,427 | ) | (29,689,526 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (85,440,796 | ) | 58,758,037 | ||||||||
Total increase (decrease) in net assets | (86,773,924 | ) | 57,004,560 | ||||||||
Net assets: | |||||||||||
Beginning of period | 188,854,567 | 131,850,007 | |||||||||
End of period (including accumulated undistributed net investment income of $1,008,159 and $0, respectively) | $ | 102,080,643 | $ | 188,854,567 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.32 | $ | 10.54 | $ | 10.05 | $ | 9.56 | $ | 9.25 | $ | 8.90 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.09 | 1.18 | 1.13 | 1.10 | 0.83 | 1.03 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.16 | 0.71 | 0.86 | 1.73 | 0.57 | 0.51 | |||||||||||||||||||||
Total from investment operations | 0.25 | 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 | (0.09 | ) | (0.78 | ) | (0.38 | ) | (0.49 | ) | — | — | |||||||||||||||||
Total distributions | (0.09 | ) | (2.11 | ) | (1.50 | ) | (2.34 | ) | (1.09 | ) | (1.19 | ) | |||||||||||||||
Net asset value, end of period | $ | 10.48 | $ | 10.32 | $ | 10.54 | $ | 10.05 | $ | 9.56 | $ | 9.25 | |||||||||||||||
Total Return | 2.47 | %** | 19.21 | %(b) | 20.27 | %(b) | 29.91 | %(b) | 15.81 | %(b) | 18.47 | %(b) | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 102,081 | $ | 188,855 | $ | 131,850 | $ | 100,943 | $ | 66,140 | $ | 89,952 | |||||||||||||||
Net expenses to average daily net assets(c) | 0.06 | %* | 0.03 | % | 0.00 | %(d) | 0.00 | %(d) | 0.00 | %(d) | 0.00 | %(d) | |||||||||||||||
Net investment income to average daily net assets(a) | 1.67 | %* | 10.91 | % | 10.81 | % | 10.06 | % | 8.88 | % | 11.43 | % | |||||||||||||||
Portfolio turnover rate | 12 | %** | 13 | % | 14 | % | 20 | % | 30 | % | 14 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | — | (e) | 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%.
(e) Effective July 1, 2005, the Fund ceased reimbursing any Fund fees or expenses (See Note 3).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
7
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks high total return. The Fund invests substantially all of its assets in Emerging Country Debt Fund (an arrangement often referred to as a "master-feeder" structure) ("ECDF") and, to a limited extent, in cash and cash equivalents. ECDF invests primarily in sovereign debt of emerging countries. In addition, ECDF may invest a portion of its assets in debt investments issued by companies tied economically to emerging countries and other foreign fixed income securities, including asset-backed securities issued by foreign governments and private issuers. A substantial portion of ECDF's holdings are typically below investment grade. Generally, at least 75% of ECDF's assets are denominated in, or hedged into, U.S. dollars. The Fund's benchmark is the JPMorgan 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.
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.
Investments held by ECDF are valued as follows. 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 generally 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 or procedures are unreliable,
8
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or other persons acting at their direction pursuant to procedures approved by the Trustees
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 ECDF 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. As of August 31, 2006, the total value of these securities represented 36.7% of net assets.
Taxes and distributions
The Fund intends to qualify each tax 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.
As of August 31, 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) | ||||||||||||
$ | 102,097,305 | $ | 325,060 | $ | — | $ | 325,060 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
For the period ended August 31, 2006, the Fund had gross gains attributed to redemption in-kind transactions of $6,647,566.
9
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from ECDF 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 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 ECDF may be waived in extraordinary circumstances if it will not incur transaction costs. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties an d transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
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
10
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
relatively illiquid. Accordingly, ECDF may not be able to realize in an actual sale amounts approximating those 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 offset some of the losses that ECDF might experience in the case of default on bonds issued by such countries; however, ECDF as of August 31, 2006 has sold more of such default protection than it has purchased. 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 EC DF'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 six months ended August 31, 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 | ||||||||||||
0.422 | % | 0.150 | % | 0.437 | % | 1.009 | % |
11
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $658 and $368, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $14,910,848 and $97,924,787, 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
As of August 31, 2006, all 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.
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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,114,256 | $ | 11,354,586 | 4,335,883 | $ | 46,077,234 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 169,743 | 1,697,427 | 3,010,030 | 29,689,525 | |||||||||||||||
Shares repurchased | (9,831,963 | ) | (98,492,809 | ) | (1,562,483 | ) | (17,008,722 | ) | |||||||||||
Net increase (decrease) | (8,547,964 | ) | $ | (85,440,796 | ) | 5,783,430 | $ | 58,758,037 |
12
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of this affiliated issuer during the six months ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class III | $ | 188,700,447 | $ | 14,910,848 | $ | 97,924,787 | $ | 1,037,533 | $ | 2,620,211 | $ | 102,422,365 |
9. Subsequent event
Pursuant to a plan of liquidation adopted by the Fund's Board of Trustees, the Fund was liquidated on September 29, 2006.
13
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Emerging Country Debt Share Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees noted that the Fund invests substantially all of its assets in another series of the Trust, GMO Emerging Country Debt Fund ("ECDF"), and, therefore, that the Fund's investment objective and principal investment strategies are identical to those of EDCF. The Trustees met over the course of the year with the Fund's and ECDF's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and ECDF and the level of skill required to manage the Fund and ECDF. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Ma nager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund and ECDF. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's and ECDF's investment performance relative to their performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed the Fund's and ECDF's performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund or ECDF, as applicable, information prepared by Lipper for ECDF, the volatility of ECDF's returns, as well as factors identified by the Manager as contributing to the Fund's and ECDF's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund and ECDF, the support those personnel received from the Manager, the investment techniques used to manage the Fund and ECDF, and the overall comp etence of the Manager.
14
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
The Trustees gave substantial consideration to the fact that the Fund does not pay an advisory fee to the Manager under the Fund's investment management agreement, but rather pays the Manager its proportionate share of ECDF's advisory fees. The Trustees noted that the portion of ECDF's advisory fees indirectly paid by the Fund to the Manager reflects the management services the Manager provides to both the Fund and ECDF under their respective investment management agreements, and that the Fund's expense ratio reflects total expenses payable by the Fund and ECDF. In evaluating the Fund's advisory fee arrangement, the Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. Also, in evaluating the advisory fees, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund and ECDF, and reviewed informatio n provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund and ECDF, the Trust, and the investment division of the Manager responsible for the management of the Fund and ECDF. For these purposes, the Trustees took into account both the fees paid by the Fund directly to the Manager under the Fund's investment management agreement and indirectly to the Manager as a result of the Fund's investment in ECDF and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered possible economies of scale to the Manager, and concluded that the fees payable under the Fund's and ECDF's agreements appropriately reflected any economies of scale associated with managing the Fund and ECDF. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the Fund's investment management agreement, that the advisory fees payable by the Fund were reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the
15
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
16
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | 1.07 | % | $ | 1,000.00 | $ | 1,024.70 | $ | 5.46 | ||||||||||
2 | ) Hypothetical | 1.07 | % | $ | 1,000.00 | $ | 1,019.82 | $ | 5.44 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
17
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 91.7 | % | |||||
Short-Term Investments | 6.0 | ||||||
Preferred Stocks | 3.4 | ||||||
Debt Obligations | 0.1 | ||||||
Investment Funds | 0.1 | ||||||
Private Equity Securities | 0.1 | ||||||
Convertible Securities | 0.0 | ||||||
Mutual Funds | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Swaps | 0.0 | ||||||
Foward Currency Contracts | (0.1 | ) | |||||
Futures | (0.2 | ) | |||||
Other | (1.1 | ) | |||||
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 International Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Country Summary** | % of Investments | ||||||
Euro Region*** | 27.6 | % | |||||
Japan | 23.4 | ||||||
United Kingdom | 16.6 | ||||||
Korea | 4.7 | ||||||
Taiwan | 3.7 | ||||||
Switzerland | 3.4 | ||||||
Brazil | 3.1 | ||||||
Australia | 2.7 | ||||||
Russia | 2.1 | ||||||
China | 1.9 | ||||||
Sweden | 1.9 | ||||||
South Africa | 1.4 | ||||||
Mexico | 1.2 | ||||||
Singapore | 1.2 | ||||||
Hong Kong | 0.9 | ||||||
Norway | 0.9 | ||||||
India | 0.6 | ||||||
Austria | 0.5 | ||||||
Canada | 0.4 | ||||||
Malaysia | 0.4 | ||||||
Denmark | 0.3 | ||||||
Israel | 0.3 | ||||||
Thailand | 0.3 | ||||||
Poland | 0.2 | ||||||
Indonesia | 0.1 | ||||||
Philippines | 0.1 | ||||||
Turkey | 0.1 | ||||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the 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.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, Netherlands and Spain.
2
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuers — 100.0% | |||||||||||
927,489 | GMO Emerging Countries Fund, Class III | 16,323,801 | |||||||||
6,311,937 | GMO Emerging Markets Fund, Class VI | 128,511,047 | |||||||||
8,694,760 | GMO International Growth Equity Fund, Class IV | 271,711,239 | |||||||||
7,962,245 | GMO International Intrinsic Value Fund, Class IV | 272,786,527 | |||||||||
177,524 | GMO International Small Companies Fund, Class III | 2,373,492 | |||||||||
TOTAL MUTUAL FUNDS (COST $524,728,351) | 691,706,106 | ||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||
20,763 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $20,765 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/13 and a market value, including accrued interest, of $21,178. | 20,763 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $20,763) | 20,763 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $524,749,114) | 691,726,869 | ||||||||||
Other Assets and Liabilities (net) — 0.0% | (25,881 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 691,700,988 |
Notes to Schedule of Investments:
As of August 31, 2006, 84.8% of the Net Assets of the Fund, through investments in the underlying fund(s), were valued using fair value prices based on models used 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 — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $20,763) (Note 2) | $ | 20,763 | |||||
Investments in affiliated issuers, at value (cost $524,728,351) (Notes 2 and 8) | 691,706,106 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 8,591 | ||||||
Total assets | 691,735,460 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 1,386 | ||||||
Accrued expenses | 33,086 | ||||||
Total liabilities | 34,472 | ||||||
Net assets | $ | 691,700,988 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 491,321,911 | |||||
Accumulated undistributed net investment income | 1,266,077 | ||||||
Accumulated net realized gain | 32,135,245 | ||||||
Net unrealized appreciation | 166,977,755 | ||||||
$ | 691,700,988 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 691,700,988 | |||||
Shares outstanding: | |||||||
Class III | 39,678,290 | ||||||
Net asset value per share: | |||||||
Class III | $ | 17.43 |
See accompanying notes to the financial statements.
4
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 1,273,284 | |||||
Interest | 133 | ||||||
Total investment income | 1,273,417 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 23,644 | ||||||
Audit and tax fees | 12,144 | ||||||
Legal fees | 6,716 | ||||||
Trustees fees and related expenses (Note 3) | 5,408 | ||||||
Registration fees | 3,404 | ||||||
Miscellaneous | 5,060 | ||||||
Total expenses | 56,376 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (49,036 | ) | |||||
Net expenses | 7,340 | ||||||
Net investment income (loss) | 1,266,077 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 4,315,956 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 28,560,950 | ||||||
Net realized gain (loss) | 32,876,906 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 7,762,586 | ||||||
Net realized and unrealized gain (loss) | 40,639,492 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 41,905,569 |
See accompanying notes to the financial statements.
5
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,266,077 | $ | 6,521,233 | |||||||
Net realized gain (loss) | 32,876,906 | 51,401,058 | |||||||||
Change in net unrealized appreciation (depreciation) | 7,762,586 | 60,422,264 | |||||||||
Net increase (decrease) in net assets from operations | 41,905,569 | 118,344,555 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (17,722,273 | ) | ||||||||
Net realized gains | |||||||||||
Class III | (29,388,508 | ) | (24,911,633 | ) | |||||||
(29,388,508 | ) | (42,633,906 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 19,657,646 | 94,760,352 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7) | |||||||||||
Class III | 6,024 | 22,825 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 19,663,670 | 94,783,177 | |||||||||
Total increase (decrease) in net assets | 32,180,731 | 170,493,826 | |||||||||
Net assets: | |||||||||||
Beginning of period | 659,520,257 | 489,026,431 | |||||||||
End of period (including accumulated undistributed net investment income of $1,266,077) | $ | 691,700,988 | $ | 659,520,257 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 17.13 | $ | 15.19 | $ | 12.83 | $ | 8.23 | $ | 9.02 | $ | 9.67 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.03 | 0.18 | 0.29 | 0.25 | 0.36 | 0.25 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 1.04 | 2.90 | 2.65 | 4.60 | (0.83 | ) | (0.66 | ) | |||||||||||||||||||
Total from investment operations | 1.07 | 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 | (0.77 | ) | (0.67 | ) | (0.16 | ) | — | — | — | ||||||||||||||||||
Total distributions | (0.77 | ) | (1.14 | ) | (0.58 | ) | (0.25 | ) | (0.32 | ) | (0.24 | ) | |||||||||||||||
Net asset value, end of period | $ | 17.43 | $ | 17.13 | $ | 15.19 | $ | 12.83 | $ | 8.23 | $ | 9.02 | |||||||||||||||
Total Return(b) | 6.38 | %(c)** | 21.15 | %(c) | 23.25 | %(c) | 60.41 | %(c) | (5.58 | )% | (4.26 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 691,701 | $ | 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 | % | 0.00 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 0.37 | %* | 1.15 | % | 2.18 | % | 2.35 | % | 4.11 | % | 2.83 | % | |||||||||||||||
Portfolio turnover rate | 2 | %** | 7 | % | 15 | % | 43 | % | 19 | % | 50 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 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)† | $ | 0.00 | (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 the 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
7
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks total return greater than the MSCI ACWI (All Country World Index) ex-U.S. Index. The Fund is a fund of funds and invests primarily in shares of the GMO International Equity Funds (which may include one or more of the GMO Emerging Markets Funds). The Fund may also invest in shares of other GMO Funds, including the GMO Fixed Income Funds, GMO Alpha Only Fund, and GMO Alternative Asset Opportunity Fund.
The financial statements of the series 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) 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 the underlying fund(s) and other mutual funds are valued at their net asset value.
Investments held by the underlying fund(s) are valued as follows. 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 generally 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
8
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
market prices are not readily available or the Manager believes established valuation methodologies or procedures are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or other persons acting at their direction pursuant to procedures approved by the Trustees. 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 are generally valued by a third party vendor using fair value prices based on models 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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax 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.
9
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 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) | ||||||||||||
$ | 525,463,444 | $ | 166,469,463 | $ | (206,038 | ) | $ | 166,263,425 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from the 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 the 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 0.15% 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
10
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 six months ended August 31, 2006 and the year ended February 28, 2006, the Fund received $1,795 and $228 in purchase premiums and $4,229 and $22,597 in red emption fees, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
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 U.S. 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. Addition ally, 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 the 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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 (excluding expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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).
11
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the six months ended August 31, 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 | |||||||||
0.619 | % | 0.102 | % | 0.721 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $3,660 and $1,932, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $30,914,581 and $10,831,190, 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 August 31, 2006, 26.3% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund.
As of August 31, 2006, less than 0.1% of the Fund's shares were held by five related parties comprised of certain GMO employee accounts.
12
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 68,204 | $ | 1,230,958 | 5,248,587 | $ | 78,942,946 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,639,894 | 27,648,610 | 2,550,396 | 39,686,743 | |||||||||||||||
Shares repurchased | (520,407 | ) | (9,221,922 | ) | (1,499,797 | ) | (23,869,337 | ) | |||||||||||
Purchase premiums and redemption fees | — | 6,024 | — | 22,825 | |||||||||||||||
Net increase (decrease) | 1,187,691 | $ | 19,663,670 | 6,299,186 | $ | 94,783,177 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these affiliated issuers during the six months ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Emerging Countries Fund, Class III | $ | 16,259,817 | $ | 1,513,855 | $ | 160,000 | $ | 63,777 | $ | 1,450,078 | $ | 16,323,801 | |||||||||||||||
GMO Emerging Markets Fund, Class VI | 129,229,135 | 12,246,842 | 1,360,000 | 676,558 | 11,570,286 | 128,511,047 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class III | 254,857,704 | 7,631,870 | 209,193,229 | — | 7,570,473 | — | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | — | 207,623,305 | 1,000,000 | — | — | 271,711,239 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 256,390,561 | 9,154,457 | 6,169,017 | 522,552 | 7,619,905 | 272,786,527 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | 2,806,956 | 360,606 | 565,298 | 10,397 | 350,208 | 2,373,492 | |||||||||||||||||||||
Totals | $ | 659,544,173 | $ | 238,530,935 | $ | 218,447,544 | $ | 1,273,284 | $ | 28,560,950 | $ | 691,706,106 |
13
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO International Equity Allocation Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees gave substantial consideration to the fact that the Fund does not pay an advisory fee to the Manager under the Fund's investment management agreement, but that the Fund indirectly bears advisory fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered the
14
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees noted that they had approved renewal of the Manager's investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in conn ection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust, the Trust, and the investment divisions of the Manager responsible for the management of those funds; information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives to those of the other funds of the Trust; and information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives to those of the other funds of the Trust.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
15
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
16
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | $ | 1,063.80 | $ | 3.75 | ||||||||||
2 | ) Hypothetical | 0.72 | % | $ | 1,000.00 | $ | 1,021.58 | $ | 3.67 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
17
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 59.0 | % | |||||
Debt Obligations | 33.6 | ||||||
Cash and Cash Equivalents | 13.1 | ||||||
Short-Term Investments | 4.3 | ||||||
Preferred Stocks | 1.7 | ||||||
Mutual Funds | 0.7 | ||||||
Loan Assignments | 0.1 | ||||||
Loan Participations | 0.1 | ||||||
Private Equity Securities | 0.1 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Call Options Purchased | 0.0 | ||||||
Convertible Securities | 0.0 | ||||||
Investment Funds | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Put Options Purchased | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | 0.0 | ||||||
Reverse Repurchase Agreements | (0.4 | ) | |||||
Swaps | (4.4 | ) | |||||
Futures | (7.6 | ) | |||||
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 Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Country/Region Summary** | % of Investments | ||||||
United States | 62.2 | % | |||||
Sweden | 7.6 | ||||||
Australia | 7.5 | ||||||
Euro Region*** | 7.4 | ||||||
United Kingdom | 3.3 | ||||||
Korea | 2.7 | ||||||
Taiwan | 1.9 | ||||||
Brazil | 1.8 | ||||||
Russia | 1.4 | ||||||
China | 1.0 | ||||||
Mexico | 0.9 | ||||||
Japan | 0.8 | ||||||
Switzerland | 0.8 | ||||||
South Africa | 0.8 | ||||||
India | 0.5 | ||||||
Singapore | 0.4 | ||||||
Hong Kong | 0.2 | ||||||
Malaysia | 0.2 | ||||||
Norway | 0.2 | ||||||
Thailand | 0.2 | ||||||
Philippines | 0.2 | ||||||
Poland | 0.2 | ||||||
Turkey | 0.2 | ||||||
Austria | 0.1 | ||||||
Denmark | 0.1 | ||||||
Israel | 0.1 | ||||||
Canada | (2.7 | ) | |||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying fund(s). The table excludes short-term investments and any investment in the underlying fund(s) that are less than 3% of invested assets. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, Netherlands and Spain.
2
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuers — 100.0% | |||||||||||
30,079,666 | GMO Alpha Only Fund, Class IV | 313,129,321 | |||||||||
2,185,080 | GMO Alternative Asset Opportunity Fund, Class III | 61,182,235 | |||||||||
23,352,118 | GMO Core Plus Bond Fund, Class IV | 246,364,849 | |||||||||
2,203,682 | GMO Domestic Bond Fund, Class VI | 22,014,787 | |||||||||
1,086,810 | GMO Emerging Countries Fund, Class III | 19,127,865 | |||||||||
980,125 | GMO Emerging Country Debt Fund, Class IV | 10,918,594 | |||||||||
9,515,760 | GMO Emerging Markets Fund, Class VI | 193,740,881 | |||||||||
9,492,308 | GMO Inflation Indexed Plus Bond Fund, Class VI | 245,281,236 | |||||||||
2,492,570 | GMO International Bond Fund, Class III | 24,975,549 | |||||||||
6,153,895 | GMO International Growth Equity Fund, Class IV | 192,309,216 | |||||||||
5,604,613 | GMO International Intrinsic Value Fund, Class IV | 192,014,057 | |||||||||
589,483 | GMO International Small Companies Fund, Class III | 7,881,388 | |||||||||
372,789 | GMO Short-Duration Investment Fund, Class III | 3,396,104 | |||||||||
8,255,443 | GMO Strategic Fixed Income Fund, Class VI | 209,358,036 | |||||||||
26,984,745 | GMO U.S. Core Equity Fund, Class VI | 382,913,536 | |||||||||
9,695,223 | GMO U.S. Quality Equity Fund, Class IV | 201,175,888 | |||||||||
65,739 | GMO U.S. Value Fund, Class III | 670,533 | |||||||||
TOTAL MUTUAL FUNDS (COST $2,187,034,961) | 2,326,454,075 | ||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||
10,828 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $10,829 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/13 and a market value, including accrued interest, of $11,045. | 10,828 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $10,828) | 10,828 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $2,187,045,789) | 2,326,464,903 | ||||||||||
Other Assets and Liabilities (net) — 0.0% | (104,189 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 2,326,360,714 |
See accompanying notes to the financial statements.
3
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Notes to Schedule of Investments:
As of August 31, 2006, 27.1% of the Net Assets of the Fund, through investments in the underlying fund(s), were valued using fair value prices based on models used by a third party vendor (Note 2).
See accompanying notes to the financial statements.
4
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $10,828) (Note 2) | $ | 10,828 | |||||
Investments in affiliated issuers, at value (cost $2,187,034,961) (Notes 2 and 8) | 2,326,454,075 | ||||||
Receivable for investments sold | 15,000 | ||||||
Receivable for Fund shares sold | 31,000,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 12,710 | ||||||
Total assets | 2,357,492,613 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 18,345,052 | ||||||
Payable for Fund shares repurchased | 12,744,235 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 3,493 | ||||||
Accrued expenses | 39,119 | ||||||
Total liabilities | 31,131,899 | ||||||
Net assets | $ | 2,326,360,714 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 2,142,831,621 | |||||
Accumulated undistributed net investment income | 6,121,031 | ||||||
Accumulated net realized gain | 37,988,948 | ||||||
Net unrealized appreciation | 139,419,114 | ||||||
$ | 2,326,360,714 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 2,326,360,714 | |||||
Shares outstanding: | |||||||
Class III | 197,492,340 | ||||||
Net asset value per share: | |||||||
Class III | $ | 11.78 |
See accompanying notes to the financial statements.
5
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 8,765,436 | |||||
Interest | 46,993 | ||||||
Total investment income | 8,812,429 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 26,772 | ||||||
Audit and tax fees | 12,512 | ||||||
Legal fees | 18,584 | ||||||
Trustees fees and related expenses (Note 3) | 14,791 | ||||||
Registration fees | 4,784 | ||||||
Miscellaneous | 14,260 | ||||||
Total expenses | 91,703 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (71,484 | ) | |||||
Net expenses | 20,219 | ||||||
Net investment income (loss) | 8,792,210 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (3,734,476 | ) | |||||
Realized gains distributions from affiliated issuers (Note 8) | 42,015,595 | ||||||
Net realized gain (loss) | 38,281,119 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 4,023,373 | ||||||
Net realized and unrealized gain (loss) | 42,304,492 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 51,096,702 |
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
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 8,792,210 | $ | 43,229,406 | |||||||
Net realized gain (loss) | 38,281,119 | 86,083,499 | |||||||||
Change in net unrealized appreciation (depreciation) | 4,023,373 | 26,009,769 | |||||||||
Net increase (decrease) in net assets from operations | 51,096,702 | 155,322,674 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (4,033,854 | ) | (51,560,906 | ) | |||||||
Net realized gains | |||||||||||
Class III | (42,538,826 | ) | (52,999,421 | ) | |||||||
(46,572,680 | ) | (104,560,327 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 509,244,702 | 730,598,623 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 400,542 | 592,545 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 509,645,244 | 731,191,168 | |||||||||
Total increase (decrease) in net assets | 514,169,266 | 781,953,515 | |||||||||
Net assets: | |||||||||||
Beginning of period | 1,812,191,448 | 1,030,237,933 | |||||||||
End of period (including accumulated undistributed net investment income of $6,121,031 and $1,362,675, respectively) | $ | 2,326,360,714 | $ | 1,812,191,448 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.76 | $ | 11.33 | $ | 10.74 | $ | 8.13 | $ | 8.64 | $ | 8.99 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a) | 0.05 | † | 0.36 | † | 0.27 | † | 0.18 | 0.20 | 0.23 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.22 | 0.86 | 0.90 | 2.68 | (0.28 | ) | (0.20 | ) | |||||||||||||||||||
Total from investment operations | 0.27 | 1.22 | 1.17 | 2.86 | (0.08 | ) | 0.03 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.02 | ) | (0.37 | ) | (0.32 | ) | (0.23 | ) | (0.43 | ) | (0.38 | ) | |||||||||||||||
From net realized gains | (0.23 | ) | (0.42 | ) | (0.26 | ) | (0.02 | ) | — | — | |||||||||||||||||
Total distributions | (0.25 | ) | (0.79 | ) | (0.58 | ) | (0.25 | ) | (0.43 | ) | (0.38 | ) | |||||||||||||||
Net asset value, end of period | $ | 11.78 | $ | 11.76 | $ | 11.33 | $ | 10.74 | $ | 8.13 | $ | 8.64 | |||||||||||||||
Total Return(b) | 2.39 | %(c)** | 11.05 | %(c) | 11.07 | %(c) | 35.53 | %(c) | (1.06 | )% | 0.49 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 2,326,361 | $ | 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 | % | 0.00 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 0.86 | %* | 3.17 | % | 2.53 | % | 2.19 | % | 4.01 | % | 2.66 | % | |||||||||||||||
Portfolio turnover rate | 23 | %** | 16 | % | 10 | % | 59 | % | 61 | % | 25 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.02 | % | 0.03 | % | 0.05 | % | 0.31 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 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 the 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
8
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks total return greater than the GMO Global Balanced Index. The Fund is a fund of funds and invests in shares of other GMO Funds, which may include the GMO U.S. Equity Funds, the GMO International Equity Funds (including one or more of the GMO Emerging Markets Funds), the GMO Fixed Income Funds, GMO Alpha Only Fund, and GMO Alternative Asset Opportunity Fund. The GMO Global Balanced Index is a composite index computed by GMO consisting of: (i) the S&P 500 Index; (ii) the MSCI ACWI (All Country World Index) ex-U.S. Index; and (iii) the Lehman Brothers U.S. Aggregate Index in the following proportions: 48.75% (S&P 500), 16.25% (MSCI ACWI (All Country World Index) ex-U.S. Index), and 35% (Lehman Brothers U.S. Aggregate Index).
The financial statements of the series 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).
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) and other mutual funds are valued at their net asset value.
Investments held by the underlying fund(s) are valued as follows. 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 generally 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
9
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
where market prices are not readily available or the Manager believes established valuation methodologies or procedures are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or other persons acting at their direction pursuant to procedures approved by the Trustees. 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 are generally valued by a third party vendor using fair value prices based on models to the extent that these fair value prices are available.
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 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 maker may differ from the value that would be realized if the securities were sold and the differences could be material. As of August 31, 2006, the total value of these securities represented 12.5% 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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax 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.
10
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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.
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 August 31, 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) | ||||||||||||
$ | 2,187,484,391 | $ | 141,165,518 | $ | (2,185,006 | ) | $ | 138,980,512 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from the 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)
August 31, 2006 (Unaudited)
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 the 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. 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 six months ended August 31, 2006 and the year ended February 28, 2006, the Fund received $391,540 and $562,037 in purchase premiums and $9,002 and $30,508 in redemption fees, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
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 U.S. 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. Addition ally, 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)
August 31, 2006 (Unaudited)
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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 (excluding expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 in the underlying fund(s)).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the six months ended August 31, 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 | ||||||||||||
0.425 | % | 0.091 | % | 0.017 | % | 0.533 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $10,007 and $5,428, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $980,639,755 and $466,759,782, 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
13
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 2006, 20.4% 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 August 31, 2006, 0.2% 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 42,464,345 | $ | 499,501,662 | 59,476,732 | $ | 689,148,423 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 3,875,040 | 44,485,450 | 8,489,047 | 96,761,248 | |||||||||||||||
Shares repurchased | (2,964,037 | ) | (34,742,410 | ) | (4,818,243 | ) | (55,311,048 | ) | |||||||||||
Purchase premium and redemption fees | — | 400,542 | — | 592,545 | |||||||||||||||
Net increase (decrease) | 43,375,348 | $ | 509,645,244 | 63,147,536 | $ | 731,191,168 |
14
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these affiliated issuers during the six months ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Alpha Only Fund, Class III | $ | 239,791,023 | $ | 4,000,000 | $ | 244,652,838 | $ | — | $ | — | $ | — | |||||||||||||||
GMO Alpha Only Fund, Class IV | — | 383,069,208 | 70,250,000 | 1,187,203 | — | 313,129,321 | |||||||||||||||||||||
GMO Alternative Asset Opportunity Fund, Class III | 54,401,971 | 4,000,000 | — | — | — | 61,182,235 | |||||||||||||||||||||
GMO Core Plus Bond Fund, Class IV | 286,341,943 | 58,712,294 | 103,576,295 | — | — | 246,364,849 | |||||||||||||||||||||
GMO Currency Hedged International Bond Fund, Class III | 60,721,936 | — | 59,962,201 | — | — | — | |||||||||||||||||||||
GMO Currency Hedged International Equity Fund, Class III | 69,497,027 | 13,766,491 | 74,791,573 | 895,812 | 12,070,699 | — | |||||||||||||||||||||
GMO Domestic Bond Fund, Class VI | 60,995,048 | 1,057,529 | 40,050,000 | 57,529 | — | 22,014,787 | |||||||||||||||||||||
GMO Emerging Countries Fund, Class III | 18,879,661 | 1,773,901 | — | 74,732 | 1,699,169 | 19,127,865 | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | 10,551,044 | 496,017 | — | 112,208 | 280,992 | 10,918,594 | |||||||||||||||||||||
GMO Emerging Markets Fund, Class VI | 174,293,709 | 36,741,272 | 600,000 | 980,040 | 16,760,338 | 193,740,881 | |||||||||||||||||||||
GMO Inflation Indexed Bond Fund, Class III | 39,248,409 | 69,648,713 | 107,725,392 | 632,284 | — | — | |||||||||||||||||||||
GMO Inflation Indexed Plus Bond Fund, Class VI | — | 238,216,062 | 100,000 | — | — | 245,281,236 | |||||||||||||||||||||
GMO International Bond Fund, Class III | 23,479,744 | 1,000,000 | 597,226 | — | — | 24,975,549 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class III | 147,420,878 | 28,933,783 | 154,370,848 | — | 4,964,556 | — | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | — | 163,840,719 | 260,000 | — | — | 192,309,216 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 146,232,252 | 38,494,678 | 504,999 | 340,832 | 4,970,036 | 192,014,057 |
15
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | $ | 7,727,372 | $ | 1,184,753 | $ | 281,095 | $ | 31,797 | $ | 1,071,009 | $ | 7,881,388 | |||||||||||||||
GMO Short-Duration Investment Fund, Class III | 3,264,489 | 23,816 | — | 15,229 | — | 3,396,104 | |||||||||||||||||||||
GMO Strategic Fixed Income Fund, Class VI | — | 206,836,093 | 99,202 | — | — | 209,358,036 | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | 315,495,777 | 79,880,255 | 6,850,057 | 2,826,317 | — | 382,913,536 | |||||||||||||||||||||
GMO U.S. Quality Equity Fund, Class IV | 153,278,225 | 46,867,603 | — | 1,608,010 | 193,727 | 201,175,888 | |||||||||||||||||||||
GMO U.S. Value Fund, Class III | 665,029 | 8,512 | — | 3,443 | 5,069 | 670,533 | |||||||||||||||||||||
Totals | $ | 1,812,285,537 | $ | 1,378,551,699 | $ | 864,671,726 | $ | 8,765,436 | $ | 42,015,595 | $ | 2,326,454,075 |
16
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Global Balanced Asset Allocation Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees gave substantial consideration to the fact that the Fund does not pay an advisory fee to the Manager under the Fund's investment management agreement, but that the Fund indirectly bears advisory fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered the
17
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees noted that they had approved renewal of the Manager's investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in conn ection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust, the Trust, and the investment divisions of the Manager responsible for the management of those funds; information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives to those of the other funds of the Trust; and information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives to those of the other funds of the Trust.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
18
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
19
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | 0.53 | % | $ | 1,000.00 | $ | 1,023.90 | $ | 2.70 | |||||||||||
2) Hypothetical | 0.53 | % | $ | 1,000.00 | $ | 1,022.53 | $ | 2.70 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
20
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 89.2 | % | |||||
Short-Term Investments | 5.7 | ||||||
Cash and Cash Equivalents | 4.4 | ||||||
Debt Obligations | 4.0 | ||||||
Preferred Stocks | 2.1 | ||||||
Investment Funds | 0.1 | ||||||
Private Equity Securities | 0.1 | ||||||
Call Options Purchased | 0.0 | ||||||
Convertible Securities | 0.0 | ||||||
Loan Assignments | 0.0 | ||||||
Loan Participations | 0.0 | ||||||
Mutual Funds | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Put Options Purchased | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Written Options | 0.0 | ||||||
Reverse Repurchase Agreements | (0.1 | ) | |||||
Swaps | (1.5 | ) | |||||
Futures | (2.6 | ) | |||||
Other | (1.4 | ) | |||||
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 Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Country Summary** | % of Investments | ||||||
United States | 53.1 | % | |||||
Euro Region*** | 11.1 | ||||||
Japan | 9.1 | ||||||
United Kingdom | 6.5 | ||||||
Korea | 3.1 | ||||||
Taiwan | 2.5 | ||||||
Brazil | 2.2 | ||||||
Australia | 1.8 | ||||||
Russia | 1.5 | ||||||
Sweden | 1.5 | ||||||
Switzerland | 1.4 | ||||||
China | 1.3 | ||||||
Mexico | 1.1 | ||||||
South Africa | 1.0 | ||||||
Singapore | 0.5 | ||||||
India | 0.4 | ||||||
Hong Kong | 0.3 | ||||||
Malaysia | 0.3 | ||||||
Norway | 0.3 | ||||||
Austria | 0.2 | ||||||
Israel | 0.2 | ||||||
Thailand | 0.2 | ||||||
Denmark | 0.1 | ||||||
Indonesia | 0.1 | ||||||
Philippines | 0.1 | ||||||
Poland | 0.1 | ||||||
Turkey | 0.1 | ||||||
Canada | (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. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, Netherlands and Spain.
2
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
AFFILIATED ISSUERS — 100.0% | |||||||||||
Mutual Funds — 100.0% | |||||||||||
1,420,325 | GMO Alpha Only Fund, Class IV | 14,785,580 | |||||||||
1,707,442 | GMO Currency Hedged International Equity Fund, Class III | 13,420,495 | |||||||||
329,753 | GMO Emerging Countries Fund, Class III | 5,803,648 | |||||||||
141,983 | GMO Emerging Country Debt Fund, Class IV | 1,581,687 | |||||||||
1,832,554 | GMO Emerging Markets Fund, Class VI | 37,310,804 | |||||||||
159,489 | GMO Inflation Indexed Plus Bond Fund, Class VI | 4,121,203 | |||||||||
1,386,342 | GMO International Growth Equity Fund, Class IV | 43,323,188 | |||||||||
1,265,455 | GMO International Intrinsic Value Fund, Class IV | 43,354,482 | |||||||||
91,454 | GMO International Small Companies Fund, Class III | 1,222,734 | |||||||||
14,465 | GMO Short-Duration Investment Fund, Class III | 131,771 | |||||||||
302,873 | GMO Strategic Fixed Income Fund, Class VI | 7,680,854 | |||||||||
8,678,494 | GMO U.S. Core Equity Fund, Class VI | 123,147,828 | |||||||||
2,412 | GMO U.S. Growth Fund, Class III | 40,591 | |||||||||
1,402,063 | GMO U.S. Quality Equity Fund, Class IV | 29,092,816 | |||||||||
42,125 | GMO U.S. Value Fund, Class III | 429,675 | |||||||||
325,447,356 | |||||||||||
Private Investment Fund — 0.0% | |||||||||||
175 | GMO SPV I, LLC (a) | 407 | |||||||||
TOTAL AFFILIATED ISSUERS (COST $279,853,701) | 325,447,763 |
See accompanying notes to the financial statements.
3
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||
16,444 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $16,445 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/13, and a market value, including accrued interest, of $16,773. | 16,444 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $16,444) | 16,444 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $279,870,145) | 325,464,207 | ||||||||||
Other Assets and Liabilities (net) — 0.0% | (10,601 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 325,453,606 |
Notes to Schedule of Investments:
(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).
As of August 31, 2006, 38.4% of the Net Assets of the Fund, through investments in the underlying fund(s), were valued using fair value prices based on modeling tools by a third party vendor.
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 — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $16,444) (Note 2) | $ | 16,444 | |||||
Investments in affiliated issuers, at value (cost $279,853,701) (Notes 2 and 8) | 325,447,763 | ||||||
Receivable for investments sold | 10,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 6,665 | ||||||
Total assets | 325,480,872 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 569 | ||||||
Accrued expenses | 26,697 | ||||||
Total liabilities | 27,266 | ||||||
Net assets | $ | 325,453,606 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 262,712,255 | |||||
Accumulated undistributed net investment income | 1,798,314 | ||||||
Accumulated net realized gain | 15,348,975 | ||||||
Net unrealized appreciation | 45,594,062 | ||||||
$ | 325,453,606 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 325,453,606 | |||||
Shares outstanding: | |||||||
Class III | 27,991,101 | ||||||
Net asset value per share: | |||||||
Class III | $ | 11.63 |
See accompanying notes to the financial statements.
5
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 1,801,166 | |||||
Interest | 2,167 | ||||||
Total investment income | 1,803,333 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 18,124 | ||||||
Audit and tax fees | 12,144 | ||||||
Legal fees | 3,312 | ||||||
Trustees fees and related expenses (Note 3) | 2,441 | ||||||
Registration fees | 2,944 | ||||||
Miscellaneous | 2,391 | ||||||
Total expenses | 41,356 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (37,996 | ) | |||||
Net expenses | 3,360 | ||||||
Net investment income (loss) | 1,799,973 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 6,837,880 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 8,698,264 | ||||||
Net realized gain (loss) | 15,536,144 | ||||||
Change in net unrealized appreciation (depreciation) on investments | (10,246,198 | ) | |||||
Net realized and unrealized gain (loss) | 5,289,946 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 7,089,919 |
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
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,799,973 | $ | 6,237,589 | |||||||
Net realized gain (loss) | 15,536,144 | 33,832,909 | |||||||||
Change in net unrealized appreciation (depreciation) | (10,246,198 | ) | (94,267 | ) | |||||||
Net increase (decrease) in net assets from operations | 7,089,919 | 39,976,231 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (53,382 | ) | (8,578,882 | ) | |||||||
Net realized gains | |||||||||||
Class III | (13,425,453 | ) | (23,838,281 | ) | |||||||
(13,478,835 | ) | (32,417,163 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 5,793,049 | (17,370,663 | ) | ||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 17,906 | 23,772 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 5,810,955 | (17,346,891 | ) | ||||||||
Total increase (decrease) in net assets | (577,961 | ) | (9,787,823 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 326,031,567 | 335,819,390 | |||||||||
End of period (including accumulated undistributed net investment income of $1,798,314 and $51,723, respectively) | $ | 325,453,606 | $ | 326,031,567 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.89 | �� | $ | 11.63 | $ | 10.86 | $ | 7.51 | $ | 8.66 | $ | 8.92 | ||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a) | 0.07 | † | 0.23 | † | 0.23 | † | 0.14 | 0.15 | 0.23 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.17 | 1.32 | 1.23 | 3.55 | (1.07 | ) | (0.14 | ) | |||||||||||||||||||
Total from investment operations | 0.24 | 1.55 | 1.46 | 3.69 | (0.92 | ) | 0.09 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.00 | )(b) | (0.34 | ) | (0.27 | ) | (0.21 | ) | (0.23 | ) | (0.13 | ) | |||||||||||||||
From net realized gains | (0.50 | ) | (0.95 | ) | (0.42 | ) | (0.13 | ) | — | (0.22 | ) | ||||||||||||||||
Total distributions | (0.50 | ) | (1.29 | ) | (0.69 | ) | (0.34 | ) | (0.23 | ) | (0.35 | ) | |||||||||||||||
Net asset value, end of period | $ | 11.63 | $ | 11.89 | $ | 11.63 | $ | 10.86 | $ | 7.51 | $ | 8.66 | |||||||||||||||
Total Return(c) | 2.19 | %(d)** | 13.91 | %(d) | 13.70 | %(d) | 49.63 | %(d) | (10.84 | )% | 1.12 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 325,454 | $ | 326,032 | $ | 335,819 | $ | 222,856 | $ | 79,736 | $ | 40,124 | |||||||||||||||
Net expenses to average daily net assets(e)(f) | 0.00 | %* | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 1.14 | %* | 1.99 | % | 2.11 | % | 1.99 | % | 3.06 | % | 2.73 | % | |||||||||||||||
Portfolio turnover rate | 11 | %** | 20 | % | 17 | % | 73 | % | 30 | % | 13 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.04 | % | 0.05 | % | 0.07 | % | 0.07 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 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 distribution from net investment income was less than $0.01 per share.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown.
(d) Calculations exclude purchase premiums and redemption fees which are borne by the shareholders.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying fund(s) (See Note 3).
(f) Net expenses to average daily net assets were less than 0.01%.
(g) Purchase premiums and redemption 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.
8
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks total return greater than the GMO Global Equity Index. The GMO Global Equity Index is a composite index computed by GMO consisting of: (i) the S&P 500 Index and (ii) the MSCI ACWI (All Country World Index) ex-U.S. Index in the following proportions: 75% (S&P 500) and 25% (MSCI ACWI (All Country World Index) ex-U.S. Index).The Fund is a fund of funds and invests primarily in shares of the GMO International Equity Funds (which may include one or more of the GMO Emerging Markets Funds) and the GMO U.S. Equity Funds. The Fund may also invest in shares of other GMO Funds, including the GMO Fixed Income Funds, GMO Alpha Only Fund, and GMO Alternative Asset Opportunity Fund.
The financial statements of the series 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).
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 the underlying fund(s) and other mutual funds are valued at their net asset value.
Investments held by the underlying fund(s) are valued as follows. 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 generally
9
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 or procedures are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or other persons acting at their direction pursuant to procedures approved by the Trustees. 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 are generally valued by a third party vendor using fair value price s based on models to the extent that these fair value prices are available.
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 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 maker may differ from the value that would be realized if the securities were sold and the differences could be material. As of August 31, 2006, the total value of these securities represented 0.6% 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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax 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.
10
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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.
As of August 31, 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) | ||||||||||||
$ | 279,960,994 | $ | 45,737,174 | $ | (233,961 | ) | $ | 45,503,213 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from the 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 the underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
11
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. 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 six months ended August 31, 2006 and the year ended February 28, 2006, the Fund received $17,386 and $10,757 in purchase premiums and $520 and $13,015 in redemption fees, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
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 U.S. 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. Addition ally, 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 an advisory fee or shareholder service fee, but receives management and shareholder service fees from the underlying fund(s) in which the Fund invests.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 (excluding expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the
12
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 in the underlying fund(s)).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the six months ended August 31, 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 | ||||||||||||
0.478 | % | 0.084 | % | 0.005 | % | 0.567 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $1,612 and $920, respectively. No remuneration was paid by the Fund to any other officer of the Trust.
4. Purchases and sales of securities
For the six months ended August 31, 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) | 38,383,327 | 35,567,14 |
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.
13
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2006, 36.0% 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 August 31, 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,465,481 | $ | 17,397,371 | 820,653 | $ | 9,603,497 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,104,136 | 12,465,701 | 2,486,440 | 28,419,617 | |||||||||||||||
Shares repurchased | (1,999,379 | ) | (24,070,023 | ) | (4,753,170 | ) | (55,393,777 | ) | |||||||||||
Purchase premiums and redemption fees | — | 17,906 | — | 23,772 | |||||||||||||||
Net increase (decrease) | 570,238 | $ | 5,810,955 | (1,446,077 | ) | $ | (17,346,891 | ) |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these affiliated issuers during the six months ended August 31, 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 | $ | 21,422,854 | $ | — | $ | 21,413,079 | $ | — | $ | — | $ | — | |||||||||||||||
GMO Alpha Only Fund, Class IV | — | 23,098,470 | 8,352,500 | 59,411 | — | 14,785,580 | |||||||||||||||||||||
GMO Currency Hedged International Equity Fund, Class III | 13,917,020 | 2,713,979 | 1,559,059 | 163,319 | 2,200,660 | 13,420,495 |
14
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Emerging Countries Fund, Class III | 6,223,371 | 538,225 | 491,880 | 22,675 | 515,551 | 5,803,648 | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | 1,647,525 | 56,960 | 103,001 | 16,255 | 40,705 | 1,581,687 | |||||||||||||||||||||
GMO Emerging Markets Fund, Class VI | 38,450,725 | 4,633,528 | 2,422,494 | 195,204 | 3,338,324 | 37,310,804 | |||||||||||||||||||||
GMO Inflation Indexed Bond Fund, Class III | 2,698,811 | 1,020,472 | 3,656,067 | 20,472 | — | — | |||||||||||||||||||||
GMO Inflation Indexed Plus Bond Fund, Class VI | — | 3,987,831 | — | — | — | 4,121,203 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class III | 42,494,690 | 2,402,664 | 37,027,669 | — | 1,202,664 | — | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | — | 33,548,487 | — | — | — | 43,323,188 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 43,151,981 | 2,485,763 | 4,503,390 | 82,195 | 1,198,568 | 43,354,482 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | 1,247,841 | 171,092 | 82,158 | 4,933 | 166,158 | 1,222,734 | |||||||||||||||||||||
GMO Short-Duration Investment Fund, Class III | 135,556 | 591 | 8,578 | 591 | — | 131,771 | |||||||||||||||||||||
GMO SPV I, LLC | 740 | — | — | — | 3,410 | 407 | * | ||||||||||||||||||||
GMO Strategic Fixed Income Fund, Class VI | — | 7,572,277 | — | — | — | 7,680,854 | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | 126,071,991 | 8,323,848 | 9,079,416 | 982,958 | — | 123,147,828 | |||||||||||||||||||||
GMO U.S. Growth Fund, Class III | 45,689 | 934 | 2,924 | 181 | 753 | 40,591 | |||||||||||||||||||||
GMO U.S. Quality Equity Fund, Class IV | 28,076,814 | 2,784,318 | 1,797,277 | 250,766 | 28,223 | 29,092,816 | |||||||||||||||||||||
GMO U.S. Value Fund, Class III | 454,865 | 5,454 | 29,221 | 2,206 | 3,248 | 429,675 | |||||||||||||||||||||
Totals | $ | 326,040,473 | $ | 93,344,893 | $ | 90,528,713 | $ | 1,801,166 | $ | 8,698,264 | $ | 325,447,763 |
* After effect of return of capital distributions of $170, $249 and $153 on March 7, 2006, May 24, 2006 and June 15, 2006, respectively.
15
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Global (U.S.+) Equity Allocation Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees gave substantial consideration to the fact that the Fund does not pay an advisory fee to the Manager under the Fund's investment management agreement, but that the Fund indirectly bears advisory fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered the
16
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees noted that they had approved renewal of the Manager's investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in conn ection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust, the Trust, and the investment divisions of the Manager responsible for the management of those funds; information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives to those of the other funds of the Trust; and information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives to those of the other funds of the Trust.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
17
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
18
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | 0.57 | % | $ | 1,000.00 | $ | 1,021.90 | $ | 2.90 | ||||||||||
2 | ) Hypothetical | 0.57 | % | $ | 1,000.00 | $ | 1,022.33 | $ | 2.91 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
19
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 53.3 | % | |||||
Debt Obligations | 34.7 | ||||||
Cash and Cash Equivalents | 23.2 | ||||||
Preferred Stocks | 4.1 | ||||||
Short-Term Investments | 4.0 | ||||||
Mutual Funds | 1.5 | ||||||
Loan Assignments | 0.2 | ||||||
Loan Participations | 0.2 | ||||||
Private Equity Securities | 0.2 | ||||||
Call Options Purchased | 0.1 | ||||||
Investment Funds | 0.1 | ||||||
Rights and Warrants | 0.1 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Convertible Securities | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Put Options Purchased | 0.0 | ||||||
Written Options | 0.0 | ||||||
Reverse Repurchase Agreements | (0.5 | ) | |||||
Swaps | (7.9 | ) | |||||
Futures | (13.3 | ) | |||||
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)
August 31, 2006 (Unaudited)
Country/Region Summary** | % of Investments | ||||||
United States | 49.6 | % | |||||
Sweden | 7.9 | ||||||
Australia | 7.8 | ||||||
Korea | 7.8 | ||||||
Taiwan | 6.2 | ||||||
Brazil | 5.8 | ||||||
Russia | 3.7 | ||||||
China | 3.2 | ||||||
Euro Region*** | 3.0 | ||||||
Mexico | 2.7 | ||||||
South Africa | 2.4 | ||||||
India | 1.2 | ||||||
Malaysia | 0.7 | ||||||
Thailand | 0.6 | ||||||
Israel | 0.5 | ||||||
United Kingdom | 0.5 | ||||||
Philippines | 0.5 | ||||||
Switzerland | 0.4 | ||||||
Poland | 0.4 | ||||||
Turkey | 0.4 | ||||||
Argentina | 0.2 | ||||||
Colombia | 0.2 | ||||||
Indonesia | 0.2 | ||||||
Venezuela | 0.2 | ||||||
Austria | 0.1 | ||||||
Norway | 0.1 | ||||||
Singapore | 0.1 | ||||||
Ukraine | 0.1 | ||||||
Uruguay | 0.1 | ||||||
Canada | (3.0 | ) | |||||
Japan | (3.6 | ) | |||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying fund(s). The table excludes short-term investment(s) and any investment in the underlying fund(s) that is less than 3% of invested assets. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, Netherlands and Spain
2
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuers — 100.0% | |||||||||||
28,210,879 | GMO Alpha Only Fund, Class IV | 293,675,253 | |||||||||
2,398,943 | GMO Alternative Asset Opportunity Fund, Class III | 67,170,407 | |||||||||
2,266,647 | GMO Emerging Country Debt Fund, Class IV | 25,250,452 | |||||||||
15,062,977 | GMO Emerging Markets Fund, Class VI | 306,682,204 | |||||||||
6,146,783 | GMO Inflation Indexed Plus Bond Fund, Class VI | 158,832,875 | |||||||||
1,149,045 | GMO International Growth Equity Fund, Class IV | 35,907,659 | |||||||||
1,032,471 | GMO International Intrinsic Value Fund, Class IV | 35,372,455 | |||||||||
1,708,541 | GMO International Small Companies Fund, Class III | 22,843,198 | |||||||||
8,238,170 | GMO Strategic Fixed Income Fund, Class VI | 208,919,979 | |||||||||
3,535,716 | GMO U.S. Quality Equity Fund, Class IV | 73,366,097 | |||||||||
TOTAL MUTUAL FUNDS (COST $1,135,679,555) | 1,228,020,579 | ||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||
19,683 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/2006, with a maturity value of $19,685 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/2013 and a market value, including accrued interest, of $20,077. | 19,683 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $19,683) | 19,683 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $1,135,699,238) | 1,228,040,262 | ||||||||||
Other Assets and Liabilities (net) — 0.0% | (38,113 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,228,002,149 |
Notes to Schedule of Investments:
As of August 31, 2006, 32.7% of the Net Assets of the Fund, through investments in the underlying fund(s), were valued using fair value prices based on models used 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 — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in affiliated issuers, at value (cost $1,135,679,555) (Notes 2 and 8) | $ | 1,228,020,579 | |||||
Investments in unaffiliated issuers, at value (cost $19,683) (Note 2) | 19,683 | ||||||
Receivable for investments sold | 26,345 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 9,579 | ||||||
Total assets | 1,228,076,186 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 26,470 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 2,380 | ||||||
Accrued expenses | 45,187 | ||||||
Total liabilities | 74,037 | ||||||
Net assets | $ | 1,228,002,149 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 1,098,359,047 | |||||
Accumulated undistributed net investment income | 2,619,247 | ||||||
Accumulated net realized gain | 34,682,831 | ||||||
Net unrealized appreciation | 92,341,024 | ||||||
$ | 1,228,002,149 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 1,228,002,149 | |||||
Shares outstanding: | |||||||
Class III | 45,883,611 | ||||||
Net asset value per share: | |||||||
Class III | $ | 26.76 |
See accompanying notes to the financial statements.
4
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 5,739,389 | |||||
Interest | 1,319 | ||||||
Total investment income | 5,740,708 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 24,748 | ||||||
Audit and tax fees | 12,328 | ||||||
Legal fees | 11,960 | ||||||
Chief Compliance Officer (Note 3) | 3,496 | ||||||
Trustees fees and related expenses (Note 3) | 10,206 | ||||||
Registration fees | 1,288 | ||||||
Miscellaneous | 5,612 | ||||||
Total expenses | 69,638 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (55,936 | ) | |||||
Net expenses | 13,702 | ||||||
Net investment income (loss) | 5,727,006 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (11,493,098 | ) | |||||
Realized gains distributions from affiliated issuers (Note 8) | 46,882,710 | ||||||
Net realized gain (loss) | 35,389,612 | ||||||
Change in net unrealized appreciation (depreciation) on investments | (16,972,924 | ) | |||||
Net realized and unrealized gain (loss) | 18,416,688 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 24,143,694 |
See accompanying notes to the financial statements.
5
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 5,727,006 | $ | 51,944,865 | |||||||
Net realized gain (loss) | 35,389,612 | 101,378,224 | |||||||||
Change in net unrealized appreciation (depreciation) | (16,972,924 | ) | 21,287,396 | ||||||||
Net increase (decrease) in net assets from operations | 24,143,694 | 174,610,485 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (3,177,300 | ) | (61,779,932 | ) | |||||||
Net realized gains | |||||||||||
Class III | (63,023,707 | ) | (57,743,585 | ) | |||||||
(66,201,007 | ) | (119,523,517 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 62,430,032 | 84,329,738 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 4,709 | 109,413 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 62,434,741 | 84,439,151 | |||||||||
Total increase (decrease) in net assets | 20,377,428 | 139,526,119 | |||||||||
Net assets: | |||||||||||
Beginning of period | 1,207,624,721 | 1,068,098,602 | |||||||||
End of period (including accumulated undistributed net investment income of $2,619,247 and $69,541, respectively) | $ | 1,228,002,149 | $ | 1,207,624,721 |
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)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 27.76 | $ | 26.50 | $ | 24.28 | $ | 20.00 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)(b) | 0.13 | † | 1.26 | † | 0.98 | † | 0.61 | ||||||||||||
Net realized and unrealized gain (loss) | 0.39 | 2.93 | 3.00 | 4.53 | |||||||||||||||
Total from investment operations | 0.52 | 4.19 | 3.98 | 5.14 | |||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.07 | ) | (1.51 | ) | (0.99 | ) | (0.75 | ) | |||||||||||
From net realized gains | (1.45 | ) | (1.42 | ) | (0.77 | ) | (0.11 | ) | |||||||||||
Total distributions | (1.52 | ) | (2.93 | ) | (1.76 | ) | (0.86 | ) | |||||||||||
Net asset value, end of period | $ | 26.76 | $ | 27.76 | $ | 26.50 | $ | 24.28 | |||||||||||
Total Return(c) | 2.00 | %** | 16.50 | % | 16.74 | % | 25.92 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 1,228,002 | $ | 1,207,625 | $ | 1,068,099 | $ | 287,490 | |||||||||||
Net expenses to average daily net assets(d)(e) | 0.00 | %* | 0.00 | % | 0.00 | % | 0.00 | %* | |||||||||||
Net investment income to average daily net assets(b) | 0.94 | %* | 4.64 | % | 3.92 | % | 5.05 | %* | |||||||||||
Portfolio turnover rate | 44 | %** | 47 | % | 50 | % | 24 | %** | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.02 | % | 0.07 | %* | |||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 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 the 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
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks positive total return. The Fund does not seek to control risk relative to a particular securities market index or benchmark. In addition, the Fund does not seek to outperform a particular securities market index or blend of market indices. The Fund is a fund of funds and invests in shares of other GMO Funds, which may include the GMO International Equity Funds (including one or more of the GMO Emerging Markets Funds), the GMO U.S. Equity Funds, the GMO Fixed Income Funds, GMO Alpha Only Fund, and GMO Alternative Asset Opportunity Fund. The Fund is not restricted in its exposure to any particular asset class, and at times may be substantially invested in the underlying fund(s) that primarily invest in a single asset class. In addition, the Fund is not restricted in its expo sure to any particular market.
The financial statements of the series 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).
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 the underlying fund(s) and other mutual funds are valued at their net asset value.
Investments held by the underlying fund(s) are valued as follows. 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
8
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
quoted bid price. Unlisted securities for which market quotations are readily available are generally 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 or procedures are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or other persons acting at their direction pursuant to procedures approved by the Trustees. 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 are generally valued by a third party vendor using fair value prices based on models to the extent that these fair value prices are available.
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 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 maker may differ from the value that would be realized if the securities were sold and the differences could be material. As of August 31, 2006, the total value of these securities represented 6.4% 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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax 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
9
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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.
As of August 31, 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) | ||||||||||||
$ | 1,136,171,556 | $ | 94,794,993 | $ | (2,926,287 | ) | $ | 91,868,706 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from the 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
10
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 the 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 0.24% and 0.24%, of the amount invested or redeemed, 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 redemption fee in an amount approximately equal to the fee in the amount approximately equal to the fee with respect to that portion. In addition, the pur chase 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 six months ended August 31, 2006 and for the year ended February 28, 2006, the Fund received $2,496 and $23,654 in purchase premiums and $2,213 and $85,759 in redemption fees, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
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 U.S. 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. Addition ally, 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.
11
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 (excluding expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 in the underlying fund(s)).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the six months ended August 31, 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 | ||||||||||||
0.536 | % | 0.093 | % | 0.034 | % | 0.663 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $6,894 and $3,496, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $575,948,717 and $527,121,512, 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
12
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 August 31, 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.
As of August 31, 2006, 1.8% of the Fund's shares were held by twenty 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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 36,412 | $ | 1,008,469 | 302,694 | $ | 8,228,184 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 2,383,074 | 62,388,881 | 4,145,312 | 110,385,444 | |||||||||||||||
Shares repurchased | (36,604 | ) | (967,318 | ) | (1,246,919 | ) | (34,283,890 | ) | |||||||||||
Purchase premiums and redemption fees | — | 4,709 | — | 109,413 | |||||||||||||||
Net increase (decrease) | 2,382,882 | $ | 62,434,741 | 3,201,087 | $ | 84,439,151 |
13
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these affiliated issuers during the six months ended August 31, 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 | $ | 298,647,908 | $ | — | $ | 300,151,569 | $ | — | $ | — | $ | — | |||||||||||||||
GMO Alpha Only Fund, Class IV | — | 344,045,851 | 50,000,000 | 1,179,639 | — | 293,675,253 | |||||||||||||||||||||
GMO Alternative Asset Opportunity Fund, Class III | 63,883,855 | — | — | — | — | 67,170,407 | |||||||||||||||||||||
GMO Core Plus Bond Fund, Class IV | 42,247,589 | 10,005,000 | 51,902,781 | — | — | — | |||||||||||||||||||||
GMO Currency Hedged International Bond Fund, Class III | 187,264,495 | — | 184,063,805 | — | — | — | |||||||||||||||||||||
GMO Currency Hedged International Equity Fund, Class III | 77,687,695 | 14,626,073 | 82,772,684 | 1,010,467 | 13,615,607 | — | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | 24,640,997 | 909,318 | — | 259,494 | 649,824 | 25,250,452 | |||||||||||||||||||||
GMO Emerging Markets Fund, Class VI | 305,265,395 | 29,044,405 | — | 1,604,513 | 27,439,892 | 306,682,204 | |||||||||||||||||||||
GMO Inflation Indexed Bond Fund, Class III | 53,126,931 | 101,788,390 | 153,669,578 | 901,949 | — | — | |||||||||||||||||||||
GMO Inflation Indexed Plus Bond Fund, Class VI | — | 153,669,578 | — | — | — | 158,832,875 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class III | 33,771,273 | 1,008,620 | 30,924,216 | — | 1,008,620 | — | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | — | 30,924,216 | 405,756 | — | — | 35,907,659 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 34,736,907 | 1,049,936 | 2,211,414 | 67,381 | 982,555 | 35,372,455 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | 23,900,156 | 3,204,822 | 2,095,494 | 92,404 | 3,112,417 | 22,843,198 | |||||||||||||||||||||
GMO Strategic Fixed Income Fund, Class VI | — | 205,954,587 | — | — | — | 208,919,979 | |||||||||||||||||||||
GMO U.S. Quality Equity Fund, Class IV | 62,486,196 | 10,793,706 | — | 623,542 | 73,795 | 73,366,097 | |||||||||||||||||||||
Totals | $ | 1,207,659,397 | $ | 907,024,502 | $ | 858,197,297 | $ | 5,739,389 | $ | 46,882,710 | $ | 1,228,020,579 |
14
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Benchmark-Free Allocation Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to a comparative index, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees gave substantial consideration to the fact that the Fund does not pay an advisory fee to the Manager under the Fund's investment management agreement, but that the Fund indirectly bears advisory fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered the
15
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees noted that they had approved renewal of the Manager's investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in conn ection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust, the Trust, and the investment divisions of the Manager responsible for the management of those funds; information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives to those of the other funds of the Trust; and information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives to those of the other funds of the Trust.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
16
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
17
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | 0.66 | % | $ | 1,000.00 | $ | 1,020.00 | $ | 3.36 | |||||||||||
2) Hypothetical | 0.66 | % | $ | 1,000.00 | $ | 1,021.88 | $ | 3.36 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
18
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 94.9 | % | |||||
Short-Term Investments | 6.1 | ||||||
Preferred Stocks | 0.8 | ||||||
Mutual Funds | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Futures | (0.1 | ) | |||||
Forward Currency Contracts | (0.1 | ) | |||||
Other | (1.6 | ) | |||||
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 World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Country Summary** | % of Investments | ||||||
United States | 34.0 | % | |||||
Euro Region*** | 20.3 | ||||||
Japan | 17.3 | ||||||
United Kingdom | 12.3 | ||||||
Switzerland | 2.4 | ||||||
Australia | 2.0 | ||||||
Korea | 1.4 | ||||||
Sweden | 1.4 | ||||||
Taiwan | 1.1 | ||||||
Russia | 0.9 | ||||||
Singapore | 0.9 | ||||||
Brazil | 0.7 | ||||||
China | 0.7 | ||||||
Hong Kong | 0.7 | ||||||
Norway | 0.6 | ||||||
South Africa | 0.6 | ||||||
India | 0.5 | ||||||
Austria | 0.4 | ||||||
Mexico | 0.4 | ||||||
Canada | 0.3 | ||||||
Denmark | 0.2 | ||||||
Israel | 0.2 | ||||||
Malaysia | 0.2 | ||||||
Chile | 0.1 | ||||||
Indonesia | 0.1 | ||||||
Poland | 0.1 | ||||||
Thailand | 0.1 | ||||||
Turkey | 0.1 | ||||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying fund(s). The table excludes short-term investments and any investment in the underlying fund(s) that are less than 3% of invested assets. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, Netherlands and Spain.
2
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuers — 100.0% | |||||||||||
6,479,317 | GMO Currency Hedged International Equity Fund, Class III | 50,927,431 | |||||||||
5,148,819 | GMO Emerging Markets Quality Fund, Class VI | 53,650,691 | |||||||||
5,782,375 | GMO International Growth Equity Fund, Class IV | 180,699,227 | |||||||||
5,276,305 | GMO International Intrinsic Value Fund, Class IV | 180,766,198 | |||||||||
54,322 | GMO International Small Companies Fund, Class III | 726,290 | |||||||||
12,480,459 | GMO U.S. Core Equity Fund, Class VI | 177,097,710 | |||||||||
3,082,074 | GMO U.S. Quality Equity Fund, Class IV | 63,953,034 | |||||||||
TOTAL MUTUAL FUNDS (COST $683,475,607) | 707,820,581 | ||||||||||
SHORT-TERM INVESTMENTS — 0.1% | |||||||||||
515,063 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $515,114 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/13, and a market value, including accrued interest, of $525,365. | 515,063 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $515,063) | 515,063 | ||||||||||
TOTAL INVESTMENTS — 100.1% (Cost $683,990,670) | 708,335,644 | ||||||||||
Other Assets and Liabilities (net) — (0.1%) | (490,034 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 707,845,610 |
Notes to Schedule of Investments:
As of August 31, 2006, 57.9% of the Net Assets of the Fund, through investments in the underlying fund(s), were valued using fair value prices based on models used 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 — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $515,063) (Note 2) | $ | 515,063 | |||||
Investments in affiliated issuers, at value (cost $683,475,607) (Notes 2 and 8) | 707,820,581 | ||||||
Interest receivable | 98 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 10,354 | ||||||
Total assets | 708,346,096 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 490,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 752 | ||||||
Accrued expenses | 9,734 | ||||||
Total liabilities | 500,486 | ||||||
Net assets | $ | 707,845,610 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 665,319,588 | |||||
Accumulated undistributed net investment income | 2,256,680 | ||||||
Accumulated net realized gain | 15,924,368 | ||||||
Net unrealized appreciation | 24,344,974 | ||||||
$ | 707,845,610 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 707,845,610 | |||||
Shares outstanding: | |||||||
Class III | 30,272,579 | ||||||
Net asset value per share: | |||||||
Class III | $ | 23.38 |
See accompanying notes to the financial statements.
4
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 2,233,677 | |||||
Interest | 28,711 | ||||||
Total investment income | 2,262,388 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 17,848 | ||||||
Audit and tax fees | 12,144 | ||||||
Legal fees | 3,864 | ||||||
Trustees fees and related expenses (Note 3) | 3,554 | ||||||
Registration fees | 10,120 | ||||||
Miscellaneous | 2,851 | ||||||
Total expenses | 50,381 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (45,724 | ) | |||||
Net expenses | 4,657 | ||||||
Net investment income (loss) | 2,257,731 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 97,885 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 15,829,041 | ||||||
Net realized gain (loss) | 15,926,926 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 7,830,221 | ||||||
Net realized and unrealized gain (loss) | 23,757,147 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 26,014,878 |
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
Six Months Ended August 31, 2006 (Unaudited) | Period from June 16, 2005 (commencement of operations) through February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 2,257,731 | $ | 2,779,142 | |||||||
Net realized gain (loss) | 15,926,926 | 6,165,975 | |||||||||
Change in net unrealized appreciation (depreciation) | 7,830,221 | 16,514,753 | |||||||||
Net increase (decrease) in net assets from operations | 26,014,878 | 25,459,870 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (23,241 | ) | (3,995,989 | ) | |||||||
Net realized gains | |||||||||||
Class III | (3,253,758 | ) | (1,675,738 | ) | |||||||
(3,276,999 | ) | (5,671,727 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 277,766,177 | 387,323,355 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 111,447 | 118,609 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 277,877,624 | 387,441,964 | |||||||||
Total increase (decrease) in net assets | 300,615,503 | 407,230,107 | |||||||||
Net assets: | |||||||||||
Beginning of period | 407,230,107 | — | |||||||||
End of period (including accumulated undistributed net investment income of $2,256,680 and $22,190, respectively) | $ | 707,845,610 | $ | 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 each period)
Six Months Ended August 31, 2006 (Unaudited) | Period from June 16, 2005 (commencement of operations) through February 28, 2006 | ||||||||||
Net asset value, beginning of period | $ | 22.49 | $ | 20.00 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)(a)† | 0.10 | 0.37 | |||||||||
Net realized and unrealized gain (loss) | 0.93 | 2.78 | |||||||||
Total from investment operations | 1.03 | 3.15 | |||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | (0.00 | )(b) | (0.46 | ) | |||||||
From net realized gains | (0.14 | ) | (0.20 | ) | |||||||
Total distributions | (0.14 | ) | (0.66 | ) | |||||||
Net asset value, end of period | $ | 23.38 | $ | 22.49 | |||||||
Total Return(c) | 4.61 | %** | 15.90 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 707,846 | $ | 407,230 | |||||||
Net expenses to average daily net assets(d)(e) | 0.00 | %* | 0.00 | %* | |||||||
Net investment income to average daily net assets(a) | 0.87 | %* | 2.42 | %* | |||||||
Portfolio turnover rate | 1 | %** | 5 | %** | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.06 | %* | |||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 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 distribution from net investment income calculated to less than $0.01 per share.
(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 the 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.
* 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
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks total return greater than the MSCI World Index. The Fund is a fund of funds and invests primarily in shares of the GMO International Equity Funds (which may include one or more of the GMO Emerging Markets Funds) and the GMO U.S. Equity Funds. The Fund may also invest in shares of other GMO Funds, including the GMO Fixed Income Funds, GMO Alpha Only Fund, and GMO Alternative Asset Opportunity Fund.
The financial statements of the series 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) 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) and other mutual funds are valued at their net asset value.
Investments held by the underlying fund(s) are valued as follows. 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 generally 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 or
8
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
procedures are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or other persons acting at their direction pursuant to procedures approved by the Trustees.
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 are generally valued by a third party vendor using fair value prices based on models 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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax 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.
9
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 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) | ||||||||||||
$ | 684,107,494 | $ | 28,787,961 | $ | (4,559,811 | ) | $ | 24,228,150 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from the 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 the 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 underlying fund(s) in which the Fund was invested. The level of purchase premium and redemption fee for
10
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 six months ended August 31, 2006 and the period ended February 28, 2006, the Fund received $110,587 and $118,609 in purchase premiums and $860 and $0 in redemption fees, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
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 U.S. 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. Addition ally, 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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 (excluding expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 in the underlying fund(s)).
11
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the period ended August 31, 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 | |||||||||
0.464 | % | 0.096 | % | 0.560 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the period ended August 31, 2006, was $2,358 and $1,104, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $296,527,327 and $3,877,987, 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 August 31, 2006, 44.6% 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.
12
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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:
Six Months Ended August 31, 2006 (Unaudited) | Period from June 16, 2005 (commencement of operations) through February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 12,123,230 | $ | 276,856,924 | 17,845,201 | $ | 381,651,629 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 144,865 | 3,276,853 | 263,434 | 5,671,726 | |||||||||||||||
Shares repurchased | (104,151 | ) | (2,367,600 | ) | — | — | |||||||||||||
Purchase premiums and redemption fees | — | 111,447 | — | 118,609 | |||||||||||||||
Net increase (decrease) | 12,163,944 | $ | 277,877,624 | 18,108,635 | $ | 387,441,964 |
13
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these affiliated issuers during the six months ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Alpha Only Fund, Class III | $ | 1,638,184 | $ | — | $ | 1,654,388 | $ | — | $ | — | $ | — | |||||||||||||||
GMO Alpha Only Fund, Class IV | — | 1,691,404 | 1,663,087 | — | — | — | |||||||||||||||||||||
GMO Currency Hedged International Equity Fund, Class III | 34,585,400 | 22,143,644 | 650,000 | 500,750 | 6,747,390 | 50,927,431 | |||||||||||||||||||||
GMO Emerging Markets Quality Fund, Class VI | 33,548,336 | 19,660,494 | — | 84,735 | 1,066,887 | 53,650,691 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class III | 102,531,806 | 34,747,803 | 133,101,521 | — | 3,938,169 | — | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | — | 170,491,521 | — | — | — | 180,699,227 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 102,528,906 | 71,987,358 | 793,622 | 269,409 | 3,928,544 | 180,766,198 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | 679,653 | 116,173 | �� | 2,930 | 98,696 | 726,290 | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | 97,470,295 | 80,595,552 | 11,278 | 973,200 | — | 177,097,710 | |||||||||||||||||||||
GMO U.S. Quality Equity Fund, Class IV | 34,260,556 | 29,089,287 | — | 402,653 | 49,355 | 63,953,034 | |||||||||||||||||||||
Totals | $ | 407,243,136 | $ | 430,523,236 | $ | 137,873,896 | $ | 2,233,677 | $ | 15,829,041 | $ | 707,820,581 |
14
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO World Opportunities Equity Allocation Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees gave substantial consideration to the fact that the Fund does not pay an advisory fee to the Manager under the Fund's investment management agreement, but that the Fund indirectly bears advisory fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered the
15
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees noted that they had approved renewal of the Manager's investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in conn ection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust, the Trust, and the investment divisions of the Manager responsible for the management of those funds; information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives to those of the other funds of the Trust; and information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives to those of the other funds of the Trust.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
16
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
17
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | $ | 1,046.10 | $ | 2.89 | ||||||||||
2 | ) Hypothetical | 0.56 | % | $ | 1,000.00 | $ | 1,022.38 | $ | 2.85 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
18
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Semiannual Report
August 31, 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 Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 60.1 | % | |||||
Debt Obligations | 35.3 | ||||||
Short-Term Investments | 4.5 | ||||||
Preferred Stocks | 0.8 | ||||||
Loan Assignments | 0.1 | ||||||
Loan Participations | 0.1 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Swaps | 0.1 | ||||||
Call Options Purchased | 0.0 | ||||||
Mutual Funds | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Put Options Purchased | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | 0.0 | ||||||
Futures | (0.2 | ) | |||||
Reverse Repurchase Agreements | (0.4 | ) | |||||
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 Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Country/Region Summary** | % of Investments | ||||||
United States | 41.3 | % | |||||
Euro Region*** | 15.5 | ||||||
Australia | 8.3 | ||||||
Sweden | 8.1 | ||||||
United Kingdom | 8.0 | ||||||
Japan | 7.6 | ||||||
Korea | 1.8 | ||||||
Switzerland | 1.6 | ||||||
Taiwan | 1.3 | ||||||
Russia | 1.2 | ||||||
Brazil | 1.1 | ||||||
China | 0.9 | ||||||
South Africa | 0.9 | ||||||
Mexico | 0.8 | ||||||
India | 0.7 | ||||||
Singapore | 0.6 | ||||||
Hong Kong | 0.4 | ||||||
Norway | 0.4 | ||||||
Israel | 0.3 | ||||||
Poland | 0.3 | ||||||
Argentina | 0.2 | ||||||
Austria | 0.2 | ||||||
Indonesia | 0.2 | ||||||
Malaysia | 0.2 | ||||||
Philippines | 0.2 | ||||||
Chile | 0.1 | ||||||
Denmark | 0.1 | ||||||
Thailand | 0.1 | ||||||
Turkey | 0.1 | ||||||
Canada | (2.5 | ) | |||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the 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. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands and Spain.
2
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuers — 100.0% | |||||||||||
4,512,493 | GMO Core Plus Bond Fund, Class IV | 47,606,798 | |||||||||
99,769 | GMO Emerging Country Debt Fund, Class IV | 1,111,423 | |||||||||
3,650,543 | GMO Emerging Markets Quality Fund, Class VI | 38,038,653 | |||||||||
2,332,490 | GMO Inflation Indexed Plus Bond Fund, Class VI | 60,271,539 | |||||||||
1,242,298 | GMO International Bond Fund, Class III | 12,447,823 | |||||||||
2,615,981 | GMO International Growth Equity Fund, Class IV | 81,749,419 | |||||||||
2,383,902 | GMO International Intrinsic Value Fund, Class IV | 81,672,483 | |||||||||
92,899 | GMO International Small Companies Fund, Class III | 1,242,065 | |||||||||
1,452,083 | GMO Strategic Fixed Income Fund, Class VI | 36,824,823 | |||||||||
2,513,359 | GMO U.S. Core Equity Fund, Class VI | 35,664,559 | |||||||||
1,815,341 | GMO U.S. Quality Equity Fund, Class IV | 37,668,329 | |||||||||
TOTAL MUTUAL FUNDS (COST $410,638,605) | 434,297,914 | ||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||
19,746 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $19,748 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/13, and a market value, including accrued interest, of $20,141. | 19,746 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $19,746) | 19,746 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $410,658,351) | 434,317,660 | ||||||||||
Other Assets and Liabilities (net) — 0.0% | 89,130 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 434,406,790 |
Notes to Schedule of Investments:
As of August 31, 2006, 39.9% of the Net Assets of the Fund, through investments in the underlying fund(s), were valued using fair value prices based on models used by a third party vendor (Note 2).
See accompanying notes to the financial statements.
3
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $19,746) (Note 2) | $ | 19,746 | |||||
Investments in affiliated issuers, at value (cost $410,638,605) (Notes 2 and 8) | 434,297,914 | ||||||
Receivable for Fund shares sold | 17,025,989 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 8,339 | ||||||
Total assets | 451,351,988 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 16,916,100 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 618 | ||||||
Accrued expenses | 28,480 | ||||||
Total liabilities | 16,945,198 | ||||||
Net assets | $ | 434,406,790 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 403,106,490 | |||||
Accumulated undistributed net investment income | 1,005,467 | ||||||
Accumulated net realized gain | 6,635,524 | ||||||
Net unrealized appreciation | 23,659,309 | ||||||
$ | 434,406,790 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 434,406,790 | |||||
Shares outstanding: | |||||||
Class III | 18,760,023 | ||||||
Net asset value per share: | |||||||
Class III | $ | 23.16 |
See accompanying notes to the financial statements.
4
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 1,016,481 | |||||
Interest | 4,995 | ||||||
Total investment income | 1,021,476 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 21,528 | ||||||
Audit and tax fees | 12,144 | ||||||
Legal fees | 3,496 | ||||||
Trustees fees and related expenses (Note 3) | 3,065 | ||||||
Registration fees | 4,876 | ||||||
Miscellaneous | 2,668 | ||||||
Total expenses | 47,777 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (43,700 | ) | |||||
Net expenses | 4,077 | ||||||
Net investment income (loss) | 1,017,399 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 1,006,177 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 5,771,159 | ||||||
Net realized gain (loss) | 6,777,336 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 10,406,633 | ||||||
Net realized and unrealized gain (loss) | 17,183,969 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 18,201,368 |
See accompanying notes to the financial statements.
5
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Period from May 31, 2005 (commencement of operations) through February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,017,399 | $ | 4,730,747 | |||||||
Net realized gain (loss) | 6,777,336 | 5,787,736 | |||||||||
Change in net unrealized appreciation (depreciation) | 10,406,633 | 13,252,676 | |||||||||
Net increase (decrease) in net assets from operations | 18,201,368 | 23,771,159 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (53,833 | ) | (6,503,776 | ) | |||||||
Net realized gains | |||||||||||
Class III | (4,701,400 | ) | (316,251 | ) | |||||||
(4,755,233 | ) | (6,820,027 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 54,306,084 | 349,524,197 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 32,242 | 147,000 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 54,338,326 | 349,671,197 | |||||||||
Total increase (decrease) in net assets | 67,784,461 | 366,622,329 | |||||||||
Net assets: | |||||||||||
Beginning of period | 366,622,329 | — | |||||||||
End of period (including accumulated undistributed net investment income of $1,005,467 and $41,901, respectively) | $ | 434,406,790 | $ | 366,622,329 |
See accompanying notes to the financial statements.
6
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 (Unaudited) | Period from May 31, 2005 (commencement of operations) through February 28, 2006 | ||||||||||
Net asset value, beginning of period | $ | 22.37 | $ | 20.00 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)(a)† | 0.06 | 0.52 | |||||||||
Net realized and unrealized gain (loss) | 0.99 | 2.34 | |||||||||
Total from investment operations | 1.05 | 2.86 | |||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | (0.00 | )(b) | (0.47 | ) | |||||||
From net realized gains | (0.26 | ) | (0.02 | ) | |||||||
Total distributions | (0.26 | ) | (0.49 | ) | |||||||
Net asset value, end of period | $ | 23.16 | $ | 22.37 | |||||||
Total Return(c) | 4.75 | %** | 14.42 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 434,407 | $ | 366,622 | |||||||
Net expenses to average daily net assets(d)(e) | 0.00 | %* | 0.00 | %* | |||||||
Net investment income to average daily net assets(a) | 0.52 | %* | 3.22 | %* | |||||||
Portfolio turnover rate | 23 | %** | 10 | %** | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.06 | %* | |||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 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 distribution from net investment income was less than $0.01 per share.
(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 shareholder.
(d) Net expenses exclude expenses incurred indirectly through investments in the 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
7
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
1. Organization
GMO Strategic Opportunities Allocation Fund (formerly 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 Funds into classes.
The Fund seeks total return greater than the GMO Strategic Balanced Index. The GMO Strategic Balanced Index is a composite index computed by GMO consisting of: (i) the MSCI World Index and (ii) the Lehman Brothers U.S. Aggregate Index in the following proportions: 75% (MSCI World Index) and 25% (Lehman Brothers U.S. Aggregate Index). The Fund is a fund of funds and invests in shares of other GMO Funds ("underlying fund(s)"), which may include the GMO U.S. Equity Funds, the GMO International Equity Funds (including one or more of the GMO Emerging Markets Funds), the GMO Fixed Income Funds, GMO Alpha Only Fund, and GMO Alternative Asset Opportunity Fund.
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) and other mutual funds are valued at their net asset value.
Investments held by the underlying fund(s) are valued as follows. 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 generally 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 or
8
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
procedures are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or other persons acting at their direction pursuant to procedures approved by the Trustees. 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 are generally valued by a third party vendor using fair value prices based on models to the extent that these fair value prices are available.
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 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 maker may differ from the value that would be realized if the securities were sold and the differences could be material. As of August 31, 2006, the total value of these securities represented 12.8% 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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax 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
9
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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.
As of August 31, 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) | ||||||||||||
$ | 410,811,770 | $ | 25,798,661 | $ | (2,292,771 | ) | $ | 23,505,890 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from the 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 the underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
10
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 0.05% 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 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 six months ended August 31, 2006 and the period ended February 28, 2006, the Fund received $30,297 and $143,850 in purchase premiums and $1,945 and $3,150 in redemption fees, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
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 U.S. 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. Addition ally, 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 the 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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 (excluding expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or
11
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 in the underlying fund(s)).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the six months ended August 31, 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 | ||||||||||||
0.406 | % | 0.096 | % | 0.018 | % | 0.520 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $1,869 and $1,012, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $147,938,089 and $91,634,009, 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.
12
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
6. Principal shareholders
As of August 31, 2006, 48.3% 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 August 31, 2006, 99.98% 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:
Six Months Ended August 31, 2006 (Unaudited) | Period from May 31, 2005 (commencement of operations) through February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 2,326,211 | $ | 53,311,587 | 17,293,712 | $ | 369,830,731 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 211,826 | 4,751,249 | 295,550 | 6,375,003 | |||||||||||||||
Shares repurchased | (164,126 | ) | (3,756,752 | ) | (1,203,150 | ) | (26,681,537 | ) | |||||||||||
Purchase premiums and redemption fees | — | 32,242 | — | 147,000 | |||||||||||||||
Net increase (decrease) | 2,373,911 | $ | 54,338,326 | 16,386,112 | $ | 349,671,197 |
13
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these affiliated issuers during the six months ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Core Plus Bond, Fund, Class IV | $ | 57,865,320 | $ | 8,797,500 | $ | 20,000,000 | $ | — | $ | — | $ | 47,606,798 | |||||||||||||||
GMO Currency Hedged International Bond Fund, Class III | 9,229,127 | — | 9,116,081 | — | — | — | |||||||||||||||||||||
GMO Currency Hedged International Equity Fund, Class III | 1,005,543 | 189,357 | 1,071,366 | 13,082 | 176,275 | — | |||||||||||||||||||||
GMO Domestic Bond, Fund Class VI | 7,382,206 | 3,759 | 7,318,303 | 3,759 | — | — | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | 1,084,598 | 40,024 | — | 11,422 | 28,603 | 1,111,423 | |||||||||||||||||||||
GMO Emerging Markets Quality Fund, Class VI | 33,857,607 | 4,032,280 | — | 75,953 | 956,326 | 38,038,653 | |||||||||||||||||||||
GMO Inflation Indexed Bond Fund, Class III | 10,255,231 | 17,321,786 | 27,331,554 | 160,420 | — | — | |||||||||||||||||||||
GMO Inflation Indexed Plus Bond Fund, Class VI | — | 58,488,554 | — | — | — | 60,271,539 | |||||||||||||||||||||
GMO International Bond Fund, Class III | 11,890,420 | — | 2,000 | — | — | 12,447,823 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class III | 83,734,942 | 2,899,835 | 83,348,279 | — | 2,199,835 | — | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | — | 75,272,679 | 1,000,000 | — | — | 81,749,419 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 83,292,632 | 7,056,087 | 13,219,105 | 151,205 | 2,204,882 | 81,672,483 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | 1,187,543 | 173,796 | — | 5,011 | 168,785 | 1,242,065 | |||||||||||||||||||||
GMO Strategic Fixed Income Fund, Class VI | — | 36,350,484 | — | — | — | 36,824,823 | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | 34,538,207 | 2,785,704 | 1,000,000 | 285,704 | — | 35,664,559 | |||||||||||||||||||||
GMO U.S. Quality Equity Fund, Class IV | 31,257,649 | 6,298,923 | — | 309,925 | 36,453 | 37,668,329 | |||||||||||||||||||||
Totals | $ | 366,581,025 | $ | 219,710,768 | $ | 163,406,688 | $ | 1,016,481 | $ | 5,771,159 | $ | 434,297,914 |
14
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Strategic Opportunities Allocation Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees gave substantial consideration to the fact that the Fund does not pay an advisory fee to the Manager under the Fund's investment management agreement, but that the Fund indirectly bears advisory fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered the
15
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees noted that they had approved renewal of the Manager's investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in conn ection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust, the Trust, and the investment divisions of the Manager responsible for the management of those funds; information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives to those of the other funds of the Trust; and information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives to those of the other funds of the Trust.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement a rrangement in place with the Fund, and the reputation of the Fund's other service providers.
16
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
17
GMO Strategic Opportunities Allocation Fund
(formerly GMO Strategic Balanced Allocation Fund)
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | 0.52 | % | $ | 1,000.00 | $ | 1,047.50 | $ | 2.68 | ||||||||||
2 | ) Hypothetical | 0.52 | % | $ | 1,000.00 | $ | 1,022.58 | $ | 2.65 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
18
GMO Alpha Only Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Cash and Cash Equivalents | 97.0 | % | |||||
Common Stocks | 85.8 | ||||||
Short-Term Investments | 5.4 | ||||||
Preferred Stocks | 1.8 | ||||||
Debt Obligations | 0.1 | ||||||
Private Equity Securities | 0.1 | ||||||
Convertible Securities | 0.0 | ||||||
Investment Funds | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Forward Currency Contracts | (0.1 | ) | |||||
Swaps | (33.6 | ) | |||||
Futures | (55.3 | ) | |||||
Other | (1.2 | ) | |||||
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 Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 91.8% | |||||||||||
United States — 91.8% | |||||||||||
Affiliated Issuers | |||||||||||
9,665,458 | GMO Emerging Markets Fund, Class VI | 196,788,733 | |||||||||
12,660,665 | GMO International Growth Equity Fund, Class IV | 395,645,783 | |||||||||
11,419,676 | GMO International Intrinsic Value Fund, Class IV | 391,238,099 | |||||||||
30,092,645 | GMO U.S. Core Equity Fund, Class VI | 427,014,627 | |||||||||
11,062,082 | GMO U.S. Quality Equity Fund, Class IV | 229,538,192 | |||||||||
1,640,225,434 | |||||||||||
TOTAL MUTUAL FUNDS (COST $1,575,924,443) | 1,640,225,434 | ||||||||||
COMMON STOCKS — 0.0% | |||||||||||
Italy — 0.0% | |||||||||||
12,500 | Grassetto SPA * (a) (b) | 160 | |||||||||
TOTAL COMMON STOCKS (COST $7,040) | 160 | ||||||||||
SHORT-TERM INVESTMENTS — 5.6% | |||||||||||
89,400,000 | ING Bank Time Deposit, 5.29%, due 09/01/06 | 89,400,000 | |||||||||
11,000,000 | Societe Generale Time Deposit, 5.27%, due 09/01/06 | 11,000,000 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $100,400,000) | 100,400,000 | ||||||||||
TOTAL INVESTMENTS — 97.4% (Cost $1,676,331,483) | 1,740,625,594 | ||||||||||
Other Assets and Liabilities (net) — 2.6% | 46,748,752 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,787,374,346 |
See accompanying notes to the financial statements.
2
GMO Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
A summary of outstanding financial instruments at August 31, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales | |||||||||||||||||||
11/22/06 | AUD | 15,785,987 | $ | 12,033,563 | $ | (16,564 | ) | ||||||||||||
11/22/06 | CHF | 19,517,061 | 15,985,497 | (8,847 | ) | ||||||||||||||
11/22/06 | DKK | 10,311,400 | 1,778,852 | (29 | ) | ||||||||||||||
11/22/06 | EUR | 57,579,292 | 74,109,098 | 42,279 | |||||||||||||||
11/22/06 | GBP | 29,676,307 | 56,565,326 | (438,883 | ) | ||||||||||||||
11/22/06 | HKD | 31,745,922 | 4,091,655 | 1,894 | |||||||||||||||
11/22/06 | JPY | 6,285,046,359 | 54,125,246 | 505,686 | |||||||||||||||
11/22/06 | NOK | 13,285,984 | 2,111,601 | 16,178 | |||||||||||||||
11/22/06 | NZD | 602,989 | 393,283 | (10,463 | ) | ||||||||||||||
11/22/06 | SEK | 37,189,638 | 5,162,188 | 50,015 | |||||||||||||||
11/22/06 | SGD | 3,348,188 | 2,135,787 | 1,220 | |||||||||||||||
$ | 142,486 |
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales | |||||||||||||||||||
418 | CAC 40 | September 2006 | $ | 27,670,354 | $ | (678,636 | ) | ||||||||||||
104 | DAX | September 2006 | 19,522,932 | (1,511,729 | ) | ||||||||||||||
610 | FTSE 100 | September 2006 | 68,567,411 | (3,805,585 | ) | ||||||||||||||
43 | HANG SENG | September 2006 | 4,804,102 | (119,995 | ) | ||||||||||||||
70 | IBEX 35 | September 2006 | 10,904,252 | (252,988 | ) | ||||||||||||||
482 | OMXS 30 | September 2006 | 6,601,328 | (52,428 | ) | ||||||||||||||
414 | Russell 2000 | September 2006 | 149,391,900 | (9,289,056 | ) | ||||||||||||||
1,852 | S&P 500 | September 2006 | 604,492,800 | (33,684,808 | ) | ||||||||||||||
45 | S&P/MIB | September 2006 | 10,960,462 | (872,627 | ) | ||||||||||||||
157 | SPI 200 | September 2006 | 15,295,348 | (577,215 | ) | ||||||||||||||
490 | TOPIX | September 2006 | 68,223,092 | (3,800,204 | ) | ||||||||||||||
$ | (54,645,271 | ) |
See accompanying notes to the financial statements.
3
GMO Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2006 (Unaudited)
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||||||
600,000,000 | USD | 6/15/2007 | Deutsche Bank | MSCI EAFE | 3 month | ||||||||||||||||||||||||||
Equity Index | LIBOR -0.70% | $ | (52,511,336 | ) |
As of August 31, 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:
LIBOR - London Interbank Offered Rate
* 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).
As of August 31, 2006, 46.8% of the Net Assets of the Fund, through investments in the underlying fund(s), were valued using fair value prices based on models used by a third party vendor (Note 2).
Currency Abbreviations:
AUD - Australian Dollar CHF - Swiss Franc DKK - Danish Krone EUR - Euro GBP - Brit ish Pound HKD - Hong Kong Dollar | JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollar SEK - Swedish Krona SGD - Singapore Dollar USD - United States Dollar | ||||||
See accompanying notes to the financial statements.
4
GMO Alpha Only Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $100,407,040) (Note 2) | $ | 100,400,160 | |||||
Investments in affiliated issuers, at value (cost $1,575,924,443) (Notes 2 and 8) | 1,640,225,434 | ||||||
Cash | 41,170 | ||||||
Foreign currency, at value (cost $646) (Note 2) | 652 | ||||||
Interest receivable | 14,747 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 617,272 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 50,160,000 | ||||||
Receivable for collateral on open swaps contracts (Note 2) | 49,480,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 800,722 | ||||||
Total assets | 1,841,740,157 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 758,328 | ||||||
Shareholder service fee | 158,346 | ||||||
Trustees and Chief Compliance Officer fees | 3,215 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 474,786 | ||||||
Payable for open swap contracts (Note 2) | 52,511,336 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 423,908 | ||||||
Accrued expenses | 35,892 | ||||||
Total liabilities | 54,365,811 | ||||||
Net assets | $ | 1,787,374,346 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 1,787,754,582 | |||||
Accumulated undistributed net investment income | 15,987,744 | ||||||
Accumulated net realized gain | 26,352,024 | ||||||
Net unrealized depreciation | (42,720,004 | ) | |||||
$ | 1,787,374,346 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 156,118,306 | |||||
Class IV shares | $ | 1,631,256,040 | |||||
Shares outstanding: | |||||||
Class III | 15,008,173 | ||||||
Class IV | 156,754,234 | ||||||
Net asset value per share: | |||||||
Class III | $ | 10.40 | |||||
Class IV | $ | 10.41 |
See accompanying notes to the financial statements.
5
GMO Alpha Only Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 6,901,968 | |||||
Interest | 4,407,843 | ||||||
Total investment income | 11,309,811 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 4,290,197 | ||||||
Shareholder service fee – Class III (Note 3) | 166,173 | ||||||
Shareholder service fee – Class IV (Note 3) | 747,257 | ||||||
Custodian and fund accounting agent fees | 87,952 | ||||||
Transfer agent fees | 16,468 | ||||||
Audit and tax fees | 26,588 | ||||||
Legal fees | 16,114 | ||||||
Trustees fees and related expenses (Note 3) | 16,697 | ||||||
Registration fees | 8,004 | ||||||
Miscellaneous | 12,328 | ||||||
Total expenses | 5,387,778 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (106,044 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (3,694,525 | ) | |||||
Shareholder service fee waived – (Note 3) | (694,717 | ) | |||||
Net expenses | 892,492 | ||||||
Net investment income (loss) | 10,417,319 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 18,310,375 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 41,604,379 | ||||||
Closed futures contracts | 57,322,573 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (34,301,788 | ) | |||||
Net realized gain (loss) | 82,935,539 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (12,256,680 | ) | |||||
Open futures contracts | (20,536,744 | ) | |||||
Open swap contracts | (52,511,336 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 5,893,998 | ||||||
Net unrealized gain (loss) | (79,410,762 | ) | |||||
Net realized and unrealized gain (loss) | 3,524,777 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 13,942,096 |
See accompanying notes to the financial statements.
6
GMO Alpha Only Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 10,417,319 | $ | 12,344,808 | |||||||
Net realized gain (loss) | 82,935,539 | 2,453,870 | |||||||||
Change in net unrealized appreciation (depreciation) | (79,410,762 | ) | 17,664,015 | ||||||||
Net increase (decrease) in net assets from operations | 13,942,096 | 32,462,693 | |||||||||
Distribution to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (833,529 | ) | (44,049,884 | ) | |||||||
Class IV | (6,418,619 | ) | — | ||||||||
Total distributions from net investment income | (7,252,148 | ) | (44,049,884 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | (1,305,496,251 | ) | 1,290,587,348 | ||||||||
Class IV | 1,625,450,545 | — | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 319,954,294 | 1,290,587,348 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7) | |||||||||||
Class III | 90,331 | 1,673,529 | |||||||||
Class IV | 478,412 | — | |||||||||
Increase in net assets resulting from net purchase premiums and redemption fees | 568,743 | 1,673,529 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 320,523,037 | 1,292,260,877 | |||||||||
Total increase (decrease) in net assets | 327,212,985 | 1,280,673,686 | |||||||||
Net assets: | |||||||||||
Beginning of period | 1,460,161,361 | 179,487,675 | |||||||||
End of period (including accumulated undistributed net investment income of $15,987,744 and $12,822,573, respectively) | $ | 1,787,374,346 | $ | 1,460,161,361 |
See accompanying notes to the financial statements.
7
GMO Alpha Only Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.36 | $ | 10.26 | $ | 9.99 | $ | 9.63 | $ | 9.23 | $ | 8.73 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.06 | 0.16 | 0.19 | 0.17 | 0.20 | 0.17 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.02 | 0.31 | 0.08 | 0.19 | 0.49 | 0.96 | |||||||||||||||||||||
Total from investment operations | 0.08 | 0.47 | 0.27 | 0.36 | 0.69 | 1.13 | |||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.04 | ) | (0.37 | ) | — | — | (0.29 | ) | (0.63 | ) | |||||||||||||||||
Total distributions | �� | (0.04 | ) | (0.37 | ) | — | — | (0.29 | ) | (0.63 | ) | ||||||||||||||||
Net asset value, end of period | $ | 10.40 | $ | 10.36 | $ | 10.26 | $ | 9.99 | $ | 9.63 | $ | 9.23 | |||||||||||||||
Total Return(b) | 0.80 | %** | 4.63 | % | 2.70 | % | 3.74 | % | 7.61 | % | 13.32 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 156,118 | $ | 1,460,161 | $ | 179,488 | $ | 74,841 | $ | 26,329 | $ | 16,628 | |||||||||||||||
Net expenses to average daily net assets(c) | 0.14 | %* | 0.10 | % | 0.18 | % | 0.26 | % | 0.64 | % | 0.37 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 1.16 | %* | 1.52 | % | 1.94 | % | 1.72 | % | 2.06 | % | 1.88 | % | |||||||||||||||
Portfolio turnover rate | 9 | %** | 40 | % | 19 | % | 11 | % | 111 | % | 22 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.53 | %* | 0.59 | % | 0.62 | % | 0.72 | % | 0.94 | % | 0.78 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (d) | $ | 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 the underlying fund(s) (See Note 3).
(d) Purchase premiums and redemption 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.
8
GMO Alpha Only Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout the period)
Period from March 2, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||
Net asset value, beginning of period | $ | 10.37 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)(a)† | 0.06 | ||||||
Net realized and unrealized gain (loss) | 0.02 | ||||||
Total from investment operations | 0.08 | ||||||
Less distributions to shareholders: | |||||||
From net investment income | (0.04 | ) | |||||
Total distributions | (0.04 | ) | |||||
Net asset value, end of period | $ | 10.41 | |||||
Total Return(b) | 0.80 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 1,631,256 | |||||
Net expenses to average daily net assets(c) | 0.10 | %* | |||||
Net investment income to average daily net assets(a) | 1.22 | %* | |||||
Portfolio turnover rate | 9 | %†† | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.52 | %* | |||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | 0.00 | (d) |
(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 investment in the underlying fund(s) (See Note 3).
(d) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the six months ended August 31, 2006.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
9
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
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 Funds into classes.
The Fund seeks to outperform the Citigroup 3-Month Treasury Bill Index. The Fund invests primarily in shares of the GMO U.S. Equity Funds and the GMO International Equity Funds (which may include one or more of the GMO Emerging Markets Funds). The Fund also may invest in shares of GMO Emerging Country Debt Fund. In addition, the Fund may invest directly in securities of the type in which the underlying funds invest. GMO invests in sub-asset classes that it expects to outperform the relevant broader asset class, and seeks to hedge some or all of the expected return (and foreign currency exposure) of the broader asset class. To the extent that the Fund's hedges are effective, the performance of the Fund's portfolio is expected to have a low correlation to the performance of the broader global asset classes in which the Fund invests. Instead, the Fund is expected to perform more like a short-term fixed income fund, with variation i n return (alpha) resulting from aggregate outperformance or underperformance of the sub-asset classes in which the Fund invests relative to the relevant broader asset classes.
As of August 31, 2006, the Fund had two classes of shares outstanding: Class III and Class IV. Class IV shares commenced operations on March 2, 2006. Each class of shares bears a different level of shareholder service fees.
The financial statements of the series 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) 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.
10
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Portfolio valuation
Shares of the underlying fund(s) and other mutual funds are valued at their net asset value.
Investments held by the underlying fund(s) are valued as follows. 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 generally 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 or procedures are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or other persons acting at their direction pursuant to procedures approved by the Trustees.
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 are generally valued by a third party vendor using fair value prices based on models 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 including 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
11
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. 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 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. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may write call and put options. 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 t he 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
12
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. There were no written option contracts outstanding at the end of the period.
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. Ther e were no purchased option contracts outstanding at the end of the period.
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. Interest rate swap agreements involve the exchange by one party 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 party 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 a s 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
13
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax 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.
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 August 31, 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) | ||||||||||||
$ | 1,676,588,525 | $ | 67,292,112 | $ | (3,255,043 | ) | $ | 64,037,069 |
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 Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from the 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 the 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. 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 invests and the estimated transaction costs of investing directly in securities. 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 and direct investments). 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 re demption 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 six months ended August 31, 2006 and the year ended February 28, 2006, the Fund received $428,961 and $1,425,013 in purchase premiums and $139,782 and $248,516 in redemption fees, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp
15
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
Investment risks
The Fund is subject to the investment risks associated with its direct and indirect exposure to foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in U.S. 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 and 0.10% for Class IV shares. The Manager will waive the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.10% for Class IV shares; provided, however, that the amount of this waiver will not exceed the respective Class' shareholder service fee.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, expenses indirectly incurred by investment in the underlying Fund(s), fees and expenses of the independent trustees of the Trust, expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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, "Excluded Fund Fees and Expenses")) exceed 0.50% of the Fund's average daily net assets. In addition, the Manager has contractually agreed to reimburse the Fund throu gh at least June 30, 2007 to the extent that the sum of (a) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses) and (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in underlying Fund(s) (excluding these Funds' Excluded Fund Fees and Expenses and, in the case of ECDF, excluding ECDF's fees and expenses of the independent trustees of the Trust, fees expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's CCO (excluding any employee benefits), and investment-related expenses such as brokerage commissions, hedging transaction fees, securities lending fees and expenses, interest expense and transfer taxes), exceeds 0.50% of the Fund's average daily
16
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
net assets, subject to a maximum total reimbursement to the Fund equal to 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 six months ended August 31, 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 | |||||||||
0.445 | % | 0.081 | % | 0.526 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $12,833 and $4,692, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $446,243,347 and $137,800,000, 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 August 31, 2006, 80.6% 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.
17
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
As of August 31, 2006, 2.3% of the Fund's shares were held by eight related parties comprised of certain GMO employee accounts, and 97.5% 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 full and fractional shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 7,875,588 | $ | 81,525,976 | 157,546,087 | $ | 1,649,310,656 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 67,377 | 693,981 | 4,211,361 | 43,039,715 | |||||||||||||||
Shares repurchased | (133,835,919 | ) | (1,387,716,208 | ) | (38,346,631 | ) | (401,763,023 | ) | |||||||||||
Purchase premiums and redemption fees | — | 90,331 | — | 1,673,529 | |||||||||||||||
Net increase (decrease) | (125,892,954 | ) | $ | (1,305,405,920 | ) | 123,410,817 | $ | 1,292,260,877 | |||||||||||
Period From March 2, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||||||||||||||
Class IV: | Shares | Amount | |||||||||||||||||
Shares sold | 170,492,516 | $ | 1,767,243,084 | ||||||||||||||||
Shares issued to shareholders in reinvestment of distributions | 623,143 | 6,418,371 | |||||||||||||||||
Shares repurchased | (14,361,425 | ) | (148,210,910 | ) | |||||||||||||||
Purchase premiums and redemption fees | — | 478,412 | |||||||||||||||||
Net increase (decrease) | 156,754,234 | $ | 1,625,928,957 |
18
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these affiliated issuers during the six months ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Emerging Markets Fund, Class III | $ | 159,688,267 | $ | — | $ | 141,185,611 | $ | — | $ | — | $ | — | |||||||||||||||
GMO Emerging Markets Fund, Class VI | — | 214,228,697 | 17,200,000 | 1,089,682 | 18,635,404 | 196,788,733 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class III | 319,319,726 | 92,538,619 | 397,215,590 | — | 11,364,619 | — | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | — | 385,715,590 | 19,200,000 | — | — | 395,645,783 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class III | 319,360,923 | — | 294,994,568 | — | — | — | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | — | 396,174,674 | 46,300,000 | 779,620 | 11,368,486 | 391,238,099 | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class III | 342,268,774 | — | 335,256,491 | — | — | — | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | — | 449,042,013 | 21,800,000 | 3,115,522 | — | 427,014,627 | |||||||||||||||||||||
GMO U.S. Quality Equity Fund, Class III | 185,084,052 | — | 176,754,887 | — | — | — | |||||||||||||||||||||
GMO U.S. Quality Equity Fund, Class IV | — | 236,950,901 | 16,300,000 | 1,917,144 | 235,870 | 229,538,192 | |||||||||||||||||||||
Totals | $ | 1,325,721,742 | $ | 1,774,650,494 | $ | 1,466,207,147 | $ | 6,901,968 | $ | 41,604,379 | $ | 1,640,225,434 |
19
GMO Alpha Only Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO Alpha Only Fund. In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives. In evaluating the Fund's advisory fee
20
GMO Alpha Only Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
arrangement, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives. The Trustees also reviewed the Manager's profitability with respect to the Fund, the Trust, and the investment division of the Manager responsible for the management of the Fund. For these purposes, the Trustees took into account both the actual dollar amount of fees paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests, noting in particular that, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for certain of the fees and expenses (including advisory fees) that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, and concluded that the fee payable under the agreemen t appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, including the Manager's profitability, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee charged to the Fund was reasonable.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to
21
GMO Alpha Only Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2006.
22
GMO Alpha Only Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the period ended August 31, 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, as outlined in the notes to the table below.
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.
23
GMO Alpha Only Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 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 | 0.67 | % | $ | 1,000.00 | $ | 1,008.00 | $ | 3.39 | (a) | ||||||||||
2) Hypothetical | 0.67 | % | $ | 1,000.00 | $ | 1,021.83 | $ | 3.41 | (a) | ||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.63 | % | $ | 1,000.00 | $ | 1,008.00 | $ | 3.15 | (b) | ||||||||||
2) Hypothetical | 0.63 | % | $ | 1,000.00 | $ | 1,022.03 | $ | 3.21 | (a) |
(a) For the period March 1, 2006 through August 31, 2006. Expense is calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
(b) For the period March 2, 2006 (commencement of operations) through August 31, 2006. Expense is calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 182 days in the period, divided by 365 days in the year.
24
GMO Alpha Only Fund
(A Series of GMO Trust)
Proxy Voting Results
August 31, 2006 (Unaudited)
A special meeting of shareholders of the Fund was held on June 19, 2006.
Proposal
To eliminate the Fund's fundamental investment restriction with respect to short sales of securities:
Votes for | Votes against | Abstentions/Broker Non-Votes | |||||||||
158,085,216.750 | 1,706,376.731 | 0 |
25
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 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 Share Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 100.2 | % | |||||
Short-Term Investments | 0.3 | ||||||
Swaps | 0.1 | ||||||
Call Options Purchased | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures | 0.0 | ||||||
Reverse Repurchase Agreements | (1.0 | ) | |||||
Other | 0.4 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in GMO Short-Duration Collateral Fund.
1
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2006 (Unaudited)
Industry Sector Summary** | % of Debt Obligations | ||||||
Residential Asset-Backed Securities (United States) | 23.9 | % | |||||
Credit Cards | 16.5 | ||||||
Auto Financing | 7.6 | ||||||
Student Loans | 6.7 | ||||||
CMBS | 6.3 | ||||||
Residential Mortgage-Backed Securities (European) | 5.8 | ||||||
Business Loans | 5.6 | ||||||
Insured Auto Financing | 4.2 | ||||||
Residential Mortgage-Backed Securities (Australian) | 3.6 | ||||||
Investment Grade Corporate Collateralized Debt Obligations | 3.3 | ||||||
Collateralized Loan Obligations | 2.2 | ||||||
CMBS Collateralized Debt Obligations | 1.7 | ||||||
Insured Residential Mortgage-Backed Securities (United States) | 1.6 | ||||||
U.S. Government Agency | 1.2 | ||||||
Insured High Yield Collateralized Debt Obligations | 1.1 | ||||||
Other | 1.1 | ||||||
Rate Reduction Bonds | 1.1 | ||||||
Equipment Leases | 0.9 | ||||||
Insurance Premiums | 0.9 | ||||||
Insured Credit Cards | 0.8 | ||||||
Insured Time Share | 0.6 | ||||||
Airlines | 0.5 | ||||||
Insured Transportation | 0.5 | ||||||
Corporate Debt | 0.4 | ||||||
Emerging Markets Collateralized Debt Obligations | 0.3 | ||||||
Insured Business Loans | 0.3 | ||||||
Insured Residential Asset-Backed Securities (European) | 0.3 | ||||||
Insured Residential Asset-Backed Securities (United States) | 0.3 | ||||||
ABS Collateralized Debt Obligations | 0.2 | ||||||
Residential Mortgage-Backed Securities (United States) | 0.2 | ||||||
Trade Receivable | 0.2 | ||||||
High Yield Collateralized Debt Obligations | 0.1 | ||||||
100.0 | % |
** The table above incorporates aggregate industry sector exposure associated with investments in GMO Short-Duration Collateral Fund.
2
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuers — 100.0% | |||||||||||
20,994,784 | GMO Short-Duration Collateral Fund | 546,704,166 | |||||||||
TOTAL MUTUAL FUNDS (COST $539,026,151) | 546,704,166 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $539,026,151) | 546,704,166 | ||||||||||
Other Assets and Liabilities (net) — 0.0% | (55,786 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 546,648,380 |
See accompanying notes to the financial statements.
3
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in affiliated issuers, at value (cost $539,026,151) (Note 2) | $ | 546,704,166 | |||||
Cash | 9,444 | ||||||
Interest receivable | 34 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 6,231 | ||||||
Total assets | 546,719,875 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 23,150 | ||||||
Shareholder service fee | 25,465 | ||||||
Trustees and Chief Compliance Officer fees | 911 | ||||||
Accrued expenses | 21,969 | ||||||
Total liabilities | 71,495 | ||||||
Net assets | $ | 546,648,380 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 533,761,649 | |||||
Accumulated undistributed net investment income | 5,207,203 | ||||||
Accumulated net realized gain | 1,513 | ||||||
Net unrealized appreciation | 7,678,015 | ||||||
$ | 546,648,380 | ||||||
Net assets attributable to: | |||||||
Class VI shares | $ | 546,648,380 | |||||
Shares outstanding: | |||||||
Class VI | 21,299,580 | ||||||
Net asset value per share: | |||||||
Class VI | $ | 25.66 |
See accompanying notes to the financial statements.
4
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Statement of Operations — Period from March 1, 2006
(commencement of operations) through August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 5,466,264 | |||||
Interest | 1,946 | ||||||
Total investment income | 5,468,210 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 121,738 | ||||||
Shareholder service fee – Class VI (Note 3) | 133,912 | ||||||
Custodian, fund accounting agent and transfer agent fees | 20,108 | ||||||
Audit and tax fees | 9,440 | ||||||
Legal fees | 4,310 | ||||||
Trustees fees and related expenses (Note 3) | 4,074 | ||||||
Registration fees | 10,010 | ||||||
Miscellaneous | 3,753 | ||||||
Total expenses | 307,345 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (46,338 | ) | |||||
Net expenses | 261,007 | ||||||
Net investment income (loss) | 5,207,203 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 1,513 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 7,678,015 | ||||||
Net realized and unrealized gain (loss) | 7,679,528 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 12,886,731 |
See accompanying notes to the financial statements.
5
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Period from March 1, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||
Increase (decrease) in net assets: | |||||||
Operations: | |||||||
Net investment income (loss) | $ | 5,207,203 | |||||
Net realized gain (loss) | 1,513 | ||||||
Change in net unrealized appreciation (depreciation) | 7,678,015 | ||||||
Net increase (decrease) in net assets from operations | 12,886,731 | ||||||
Net share transactions (Note 7): | |||||||
Class VI | 533,761,649 | ||||||
Total increase (decrease) in net assets | 546,648,380 | ||||||
Net assets: | |||||||
Beginning of period | — | ||||||
End of period (including accumulated undistributed net investment income of $5,207,203) | $ | 546,648,380 |
See accompanying notes to the financial statements.
6
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout the period)
Period from March 1, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||
Net asset value, beginning of period | $ | 25.00 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)(a)† | 0.27 | ||||||
Net realized and unrealized gain (loss) | 0.39 | ||||||
Total from investment operations | 0.66 | ||||||
Net asset value, end of period | $ | 25.66 | |||||
Total Return(b) | 2.64 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 546,648 | |||||
Net expenses to average daily net assets | 0.11 | %* | |||||
Net investment income to average daily net assets(a) | 2.14 | %* | |||||
Portfolio turnover rate | 19 | %** | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* |
(a) Net investment income is affected by the timing of the declaration of dividends by GMO Short-Duration Collateral Fund.
(b) The total return would have been lower had certain expenses not been reimbursed during the period shown.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
7
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
1. Organization
GMO Short-Duration Collateral Share Fund (the "Fund"), which commenced operations on March 1, 2006, 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 Funds into classes.
The Fund seeks total return in excess of the JPMorgan U.S. 3 Month Cash Index. The Fund invests substantially all of its assets in GMO Short-Duration Collateral Fund (an arrangement often referred to as a "master-feeder" structure) ("SDCF") and, to a limited extent, in cash and cash equivalents. The Fund's investment objective and principal investment strategies are identical to those of SDCF. SDCF seeks to achieve its investment objective by investing primarily in high quality U.S. and foreign floating rate fixed income securities. SDCF may invest a substantial portion of its assets in asset-backed securities.
The financial statements of SDCF 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 SDCF are not publically 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
Shares of SDCF are valued at their net asset value.
Investments held by SDCF are valued as follows. 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 generally 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 or
8
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
procedures are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or other persons acting at their direction pursuant to procedures approved by the Trustees.
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 SDCF 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. As of August 31, 2006, the total value of these securities represented 41.8% of net assets.
Taxes and distributions
The Fund intends to qualify each tax 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.
As of August 31, 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) | ||||||||||||
$ | 539,026,151 | $ | 7,678,015 | $ | — | $ | 7,678,015 |
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 Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from SDCF 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 SDCF (See Note 3).
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 VI shares of the Fund at the annual rate of 0.055%.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, expenses indirectly incurred by investment in SDCF, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 Fund's average daily net assets.
10
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder in SDCF. For the period ended August 31, 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 | % | 0.007 | % | 0.009 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the period ended August 31, 2006 was $2,702 and $1,283, respectively. No remuneration was paid by the Fund 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 August 31, 2006 aggregated $539,176,238 and $151,600, 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
As of August 31, 2006, 99.99% 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 August 31, 2006, 99.99% of the Fund's shares were held by accounts for which the Manager has investment discretion.
11
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 March 1, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||||||
Class VI: | Shares | Amount | |||||||||
Shares sold | 21,299,580 | $ | 533,761,649 | ||||||||
Net increase (decrease) | 21,299,580 | $ | 533,761,649 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of this affiliated issuer during the period ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Short-Duration Collateral Fund | $ | — | $ | 539,176,238 | $ | 151,600 | $ | 5,466,264 | $ | — | $ | 546,704,166 | |||||||||||||||
Totals | $ | — | $ | 539,176,238 | $ | 151,600 | $ | 5,466,264 | $ | — | $ | 546,704,166 |
12
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of investment management agreement for Short-Duration Collateral Share Fund. In determining to approve the initial investment management agreement for the Fund, the Trustees, each of whom is not an "interested person" of the Trust, considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees met on December 13, 2005 to discuss the materials provided by the Manager for purposes of considering the Manager's proposal to establish the Fund as a new series of the Trust and the proposed new investment management agreement between the Trust, on behalf of the Fund, and the Manager. As discussed below, at meetings throughout the year, the Trustees also considered other relevant information. Matters considered by the Trustees included the following:
The Trustees noted that the Fund will invest substantially all of its assets in an existing series of GMO Trust, GMO Short-Duration Collateral Fund ("SDCF") and, therefore, that the Fund's investment objective and principal investment strategies will be identical to those of SDCF. The Trustees considered that they had met with SDCF's investment advisory personnel over the course of the year. The Trustees also considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel who will provide services under the Fund's investment management agreement. The Trustees also received information concerning the investment philosophy and investment process to be applied by the Manager in managing the Fund, and evaluated the level of skill required to manage the Fund. In connection with that information, the Trustees considered the Manager's in-house research cap abilities as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention to be devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
Since the Fund had not yet commenced operations, the Trustees were unable to consider its performance. However, because the Fund will invest substantially all of its assets in SDCF, the Trustees considered information prepared by Lipper Inc. concerning SDCF's investment performance over the past one and two year periods and since its inception relative to funds with similar objectives managed by other managers. The Trustees noted the generally positive performance of SDCF during those periods. The Trustees also considered the competence of the personnel responsible for managing SDCF, the support those personnel received from the Manager, the investment techniques used to manage SDCF, and the overall competence of the Manager.
The Trustees gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees noted that the advisory fee proposed to be charged to the Fund by GMO reflects the management services GMO provides to both the Fund and SDCF (which itself is not charged a fee) under their respective investment management agreements. The Trustees also noted that the Fund's projected expenses reflected projected total expenses payable by the Fund and SDCF. The Trustees reviewed information prepared by Lipper Inc. concerning fees paid to investment managers of funds with similar objectives, and noted that the advisory fee and projected expense ratio of the Fund compared very
13
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
favorably to those of comparable funds included in the report. In evaluating the Fund's advisory fee, the Trustees also took into account the sophistication of the investment techniques to be used to manage the Fund and SDCF. Since the Fund had not yet commenced operations, the Trustees were unable to review the Manager's profitability with respect to the Fund. The Trustees did, however, consider both the actual dollar amount of fees to be paid by the Fund directly to the Manager and the so-called "fallout benefits" to the Manager such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements, and reputational value to be derived from serving as investment manager to the Fund. The Trustees regarded the ability of the Funds of GMO Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record creates for the Manager to incr ease assets under management by, for example, attracting new clients, expanding existing client relationships and becoming a subadviser under arrangements in which the Funds would be advised and distributed by an organization with strong retail sales capabilities. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the advisory fee to be charged to the Fund was reasonable.
The Trustees also considered the quality of the services to be provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of other Funds. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the standards of the Manager with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services to be provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund would be consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objectives, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services to be provided by persons other than the Manager, considering, among other things, the Fund's estimated total expenses and the reputation of the Fund's other service providers.
14
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services to be provided supported the approval of the agreement.
At the end of the meeting of the Trustees on December 13, 2005, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the Fund's initial investment management agreement for an initial period ending on the second anniversary of the agreement's execution.
15
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, as outlined in the notes to the table below.
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 VI | |||||||||||||||||||
1) Actual | 0.12 | % | $ | 1,000.00 | $ | 1,026.40 | $ | 0.61 | |||||||||||
2) Hypothetical | 0.12 | % | $ | 1,000.00 | $ | 1,024.60 | $ | 0.61 |
* For the period March 1, 2006 through August 31, 2006. Expense is calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
16
GMO U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Semiannual Report
August 31, 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. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 96.7 | % | |||||
Short-Term Investments | 6.7 | ||||||
Futures | 0.0 | ||||||
Other | (3.4 | ) | |||||
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 U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuers — 100.0% | |||||||||||
8,115,240 | GMO U.S. Core Equity Fund, Class VI | 115,155,260 | |||||||||
1,386,023 | GMO U.S. Quality Equity Fund, Class IV | 28,759,982 | |||||||||
263,843 | GMO U.S. Small/Mid Cap Growth Fund, Class III | 4,646,271 | |||||||||
531,799 | GMO U.S. Small/Mid Cap Value Fund, Class III | 5,068,048 | |||||||||
TOTAL MUTUAL FUNDS (COST $153,347,554) | 153,629,561 | ||||||||||
SHORT-TERM INVESTMENTS — 0.2% | |||||||||||
304,764 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $304,794 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/13 and a market value, including accrued interest, of $310,860. | 304,764 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $304,764) | 304,764 | ||||||||||
TOTAL INVESTMENTS — 100.2% (Cost $153,652,318) | 153,934,325 | ||||||||||
Other Assets and Liabilities (net) — (0.2%) | (295,521 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 153,638,804 |
See accompanying notes to the financial statements.
2
GMO U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $304,764) (Note 2) | $ | 304,764 | |||||
Investments in affiliated issuers, at value (cost $153,347,554) (Notes 2 and 8) | 153,629,561 | ||||||
Interest receivable | 60 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 5,642 | ||||||
Total assets | 153,940,027 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 280,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 381 | ||||||
Accrued expenses | 20,842 | ||||||
Total liabilities | 301,223 | ||||||
Net assets | $ | 153,638,804 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 153,067,852 | |||||
Distributions in excess of net investment income | (263,695 | ) | |||||
Accumulated net realized gain | 552,640 | ||||||
Net unrealized appreciation | 282,007 | ||||||
$ | 153,638,804 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 153,638,804 | |||||
Shares outstanding: | |||||||
Class III | 25,471,255 | ||||||
Net asset value per share: | |||||||
Class III | $ | 6.03 |
See accompanying notes to the financial statements.
3
GMO U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 1,687,858 | |||||
Interest | 6,638 | ||||||
Total investment income | 1,694,496 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 210,225 | ||||||
Shareholder service fee – Class III (Note 3) | 95,571 | ||||||
Custodian, fund accounting agent and transfer agent fees | 9,660 | ||||||
Audit and tax fees | 13,524 | ||||||
Legal fees | 1,932 | ||||||
Trustees fees and related expenses (Note 3) | 1,866 | ||||||
Registration fees | 3,220 | ||||||
Miscellaneous | 1,472 | ||||||
Total expenses | 337,470 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (29,256 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (199,816 | ) | |||||
Shareholder service fee waived (Note 3) | (45,828 | ) | |||||
Net expenses | 62,570 | ||||||
Net investment income (loss) | 1,631,926 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 6,752,650 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 538,109 | ||||||
Net realized gain (loss) | 7,290,759 | ||||||
Change in net unrealized appreciation (depreciation) on investments | (11,464,874 | ) | |||||
Net realized and unrealized gain (loss) | (4,174,115 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (2,542,189 | ) |
See accompanying notes to the financial statements.
4
GMO U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,631,926 | $ | 2,316,901 | |||||||
Net realized gain (loss) | 7,290,759 | 8,765,951 | |||||||||
Change in net unrealized appreciation (depreciation) | (11,464,874 | ) | (947,845 | ) | |||||||
Net increase (decrease) in net assets from operations | (2,542,189 | ) | 10,135,007 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (2,622,991 | ) | (2,798,187 | ) | |||||||
Net realized gains | |||||||||||
Class III | (11,239,097 | ) | (3,368,950 | ) | |||||||
(13,862,088 | ) | (6,167,137 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (3,147,917 | ) | 17,780,604 | ||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 44,525 | 20,076 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | (3,103,392 | ) | 17,800,680 | ||||||||
Total increase (decrease) in net assets | (19,507,669 | ) | 21,768,550 | ||||||||
Net assets: | |||||||||||
Beginning of period | 173,146,473 | 151,377,923 | |||||||||
End of period (including distributions in excess of net investment income of $263,695 and accumulated undistributed net investment income of $727,370, respectively) | $ | 153,638,804 | $ | 173,146,473 |
See accompanying notes to the financial statements.
5
GMO U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2006 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.56 | $ | 6.41 | $ | 6.40 | $ | 4.53 | $ | 5.45 | $ | 5.11 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.05 | 0.10 | 0.11 | 0.08 | 0.09 | 0.11 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.12 | ) | 0.31 | 0.34 | 1.89 | (1.00 | ) | 0.39 | |||||||||||||||||||
Total from investment operations | (0.07 | ) | 0.41 | 0.45 | 1.97 | (0.91 | ) | 0.50 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.09 | ) | (0.12 | ) | (0.14 | ) | (0.02 | ) | (0.01 | ) | (0.16 | ) | |||||||||||||||
From net realized gains | (0.37 | ) | (0.14 | ) | (0.30 | ) | (0.08 | ) | — | — | |||||||||||||||||
Total distributions | (0.46 | ) | (0.26 | ) | (0.44 | ) | (0.10 | ) | (0.01 | ) | (0.16 | ) | |||||||||||||||
Net asset value, end of period | $ | 6.03 | $ | 6.56 | $ | 6.41 | $ | 6.40 | $ | 4.53 | $ | 5.45 | |||||||||||||||
Total Return(b) | (1.04 | )%(c)** | 6.45 | %(c) | 7.18 | %(c) | 43.72 | %(c) | (16.78 | )% | 9.80 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 153,639 | $ | 173,146 | $ | 151,378 | $ | 73,342 | $ | 13,144 | $ | 270 | |||||||||||||||
Net expenses to average daily net assets(d) | 0.07 | %* | 0.01 | % | 0.00 | %(e) | 0.00 | %(e) | 0.02 | % | 0.00 | %(e) | |||||||||||||||
Net investment income to average daily net assets(a) | 1.70 | %* | 1.52 | % | 1.75 | % | 1.43 | % | 1.93 | % | 1.99 | % | |||||||||||||||
Portfolio turnover rate | 30 | %** | 13 | % | 16 | % | 17 | % | 24 | % | 2 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.29 | %* | 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) | $ | 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 the 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.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
6
GMO U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
1. Organization
GMO U.S. Equity Allocation Fund (formerly 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 Funds into classes.
The Fund seeks total return greater than the Russell 3000 Index. The Fund is a fund of funds and invests primarily in shares of the GMO U.S. Equity Funds. The Fund seeks exposure to the securities in the Wilshire 5000 Stock Index through its investments in each of the underlying fund(s).
The financial statements of the series of the Trust in which the Fund invests ("underlying funds") 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) and other mutual funds are valued at their net asset value.
Investments held by the underlying fund(s) are valued as follows. 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 generally 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 or procedures are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or other persons acting at their direction pursuant to procedures approved by the Trustees.
7
GMO U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax 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.
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.
As of August 31, 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) | ||||||||||||
$ | 153,812,805 | $ | 1,483,958 | $ | (1,362,438 | ) | $ | 121,520 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
8
GMO U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from the 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 the 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 redemption of Fund shares were each 0.03% 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 six months ended August 31, 2006 and the year ended February 28, 2006, the Fund received $21,020 and $10,965 in purchase premiums and $23,505 and $9,111 in redemption fees, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of
9
GMO U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
3. Fees and other transactions with affiliates
The Manager determines the allocation of the assets of the Fund among designated underlying fund(s). Effective June 30, 2006, 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. Prior to June 30, 2006, GMO earned a management fee paid monthly at the annual rate of 0.33% of average daily net assets. The Fund also had a Shareholder Service Plan under which the Fund paid GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee was calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. Prior to June 30, 2006, the Fund invested in Class III shares of each underlying fund(s) being offered.
Effective June 30, 2006, the Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 (excluding expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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).
Prior to June 30, 2006, the Manager waived the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by the Class III shares of the Fund exceeded 0.15%, provided, however, that the amount of this waiver did not exceed 0.15%. In addition, the Manager had contractually agreed to reimburse the Fund for Fund expenses through June 30, 2006 to the extent the Fund's total annual operating expenses (excluding shareholder service fees, expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain ot her unusual expenses (including taxes), securities lending fees and expenses, interest expense, and transfer taxes (collectively, "Excluded Fund Fees and Expenses")) exceeded 0.33% of the Fund's average daily net assets. In addition, the Manager had contractually agreed to reimburse the Fund through June 30, 2006 to the extent that the sum of (a) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses) and (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in the underlying Funds (excluding these Funds' Excluded Fund Fees and Expenses) exceeded 0.33% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.33% of the Fund's average daily net assets.
10
GMO U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the six months ended August 31, 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 | |||||||||
0.316 | % | 0.071 | % | 0.387 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the six months ended August 31, 2006 was $1,314 and $552, respectively. No remuneration was paid by the Fund 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 six months ended August 31, 2006 aggregated $55,229,520 and $70,040,173, 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 August 31, 2006, 42.3% 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 August 31, 2006, less than 0.1% of the Fund's shares were held by one related party comprised of a certain GMO employee account.
11
GMO U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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:
Six Months Ended August 31, 2006 (Unaudited) | Year Ended February 28, 2006 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 8,056,727 | $ | 52,528,984 | 4,237,227 | $ | 27,401,967 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 2,287,052 | 13,862,088 | 960,534 | 6,158,153 | |||||||||||||||
Shares repurchased | (11,248,449 | ) | (69,538,989 | ) | (2,430,815 | ) | (15,779,516 | ) | |||||||||||
Purchase premiums and redemption fees | — | 44,525 | — | 20,076 | |||||||||||||||
Net increase (decrease) | (904,670 | ) | $ | (3,103,392 | ) | 2,766,946 | $ | 17,800,680 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these affiliated issuers during the six months ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class III | $ | 128,599,664 | $ | — | $ | 117,563,135 | $ | — | $ | — | $ | — | |||||||||||||||
GMO U.S. Core Equity Fund, Class VI | — | 162,278,809 | 54,877,173 | 1,259,295 | — | 115,155,260 | |||||||||||||||||||||
GMO U.S. Quality Equity Fund, Class III | 32,203,358 | — | 30,934,229 | — | — | — | |||||||||||||||||||||
GMO U.S. Quality Equity Fund, Class IV | — | 40,197,826 | 12,503,000 | 349,779 | 36,162 | 28,759,982 | |||||||||||||||||||||
GMO U.S. Small/Mid Cap Growth Fund, Class III | 6,237,620 | 449,215 | 1,410,000 | 12,315 | 159,132 | 4,646,271 | |||||||||||||||||||||
GMO U.S. Small/Mid Cap Value Fund, Class III | 6,111,798 | 801,034 | 1,250,000 | 66,469 | 342,815 | 5,068,048 | |||||||||||||||||||||
Totals | $ | 173,152,440 | $ | 203,726,884 | $ | 218,537,537 | $ | 1,687,858 | $ | 538,109 | $ | 153,629,561 |
12
GMO U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of renewal of investment management agreement for GMO U.S. Equity Allocation Fund (formerly GMO U.S. Sector Fund). In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2006, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust, but noted the common interests of the funds.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. In addition, at a meeting on May 17, 2006 with their independent legal counsel and the Trust's independent chief compliance officer, the Trustees discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the renewal of the Fund's investment management agreement. At the conclusion of the meeting, the Trustees instructed their independent legal counsel to request additional information from the Manager, which was furnished by the Manager and/or addressed by the Manager at a meeting of the Trustees on May 31, 2006.
The Trustees met over the course of the year with the Fund's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of any other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by Lipper Inc. ("Lipper") to have similar objectives. The Trustees reviewed performance over various periods, including one-, five- and ten-year periods, where applicable, and for the life of the Fund, information prepared by Lipper, the volatility of the Fund's returns, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. In particular, the Trustees considered the Manager's proposal to eliminate the
13
GMO U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
Fund's contractual advisory fee, effective June 30, 2006. The Trustees also considered that the Fund will continue to bear indirectly the advisory fees paid to the Manager by other funds of the Trust in which the Fund invests. In addition, the Trustees considered the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships). The Trustees noted that they had approved renewal of the Manager' s investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in connection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust, the Trust, and the investment divisions of the Manager responsible for the management of those funds; information prepared by Lipper concerning fees paid to managers of funds deemed by Lipper to have similar objectives to those of the other funds of the Trust; and information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives to those of the other funds of the Trust.
The Trustees also considered other information regarding the quality of the services provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and results with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its
14
GMO U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
At the end of the meeting on May 31, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement, as amended and restated to reflect the elimination of the Fund's advisory fee, as discussed above, for an additional twelve-month period commencing June 30, 2006.
15
GMO U.S. Equity Allocation Fund
(formerly GMO U.S. Sector Fund)
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 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, March 1, 2006 through August 31, 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 | 0.46 | % | $ | 1,000.00 | $ | 989.10 | $ | 2.31 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
16
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov Information regarding how the Fund votes proxies relating to portfolio securities during the most recent 12-month period ended June 30 is or will be available at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund will file 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 will be available on the Commission's website at www.sec.gov. The Fund's Form N-Q (when available) 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 International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 94.6 | % | |||||
Short-Term Investments | 6.3 | ||||||
Preferred Stocks | 1.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Forward Currency Contracts | (0.1 | ) | |||||
Futures | (0.2 | ) | |||||
Other | (1.6 | ) | |||||
100.0 | % | ||||||
Country Summary** | % of Investments | ||||||
Euro Region*** | 32.0 | % | |||||
Japan | 27.3 | ||||||
United Kingdom | 19.6 | ||||||
Switzerland | 3.9 | ||||||
Australia | 3.2 | ||||||
Sweden | 2.3 | ||||||
Singapore | 1.4 | ||||||
Korea | 1.3 | ||||||
Hong Kong | 1.0 | ||||||
Norway | 1.0 | ||||||
Taiwan | 1.0 | ||||||
Russia | 0.9 | ||||||
Brazil | 0.7 | ||||||
Austria | 0.6 | ||||||
China | 0.6 | ||||||
South Africa | 0.6 | ||||||
Canada | 0.5 | ||||||
India | 0.5 | ||||||
Mexico | 0.4 | ||||||
Denmark | 0.3 | ||||||
Israel | 0.2 | ||||||
Malaysia | 0.2 | ||||||
Chile | 0.1 | ||||||
Indonesia | 0.1 | ||||||
Poland | 0.1 | ||||||
Thailand | 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 the underlying fund(s). The table excludes short-term investments and any investment in the underlying fund(s) that are less than 3% of invested assets. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, Netherlands and Spain.
1
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2006 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuers — 100.0% | |||||||||||
699,521 | GMO Emerging Markets Quality Fund, Class VI | 7,289,005 |
1,575,112 | GMO International Growth Equity Fund, Class IV | 49,222,266 | |||||||||
1,441,559 | GMO International Intrinsic Value Fund, Class IV | 49,387,823 | |||||||||
TOTAL MUTUAL FUNDS (COST $101,049,800) | 105,899,094 |
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||
20,769 | Citigroup Global Markets Repurchase Agreement, dated 08/31/06, due 09/01/06, with a maturity value of $20,771 and an effective yield of 3.55%, collateralized by a U.S. Treasury Bond with a rate of 12.00%, maturity date of 08/15/13 and market value, including accrued interest, of $21,184. | 20,769 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $20,769) | 20,769 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $101,070,569) | 105,919,863 | ||||||||||
Other Assets and Liabilities (net) — 0.0% | (4,882 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 105,914,981 |
Notes to Schedule of Investments:
As of August 31, 2006, 89.5% of the Net Assets of the Fund, through investments in the underlying fund(s), were valued based on models used by a third party vendor (Note 2).
See accompanying notes to the financial statements.
2
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2006 (Unaudited)
Assets: | |||||||
Investments in affiliated issuers, at value (cost $101,049,800) (Notes 2 and 8) | $ | 105,899,094 | |||||
Investments in unaffiliated issuers, at value (cost $20,769) (Note 2) | 20,769 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 3,877 | ||||||
Total assets | 105,923,740 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 6 | ||||||
Accrued expenses | 8,753 | ||||||
Total liabilities | 8,759 | ||||||
Net assets | $ | 105,914,981 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 98,831,095 | |||||
Accumulated undistributed net investment income | 81,312 | ||||||
Accumulated net realized gain | 2,153,280 | ||||||
Net unrealized appreciation | 4,849,294 | �� | |||||
$ | 105,914,981 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 105,914,981 | |||||
Shares outstanding: | |||||||
Class III | 5,126,233 | ||||||
Net asset value per share: | |||||||
Class III | $ | 20.66 |
See accompanying notes to the financial statements.
3
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Period from June 5, 2006 through August 31, 2006 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 79,748 | |||||
Interest | 1,675 | ||||||
Total investment income | 81,423 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 783 | ||||||
Audit and tax fees | 8,526 | ||||||
Legal fees | 609 | ||||||
Trustees fees and related expenses (Note 3) | 111 | ||||||
Registration fees | 348 | ||||||
Miscellaneous | 609 | ||||||
Total expenses | 10,986 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (10,875 | ) | |||||
Net expenses | 111 | ||||||
Net investment income (loss) | 81,312 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (1,420 | ) | |||||
Realized gains distributions from affiliated issuers (Note 8) | 2,154,700 | ||||||
Net realized gain (loss) | 2,153,280 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 4,849,294 | ||||||
Net realized and unrealized gain (loss) | 7,002,574 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 7,083,886 |
See accompanying notes to the financial statements.
4
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Period from June 5, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||
Increase (decrease) in net assets: | |||||||
Operations: | |||||||
Net investment income (loss) | $ | 81,312 | |||||
Net realized gain (loss) | 2,153,280 | ||||||
Change in net unrealized appreciation (depreciation) | 4,849,294 | ||||||
Net increase (decrease) in net assets from operations | 7,083,886 | ||||||
Net share transactions (Note 7): | |||||||
Class III | 98,794,287 | ||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||
Class III | 36,808 | ||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 98,831,095 | ||||||
Total increase (decrease) in net assets | 105,914,981 | ||||||
Net assets: | |||||||
Beginning of period | — | ||||||
End of period (including accumulated undistributed net investment income of $81,312) | $ | 105,914,981 |
See accompanying notes to the financial statements.
5
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
Period from June 5, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||
Net asset value, beginning of period | $ | 20.00 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)(a) | 0.02 | † | |||||
Net realized and unrealized gain (loss) | 0.64 | ||||||
Total from investment operations | 0.66 | ||||||
Net asset value, end of period | $ | 20.66 | |||||
Total Return(b) | 3.30 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 105,915 | |||||
Net expenses to average daily net assets(c)(d) | 0.00 | %* | |||||
Net investment income to average daily net assets(a) | 0.45 | %* | |||||
Portfolio turnover rate(e) | 0 | %** | |||||
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: | $ | 0.01 | † |
(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 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) Net expenses to average daily net assets were less than 0.01%.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying fund(s) (See Note 3).
(e) Portfolio turnover rate calculated to less than 1%.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
6
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2006 (Unaudited)
1. Organization
GMO International Opportunities Equity Allocation Fund (the "Fund"), which commenced operations on June 5, 2006, 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 Funds into classes.
The Fund seeks total return greater than the MSCI EAFE Index (Europe, Australasia, and Far East). The Fund is a fund of funds and invests primarily in shares of the GMO International Equity Funds (which may include one or more of the GMO Emerging Markets Funds). The Fund may also invest in shares of other GMO Funds, including the GMO Fixed Income Funds, GMO Alpha Only Fund, and GMO Alternative Asset Opportunity Fund.
The financial statements of the series 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) 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) and other mutual funds are valued at their net asset value.
Investments held by the underlying fund(s) are valued as follows. 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 generally 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 or procedures are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or other persons acting at their direction pursuant to procedures approved by the Trustees. Because many foreign equity securities markets and exchanges close prior to the close of the New York
7
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 are generally valued by a third party vendor using fair value prices based on models 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. Repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax 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.
As of August 31, 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) | ||||||||||||
$ | 101,071,989 | $ | 4,847,874 | $ | — | $ | 4,847,874 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
8
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
Recently issued accounting pronouncement
In June 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold for financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken on a tax return. At this time the Fund has not yet determined whether or not the adoption of FIN 48 will require it to make any adjustments to its net assets or have any other effect on its financial statements.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from the 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 the 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 0.03% of the amount invested. 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, the purchase premium or redemption fee charged by the Fund may be waived in extraordin ary 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 August 31, 2006, the Fund received $36,808 in purchase premiums and $0 in redemption fees, respectively. The Manager will waive the purchase premium relating to the in-kind portion of a purchase transaction except to the extent of estimated costs (e.g. stamp duties and transfer taxes) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. There is no premium for reinvested distributions.
9
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
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 U.S. 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. Addition ally, 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.
The Manager has contractually agreed to reimburse the Fund for Fund expenses through at least June 30, 2007 (excluding expenses indirectly incurred by investment in the underlying Funds, fees and expenses of the independent trustees of the Trust, fees and expenses for legal services not procured or provided by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding employee benefits), 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 in the underlying fund(s)).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the period ended August 31, 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 | |||||||||
0.538 | % | 0.097 | % | 0.635 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the period ended August 31, 2006 was $111 and $0, respectively. No remuneration was paid by the Fund to any other officer of the Trust.
10
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2006 aggregated $101,081,220 and $30,000, 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 August 31, 2006, 70.4% 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.
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 5, 2006 (commencement of operations) through August 31, 2006 (Unaudited) | |||||||||||
Class III: | Shares | Amount | |||||||||
Shares sold | 5,126,233 | $ | 98,794,287 | ||||||||
Purchase premiums and redemption fees | — | 36,808 | |||||||||
Net increase (decrease) | 5,126,233 | $ | 98,831,095 |
11
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2006 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these affiliated issuers during the period ended August 31, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Emerging Markets Quality Fund, Class VI | $ | — | $ | 6,875,813 | $ | — | $ | 10,475 | $ | 131,892 | $ | 7,289,005 | |||||||||||||||
GMO International Growth Equity Fund, Class III | — | 34,533,570 | 34,532,367 | — | 1,012,669 | — | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | — | 47,034,867 | — | — | — | 49,222,266 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | — | 47,146,837 | 7,500 | 69,273 | 1,010,139 | 49,387,823 | |||||||||||||||||||||
Totals | $ | — | $ | 135,591,087 | $ | 34,539,867 | $ | 79,748 | $ | 2,154,700 | $ | 105,899,094 |
12
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2006 (Unaudited)
Approval of investment management agreement for GMO International Opportunities Equity Allocation Fund. In determining to approve the initial investment management agreement of the Fund, the Trustees, each of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. At a meeting on March 1, 2006, the Trustees discussed materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of considering the Manager's proposal to establish the Fund, as well as two other funds of the Trust, as new series of the Trust and the proposed new investment management agreements between the Trust, on behalf of each such fund, and the Manager. The Trustees considered separately the i nvestment management agreement for each fund, but noted the common interests of the funds. During the meeting, the Trustees met with the director of the Manager's Asset Allocation Division – the investment division which would be responsible for the management of the Fund. As discussed below, at meetings throughout the year, the Trustees also considered other information relevant to approval of the Fund's investment management agreement.
The Trustees considered that they had met with the Fund's investment advisory personnel over the course of the year. The Trustees also considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel who will provide services under the Fund's investment management agreement. In addition, the Trustees considered information concerning the investment philosophy of, and investment process to be applied by, the Manager in managing the Fund and the level of skill required to manage the Fund. In evaluating that information, the Trustees considered the Manager's in-house resources as well as other resources available to the Manager's personnel. The Trustees also took into account the time and attention to be devoted by senior management to the Fund. The Trustees considered the business reputation of the Manager, its financial resources and its professional liability insurance coverage.
Since the Fund had not yet commenced operations, the Trustees were unable to consider its performance. However, the Trustees considered the qualifications and experience of the personnel responsible for managing the Trust's existing asset allocation funds, the support those personnel received from the Manager, the investment techniques used to manage those funds, and the overall competence of the Manager.
The Trustees gave substantial consideration to the fact that the Fund would not pay an advisory fee to the Manager under the Fund's investment management agreement, but that the Fund would indirectly bear advisory fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered the so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and reputational value to be derived from serving as investment manager to the Fund. The Trustees regarded the ability of the funds of the Trust to establish a public record of their performance also to be a fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients and expanding existing client relationships (including through sub-advisory relationships).
13
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
The Trustees noted that they had approved renewal of the Manager's investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in connection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust, the Trust, and the investment divisions of the Manager responsible for the management of those funds; information prepared by Lipper Inc. ("Lipper") concerning fees paid to managers of funds deemed by Lipper to have similar objectives to those of the other funds of the Trust; and information provided by the Manager regarding fees paid by its separate account clients and any non-proprietary mutual fund clients with similar objectives to those of the other funds of the Tru st.
The Trustees also considered other information regarding the quality of the services to be provided by the Manager to the Fund. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading and business conduct of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the Manager's and the Fund's proxy voting policies and procedures, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices and res ults with respect to the execution of portfolio transactions.
The Trustees considered the scope of the services to be provided by the Manager to the Fund under the investment management agreement and shareholder service agreement. The Trustees noted that the standard of care set forth in the investment management agreement was comparable to that found in most mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund would be consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and related shareholder services. The Trustees considered the Manager's management of non-advisory services to be provided by persons other than the Manager, considering, among other things, the Fund's estimated total expenses, the Manager's proposed contractual expense reimbursement arrangement wit h respect to the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services to be provided supported the approval of the Fund's investment management agreement.
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GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2006 (Unaudited)
At the end of the meeting on March 1, 2006, the Trustees, each of whom is not an "interested person" of the Trust, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the Fund's initial investment management agreement for an initial period ending on the second anniversary of the agreement's execution.
15
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the period ended August 31, 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, as outlined in the notes to the table below.
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 | 0.64 | % | $ | 1,000.00 | $ | 1,033.00 | $ | 3.28 | (a) | |||||||||
2 | ) Hypothetical | 0.64 | % | $ | 1,000.00 | $ | 1,021.98 | $ | 3.26 | (b) |
(a) For the period June 5, 2006 (commencement of operations) through August 31, 2006. Expense is calculated using the Class's annualized net expense ratio (including interest expense and indirect
16
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 2006 (Unaudited)
expenses incurred) for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 87 days in the period, divided by 365 days in the year.
(b) For the period March 1, 2006 through August 31, 2006. Expense is calculated using the Class's annualized net expense ratio (including interest expense and indirect expenses incurred) for the period ended August 31, 2006, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
17
Item 2. Code of Ethics.
Not applicable to this filing.
Item 3. Audit Committee Financial Expert.
Not applicable to this filing.
Item 4. Principal Accountant Fees and Services.
Not applicable to this filing.
Item 5. Audit Committee of Listed Registrants.
Not applicable to this filing.
Item 6. Schedule of Investments.
The complete schedule of investments for each series of the registrant is included as part of the semiannual 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 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) Not applicable to this filing.
(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: | October 30, 2006 |
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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 | ||
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| Date: | October 30, 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 : | October 30, 2006 |
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