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) |
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J.B. Kittredge, 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: | 02/28/10 |
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Date of reporting period: | 08/31/09 |
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Item 1. Reports to Stockholders.
The semiannual reports for each series of the registrant for the periods ended August 31, 2009 are filed herewith.
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 98.6 | % | |||||
Short-Term Investments | 1.7 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | (0.3 | ) | |||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments | ||||||
Energy | 16.7 | % | |||||
Pharmaceuticals, Biotechnology & Life Sciences | 14.3 | ||||||
Health Care Equipment & Services | 10.2 | ||||||
Software & Services | 8.6 | ||||||
Insurance | 7.4 | ||||||
Technology Hardware & Equipment | 7.4 | ||||||
Retailing | 6.7 | ||||||
Food, Beverage & Tobacco | 6.7 | ||||||
Diversified Financials | 4.2 | ||||||
Food & Staples Retailing | 3.5 | ||||||
Capital Goods | 2.5 | ||||||
Household & Personal Products | 2.0 | ||||||
Banks | 1.7 | ||||||
Materials | 1.3 | ||||||
Telecommunication Services | 1.3 | ||||||
Media | 1.2 | ||||||
Consumer Durables & Apparel | 1.0 | ||||||
Utilities | 0.7 | ||||||
Commercial & Professional Services | 0.7 | ||||||
Consumer Services | 0.7 | ||||||
Transportation | 0.5 | ||||||
Semiconductors & Semiconductor Equipment | 0.4 | ||||||
Automobiles & Components | 0.2 | ||||||
Real Estate | 0.1 | ||||||
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 98.6% | |||||||||||||||
Automobiles & Components — 0.2% | |||||||||||||||
100 | Autoliv, Inc. | 3,207 | |||||||||||||
200 | Harley-Davidson, Inc. | 4,796 | |||||||||||||
300 | Johnson Controls, Inc. | 7,431 | |||||||||||||
Total Automobiles & Components | 15,434 | ||||||||||||||
Banks — 1.7% | |||||||||||||||
200 | Associated Banc Corp. | 2,074 | |||||||||||||
1,100 | BB&T Corp. | 30,734 | |||||||||||||
100 | City National Corp. | 3,950 | |||||||||||||
300 | Comerica, Inc. | 8,001 | |||||||||||||
600 | Fifth Third Bancorp | 6,564 | |||||||||||||
400 | First Horizon National Corp. * | 5,352 | |||||||||||||
500 | KeyCorp. | 3,330 | |||||||||||||
300 | People's United Financial, Inc. | 4,818 | |||||||||||||
1,600 | Popular, Inc. | 3,440 | |||||||||||||
100 | SunTrust Banks, Inc. | 2,337 | |||||||||||||
400 | TCF Financial Corp. | 5,504 | |||||||||||||
200 | US Bancorp | 4,524 | |||||||||||||
900 | Wells Fargo & Co. | 24,768 | |||||||||||||
100 | Zions Bancorporation | 1,767 | |||||||||||||
Total Banks | 107,163 | ||||||||||||||
Capital Goods — 2.4% | |||||||||||||||
300 | 3M Co. | 21,630 | |||||||||||||
100 | Caterpillar, Inc. | 4,531 | |||||||||||||
100 | Danaher Corp. | 6,071 | |||||||||||||
50 | DigitalGlobe, Inc. * | 1,003 | |||||||||||||
100 | Fastenal Co. | 3,620 | |||||||||||||
700 | General Dynamics Corp. | 41,433 | |||||||||||||
1,500 | General Electric Co. | 20,850 | |||||||||||||
100 | L-3 Communications Holdings, Inc. | 7,440 | |||||||||||||
800 | Masco Corp. | 11,584 |
See accompanying notes to the financial statements.
2
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Capital Goods — continued | |||||||||||||||
700 | Owens Corning, Inc. * | 15,638 | |||||||||||||
150 | Parker-Hannifin Corp. | 7,299 | |||||||||||||
200 | United Technologies Corp. | 11,872 | |||||||||||||
100 | URS Corp. * | 4,323 | |||||||||||||
Total Capital Goods | 157,294 | ||||||||||||||
Commercial & Professional Services — 0.7% | |||||||||||||||
200 | Cintas Corp. | 5,488 | |||||||||||||
200 | Copart, Inc. * | 7,068 | |||||||||||||
200 | Manpower, Inc. | 10,340 | |||||||||||||
400 | R.R. Donnelley & Sons Co. | 7,136 | |||||||||||||
100 | Waste Management, Inc. | 2,993 | |||||||||||||
300 | Watson Wyatt Worldwide, Inc. | 13,110 | |||||||||||||
Total Commercial & Professional Services | 46,135 | ||||||||||||||
Consumer Durables & Apparel — 1.0% | |||||||||||||||
100 | Black & Decker Corp. | 4,412 | |||||||||||||
400 | Coach, Inc. | 11,316 | |||||||||||||
100 | Hasbro, Inc. | 2,839 | |||||||||||||
200 | Jones Apparel Group, Inc. | 3,118 | |||||||||||||
200 | Leggett & Platt, Inc. | 3,650 | |||||||||||||
100 | Mohawk Industries, Inc. * | 5,012 | |||||||||||||
7 | NVR, Inc. * | 4,727 | |||||||||||||
100 | Polo Ralph Lauren Corp. | 6,638 | |||||||||||||
500 | Pulte Homes, Inc. | 6,390 | |||||||||||||
200 | Snap-On, Inc. | 7,464 | |||||||||||||
200 | Toll Brothers, Inc. * | 4,548 | |||||||||||||
100 | Whirlpool Corp. | 6,421 | |||||||||||||
Total Consumer Durables & Apparel | 66,535 | ||||||||||||||
Consumer Services — 0.7% | |||||||||||||||
200 | Apollo Group, Inc.-Class A * | 12,964 | |||||||||||||
300 | Career Education Corp. * | 7,125 | |||||||||||||
100 | ITT Educational Services, Inc. * | 10,499 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Consumer Services — continued | |||||||||||||||
100 | McDonald's Corp. | 5,624 | |||||||||||||
200 | Penn National Gaming, Inc. * | 5,842 | |||||||||||||
Total Consumer Services | 42,054 | ||||||||||||||
Diversified Financials — 4.1% | |||||||||||||||
300 | American Express Co. | 10,146 | |||||||||||||
6,000 | Bank of America Corp. | 105,540 | |||||||||||||
100 | Capital One Financial Corp. | 3,729 | |||||||||||||
40 | CME Group, Inc. | 11,642 | |||||||||||||
70 | Franklin Resources, Inc. | 6,533 | |||||||||||||
520 | Goldman Sachs Group (The), Inc. | 86,039 | |||||||||||||
300 | JPMorgan Chase & Co. | 13,038 | |||||||||||||
800 | Morgan Stanley | 23,168 | |||||||||||||
100 | State Street Corp. | 5,248 | |||||||||||||
Total Diversified Financials | 265,083 | ||||||||||||||
Energy — 16.5% | |||||||||||||||
100 | Baker Hughes, Inc. | 3,445 | |||||||||||||
800 | BJ Services Co. | 12,848 | |||||||||||||
3,800 | Chevron Corp. | 265,772 | |||||||||||||
100 | Cimarex Energy Co. | 3,904 | |||||||||||||
4,429 | ConocoPhillips | 199,438 | |||||||||||||
100 | ENSCO International, Inc. | 3,690 | |||||||||||||
6,200 | Exxon Mobil Corp. | 428,730 | |||||||||||||
100 | Frontier Oil Corp. | 1,283 | |||||||||||||
200 | Marathon Oil Corp. | 6,174 | |||||||||||||
700 | Nabors Industries Ltd. * | 12,376 | |||||||||||||
100 | Noble Energy, Inc. | 6,046 | |||||||||||||
400 | Occidental Petroleum Corp. | 29,240 | |||||||||||||
500 | Oil States International, Inc. * | 14,735 | |||||||||||||
500 | Patterson-UTI Energy, Inc. | 6,645 | |||||||||||||
300 | Penn Virginia Corp. | 5,748 | |||||||||||||
300 | St. Mary Land & Exploration Co. | 7,890 | |||||||||||||
500 | Sunoco, Inc. | 13,450 | |||||||||||||
400 | Tesoro Corp. | 5,632 |
See accompanying notes to the financial statements.
4
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Energy — continued | |||||||||||||||
200 | Unit Corp. * | 7,482 | |||||||||||||
1,700 | Valero Energy Corp. | 31,858 | |||||||||||||
Total Energy | 1,066,386 | ||||||||||||||
Food & Staples Retailing — 3.5% | |||||||||||||||
100 | BJ's Wholesale Club, Inc. * | 3,260 | |||||||||||||
300 | Kroger Co. (The) | 6,477 | |||||||||||||
375 | Supervalu, Inc. | 5,381 | |||||||||||||
2,500 | Wal-Mart Stores, Inc. | 127,175 | |||||||||||||
2,300 | Walgreen Co. | 77,924 | |||||||||||||
200 | Whole Foods Market, Inc. * | 5,816 | |||||||||||||
Total Food & Staples Retailing | 226,033 | ||||||||||||||
Food, Beverage & Tobacco — 6.6% | |||||||||||||||
3,600 | Altria Group, Inc. | 65,808 | |||||||||||||
400 | Archer-Daniels-Midland Co. | 11,532 | |||||||||||||
100 | Bunge Ltd. | 6,701 | |||||||||||||
300 | Campbell Soup Co. | 9,408 | |||||||||||||
2,100 | Coca-Cola Co. (The) | 102,417 | |||||||||||||
600 | Coca-Cola Enterprises, Inc. | 12,126 | |||||||||||||
400 | Constellation Brands, Inc.-Class A * | 5,916 | |||||||||||||
100 | Dean Foods Co. * | 1,814 | |||||||||||||
400 | General Mills, Inc. | 23,892 | |||||||||||||
200 | Hershey Co. (The) | 7,846 | |||||||||||||
100 | JM Smucker Co. (The) | 5,227 | |||||||||||||
100 | Kellogg Co. | 4,709 | |||||||||||||
107 | Kraft Foods, Inc.-Class A | 3,033 | |||||||||||||
100 | Lorillard, Inc. | 7,277 | |||||||||||||
200 | Pepsi Bottling Group (The), Inc. | 7,146 | |||||||||||||
600 | PepsiAmericas, Inc. | 16,788 | |||||||||||||
1,200 | PepsiCo, Inc. | 68,004 | |||||||||||||
1,400 | Philip Morris International, Inc. | 63,994 | |||||||||||||
224 | Tyson Foods, Inc.-Class A | 2,686 | |||||||||||||
Total Food, Beverage & Tobacco | 426,324 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Health Care Equipment & Services — 10.0% | |||||||||||||||
1,600 | AmerisourceBergen Corp. | 34,096 | |||||||||||||
900 | Cardinal Health, Inc. | 31,122 | |||||||||||||
400 | Cigna Corp. | 11,772 | |||||||||||||
400 | Coventry Health Care, Inc. * | 8,732 | |||||||||||||
200 | Express Scripts, Inc. * | 14,444 | |||||||||||||
100 | Health Net, Inc. * | 1,532 | |||||||||||||
100 | Humana, Inc. * | 3,570 | |||||||||||||
400 | LifePoint Hospitals, Inc. * | 10,052 | |||||||||||||
400 | Lincare Holdings, Inc. * | 10,556 | |||||||||||||
1,200 | McKesson Corp. | 68,232 | |||||||||||||
200 | Mednax, Inc. * | 10,414 | |||||||||||||
400 | Medtronic, Inc. | 15,320 | |||||||||||||
100 | Omnicare, Inc. | 2,289 | |||||||||||||
100 | Quest Diagnostics, Inc. | 5,396 | |||||||||||||
200 | ResMed, Inc. * | 9,182 | |||||||||||||
100 | Stryker Corp. | 4,146 | |||||||||||||
8,167 | UnitedHealth Group, Inc. | 228,676 | |||||||||||||
2,700 | WellPoint, Inc. * | 142,695 | |||||||||||||
800 | Zimmer Holdings, Inc. * | 37,880 | |||||||||||||
Total Health Care Equipment & Services | 650,106 | ||||||||||||||
Household & Personal Products — 2.0% | |||||||||||||||
200 | Clorox Co. | 11,818 | |||||||||||||
500 | Colgate-Palmolive Co. | 36,350 | |||||||||||||
200 | Kimberly-Clark Corp. | 12,092 | |||||||||||||
400 | NBTY, Inc. * | 14,824 | |||||||||||||
1,000 | Procter & Gamble Co. (The) | 54,110 | |||||||||||||
Total Household & Personal Products | 129,194 | ||||||||||||||
Insurance — 7.4% | |||||||||||||||
100 | Aflac, Inc. | 4,062 | |||||||||||||
1,600 | Allstate Corp. (The) | 47,024 | |||||||||||||
200 | American Financial Group, Inc. | 5,130 | |||||||||||||
100 | Arch Capital Group Ltd. * | 6,497 |
See accompanying notes to the financial statements.
6
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Insurance — continued | |||||||||||||||
200 | Assurant, Inc. | 5,990 | |||||||||||||
400 | Axis Capital Holdings Ltd. | 12,192 | |||||||||||||
1,000 | Chubb Corp. | 49,390 | |||||||||||||
300 | Endurance Specialty Holdings Ltd. | 10,341 | |||||||||||||
100 | Everest Re Group Ltd. | 8,431 | |||||||||||||
300 | Fidelity National Financial, Inc.-Class A | 4,506 | |||||||||||||
200 | First American Corp. | 6,304 | |||||||||||||
600 | Hartford Financial Services Group (The), Inc. | 14,232 | |||||||||||||
400 | HCC Insurance Holdings, Inc. | 10,576 | |||||||||||||
300 | Lincoln National Corp. | 7,572 | |||||||||||||
400 | Marsh & McLennan Cos., Inc. | 9,416 | |||||||||||||
800 | MetLife, Inc. | 30,208 | |||||||||||||
575 | Old Republic International Corp. | 6,848 | |||||||||||||
100 | PartnerRe Ltd. | 7,391 | |||||||||||||
100 | Principal Financial Group, Inc. | 2,840 | |||||||||||||
500 | Progressive Corp. (The) * | 8,260 | |||||||||||||
800 | Protective Life Corp. | 17,240 | |||||||||||||
400 | Prudential Financial, Inc. | 20,232 | |||||||||||||
200 | Reinsurance Group of America, Inc. | 8,610 | |||||||||||||
100 | RenaissanceRe Holdings Ltd. | 5,445 | |||||||||||||
200 | StanCorp Financial Group, Inc. | 7,570 | |||||||||||||
200 | Torchmark Corp. | 8,522 | |||||||||||||
2,500 | Travelers Cos. (The), Inc. | 126,050 | |||||||||||||
300 | Unum Group | 6,759 | |||||||||||||
700 | W.R. Berkley Corp. | 17,885 | |||||||||||||
Total Insurance | 475,523 | ||||||||||||||
Materials — 1.2% | |||||||||||||||
500 | Alcoa, Inc. | 6,025 | |||||||||||||
600 | Cabot Corp. | 11,874 | |||||||||||||
1,400 | Dow Chemical Co. (The) | 29,806 | |||||||||||||
100 | Freeport-McMoRan Copper & Gold, Inc. | 6,298 | |||||||||||||
200 | Nucor Corp. | 8,908 | |||||||||||||
200 | Pactiv Corp. * | 4,970 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Materials — continued | |||||||||||||||
200 | Reliance Steel & Aluminum Co. | 7,388 | |||||||||||||
100 | Vulcan Materials Co. | 5,004 | |||||||||||||
Total Materials | 80,273 | ||||||||||||||
Media — 1.2% | |||||||||||||||
300 | Cablevision Systems Corp.-Class A | 6,702 | |||||||||||||
800 | CBS Corp.-Class B (Non Voting) | 8,280 | |||||||||||||
1,800 | Comcast Corp.-Class A | 27,576 | |||||||||||||
200 | Discovery Communications, Inc. * | 5,184 | |||||||||||||
700 | Gannett Co., Inc. | 6,048 | |||||||||||||
200 | Omnicom Group, Inc. | 7,264 | |||||||||||||
133 | Time Warner Cable, Inc. | 4,911 | |||||||||||||
200 | Time Warner, Inc. | 5,582 | |||||||||||||
200 | Viacom, Inc. * | 5,008 | |||||||||||||
Total Media | 76,555 | ||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 14.1% | |||||||||||||||
600 | Abbott Laboratories | 27,138 | |||||||||||||
2,400 | Amgen, Inc. * | 143,376 | |||||||||||||
400 | Biogen Idec, Inc. * | 20,084 | |||||||||||||
400 | Bristol-Myers Squibb Co. | 8,852 | |||||||||||||
1,100 | Eli Lilly & Co. | 36,806 | |||||||||||||
300 | Endo Pharmaceuticals Holdings, Inc. * | 6,771 | |||||||||||||
1,300 | Forest Laboratories, Inc. * | 38,051 | |||||||||||||
400 | Gilead Sciences, Inc. * | 18,024 | |||||||||||||
2,900 | Johnson & Johnson | 175,276 | |||||||||||||
1,100 | King Pharmaceuticals, Inc. * | 11,418 | |||||||||||||
2,000 | Merck & Co., Inc. | 64,860 | |||||||||||||
400 | Mylan, Inc. * | 5,868 | |||||||||||||
16,900 | Pfizer, Inc. | 282,230 | |||||||||||||
1,600 | Wyeth | 76,560 | |||||||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 915,314 |
See accompanying notes to the financial statements.
8
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Real Estate — 0.1% | |||||||||||||||
200 | Liberty Property Trust REIT | 6,554 | |||||||||||||
Retailing — 6.6% | |||||||||||||||
200 | Abercrombie & Fitch Co.-Class A | 6,458 | |||||||||||||
100 | Advance Auto Parts, Inc. | 4,230 | |||||||||||||
400 | American Eagle Outfitters, Inc. | 5,400 | |||||||||||||
600 | AutoNation, Inc. * | 11,388 | |||||||||||||
60 | AutoZone, Inc. * | 8,835 | |||||||||||||
500 | Bed Bath & Beyond, Inc. * | 18,240 | |||||||||||||
200 | Best Buy Co., Inc. | 7,256 | |||||||||||||
300 | CarMax, Inc. * | 5,193 | |||||||||||||
100 | Dollar Tree, Inc. * | 4,994 | |||||||||||||
200 | Expedia, Inc. * | 4,610 | |||||||||||||
300 | Family Dollar Stores, Inc. | 9,084 | |||||||||||||
300 | Foot Locker, Inc. | 3,198 | |||||||||||||
300 | Gap (The), Inc. | 5,895 | |||||||||||||
100 | Genuine Parts Co. | 3,704 | |||||||||||||
5,200 | Home Depot, Inc. | 141,908 | |||||||||||||
200 | J.C. Penney Co., Inc. | 6,008 | |||||||||||||
900 | Kohl's Corp. * | 46,431 | |||||||||||||
300 | Limited Brands, Inc. | 4,476 | |||||||||||||
2,300 | Lowe's Cos., Inc. | 49,450 | |||||||||||||
100 | Nordstrom, Inc. | 2,804 | |||||||||||||
200 | O'Reilly Automotive, Inc. * | 7,656 | |||||||||||||
800 | Penske Auto Group, Inc. | 14,152 | |||||||||||||
200 | PetSmart, Inc. | 4,182 | |||||||||||||
200 | RadioShack Corp. | 3,026 | |||||||||||||
100 | Sears Holdings Corp. * | 6,345 | |||||||||||||
700 | Staples, Inc. | 15,127 | |||||||||||||
500 | Target Corp. | 23,500 | |||||||||||||
200 | Urban Outfitters, Inc. * | 5,686 | |||||||||||||
Total Retailing | 429,236 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Semiconductors & Semiconductor Equipment — 0.4% | |||||||||||||||
200 | Broadcom Corp.-Class A * | 5,690 | |||||||||||||
200 | Cree, Inc. * | 7,368 | |||||||||||||
100 | Lam Research Corp. * | 3,070 | |||||||||||||
500 | NVIDIA Corp. * | 7,260 | |||||||||||||
200 | Texas Instruments, Inc. | 4,918 | |||||||||||||
Total Semiconductors & Semiconductor Equipment | 28,306 | ||||||||||||||
Software & Services — 8.5% | |||||||||||||||
200 | Accenture Ltd.-Class A | 6,600 | |||||||||||||
100 | Adobe Systems, Inc. * | 3,142 | |||||||||||||
200 | Affiliated Computer Services, Inc.-Class A * | 8,960 | |||||||||||||
200 | Citrix Systems, Inc. * | 7,136 | |||||||||||||
200 | Cognizant Technology Solutions Corp.-Class A * | 6,976 | |||||||||||||
100 | Computer Sciences Corp. * | 4,885 | |||||||||||||
1,800 | Compuware Corp. * | 12,978 | |||||||||||||
1,300 | eBay, Inc. * | 28,782 | |||||||||||||
100 | Fidelity National Information Services, Inc. | 2,456 | |||||||||||||
100 | Fiserv, Inc. * | 4,825 | |||||||||||||
100 | Global Payments, Inc. | 4,244 | |||||||||||||
170 | Google, Inc.-Class A * | 78,484 | |||||||||||||
300 | IAC/InterActiveCorp * | 5,556 | |||||||||||||
100 | McAfee, Inc. * | 3,978 | |||||||||||||
6,800 | Microsoft Corp. | 167,620 | |||||||||||||
7,800 | Oracle Corp. | 170,586 | |||||||||||||
200 | Rovi Corp. * | 6,088 | |||||||||||||
300 | SAIC, Inc. * | 5,547 | |||||||||||||
900 | Symantec Corp. * | 13,608 | |||||||||||||
400 | Yahoo!, Inc. * | 5,844 | |||||||||||||
Total Software & Services | 548,295 | ||||||||||||||
Technology Hardware & Equipment — 7.3% | |||||||||||||||
30 | Apple, Inc. * | 5,046 | |||||||||||||
6,300 | Cisco Systems, Inc. * | 136,080 | |||||||||||||
800 | Corning, Inc. | 12,064 |
See accompanying notes to the financial statements.
10
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Technology Hardware & Equipment — continued | |||||||||||||||
1,200 | Dell, Inc. * | 18,996 | |||||||||||||
400 | Diebold, Inc. | 12,068 | |||||||||||||
600 | EMC Corp. * | 9,540 | |||||||||||||
100 | F5 Networks, Inc. * | 3,449 | |||||||||||||
100 | Hewlett-Packard Co. | 4,489 | |||||||||||||
700 | Ingram Micro, Inc.-Class A * | 11,732 | |||||||||||||
320 | International Business Machines Corp. | 37,776 | |||||||||||||
200 | Juniper Networks, Inc. * | 4,614 | |||||||||||||
300 | Lexmark International, Inc. * | 5,652 | |||||||||||||
2,500 | Motorola, Inc. | 17,950 | |||||||||||||
200 | Polycom, Inc. * | 4,718 | |||||||||||||
300 | QLogic Corp. * | 4,743 | |||||||||||||
2,700 | Qualcomm, Inc. | 125,334 | |||||||||||||
300 | SanDisk Corp. * | 5,310 | |||||||||||||
700 | Seagate Technology | 9,703 | |||||||||||||
700 | Tech Data Corp. * | 26,670 | |||||||||||||
400 | Western Digital Corp. * | 13,712 | |||||||||||||
Total Technology Hardware & Equipment | 469,646 | ||||||||||||||
Telecommunication Services — 1.2% | |||||||||||||||
958 | AT&T, Inc. | 24,956 | |||||||||||||
500 | CenturyTel, Inc. | 16,115 | |||||||||||||
1,252 | Verizon Communications, Inc. | 38,862 | |||||||||||||
Total Telecommunication Services | 79,933 | ||||||||||||||
Transportation — 0.5% | |||||||||||||||
1,700 | Avis Budget Group, Inc. * | 16,541 | |||||||||||||
200 | Norfolk Southern Corp. | 9,174 | |||||||||||||
100 | United Parcel Service, Inc.-Class B | 5,346 | |||||||||||||
Total Transportation | 31,061 | ||||||||||||||
Utilities — 0.7% | |||||||||||||||
200 | Consolidated Edison, Inc. | 8,038 | |||||||||||||
300 | Nicor, Inc. | 10,866 |
See accompanying notes to the financial statements.
11
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Utilities — continued | |||||||||||||||
200 | Northeast Utilities | 4,758 | |||||||||||||
500 | PG&E Corp. | 20,295 | |||||||||||||
100 | Progress Energy, Inc. | 3,953 | |||||||||||||
Total Utilities | 47,910 | ||||||||||||||
TOTAL COMMON STOCKS (COST $6,649,764) | 6,386,347 | ||||||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||||||
Technology Hardware & Equipment — 0.0% | |||||||||||||||
800 | Seagate Technology, Inc. Rights * (a) | — | |||||||||||||
TOTAL RIGHTS AND WARRANTS (COST $0) | — | ||||||||||||||
SHORT-TERM INVESTMENTS — 1.7% | |||||||||||||||
Money Market Funds — 1.7% | |||||||||||||||
110,142 | State Street Institutional Treasury Money Market Fund-Institutional Class | 110,142 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $110,142) | 110,142 | ||||||||||||||
TOTAL INVESTMENTS — 100.3% (Cost $6,759,906) | 6,496,489 | ||||||||||||||
Other Assets and Liabilities (net) — (0.3%) | (22,499 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 6,473,990 |
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
* 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).
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, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $6,759,906) (Note 2) | $ | 6,496,489 | |||||
Dividends receivable | 18,103 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 5,797 | ||||||
Total assets | 6,520,389 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 1,682 | ||||||
Shareholder service fee | 813 | ||||||
Accrued expenses | 43,904 | ||||||
Total liabilities | 46,399 | ||||||
Net assets | $ | 6,473,990 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 18,735,404 | |||||
Accumulated undistributed net investment income | 17,525 | ||||||
Accumulated net realized loss | (12,015,522 | ) | |||||
Net unrealized depreciation | (263,417 | ) | |||||
$ | 6,473,990 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 6,473,990 | |||||
Shares outstanding: | |||||||
Class III | 1,068,821 | ||||||
Net asset value per share: | |||||||
Class III | $ | 6.06 |
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, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $3) | $ | 71,571 | |||||
Total investment income | 71,571 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 8,928 | ||||||
Shareholder service fee – Class III (Note 3) | 4,320 | ||||||
Audit and tax fees | 28,152 | ||||||
Custodian, fund accounting agent and transfer agent fees | 9,752 | ||||||
Legal fees | 92 | ||||||
Trustees fees and related expenses (Note 3) | 34 | ||||||
Total expenses | 51,278 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (37,996 | ) | |||||
Net expenses | 13,282 | ||||||
Net investment income (loss) | 58,289 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (481,917 | ) | |||||
Closed futures contracts | (988 | ) | |||||
Net realized gain (loss) | (482,905 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 2,077,464 | ||||||
Open futures contracts | 5,162 | ||||||
Net unrealized gain (loss) | 2,082,626 | ||||||
Net realized and unrealized gain (loss) | 1,599,721 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 1,658,010 |
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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 58,289 | $ | 398,306 | |||||||
Net realized gain (loss) | (482,905 | ) | (10,752,627 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 2,082,626 | 1,196,334 | |||||||||
Net increase (decrease) in net assets from operations | 1,658,010 | (9,157,987 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (50,102 | ) | (435,336 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | 28,099 | (14,926,712 | ) | ||||||||
Total increase (decrease) in net assets | 1,636,007 | (24,520,035 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 4,837,983 | 29,358,018 | |||||||||
End of period (including accumulated undistributed net investment income of $17,525 and $9,338, respectively) | $ | 6,473,990 | $ | 4,837,983 |
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 4.55 | $ | 7.86 | $ | 9.68 | $ | 10.78 | $ | 11.71 | $ | 11.36 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.05 | 0.14 | 0.18 | 0.21 | 0.26 | 0.20 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 1.51 | (3.31 | ) | (1.23 | ) | 0.80 | 0.58 | 0.86 | |||||||||||||||||||
Total from investment operations | 1.56 | (3.17 | ) | (1.05 | ) | 1.01 | 0.84 | 1.06 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.05 | ) | (0.14 | ) | (0.18 | ) | (0.23 | ) | (0.28 | ) | (0.19 | ) | |||||||||||||||
From net realized gains | — | — | (0.59 | ) | (1.88 | ) | (1.49 | ) | (0.52 | ) | |||||||||||||||||
Total distributions | (0.05 | ) | (0.14 | ) | (0.77 | ) | (2.11 | ) | (1.77 | ) | (0.71 | ) | |||||||||||||||
Net asset value, end of period | $ | 6.06 | $ | 4.55 | $ | 7.86 | $ | 9.68 | $ | 10.78 | $ | 11.71 | |||||||||||||||
Total Return(a) | 34.40 | %** | (40.83 | )% | (11.88 | )% | 9.80 | % | 7.73 | % | 9.59 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 6,474 | $ | 4,838 | $ | 29,358 | $ | 35,726 | $ | 95,605 | $ | 112,411 | |||||||||||||||
Net expenses to average daily net assets | 0.46 | %* | 0.46 | %(b) | 0.46 | % | 0.46 | % | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 2.02 | %* | 1.94 | % | 1.93 | % | 1.91 | % | 2.31 | % | 1.79 | % | |||||||||||||||
Portfolio turnover rate | 25 | %** | 57 | % | 75 | % | 72 | % | 62 | % | 60 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 1.32 | %* | 0.43 | % | 0.23 | % | 0.13 | % | 0.12 | % | 0.10 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
† 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, 2009 (Unaudited)
1. Organization
GMO U.S. Intrinsic Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 long-term capital growth. The Fund seeks to achieve its objective by outperforming its benchmark, the Russell 1000 Value Index. The Fund typically makes equity investments in U.S. companies that issue stocks included in the Russell 1000 Index, a U.S. stock index, and in companies with similar market capitalizations. Under normal circumstances, the Fund invests at least 80% of its assets in investments tied economically to the U.S. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the counter derivatives, including options, futures, and swap contracts. The Fund also may invest in unaffiliat ed money market funds and in GMO U.S. Treasury Fund.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives)
17
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund valued rights held as worthless.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
Asset Valuation Inputs | Investments in Securities | Other Financial Instruments | |||||||||
Level 1 - Quoted Prices | $ | 6,386,347 | $ | — | |||||||
Level 2 - Other Significant Observable Inputs | 110,142 | — | |||||||||
Level 3 - Significant Unobservable Inputs | 0 | * | — | ||||||||
Total | $ | 6,496,489 | $ | — |
* Represents the interest in worthless securities that have no value at August 31, 2009.
Liability Valuation Inputs | Investments in Securities | Other Financial Instruments | |||||||||
Level 1 - Quoted Prices | $ | — | $ | — | |||||||
Level 2 - Other Significant Observable Inputs | — | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | — | $ | — |
18
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
All of the Fund's common stocks are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks. All short-term investments are classified as Level 2.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
19
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility
20
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. Rights and warrants held 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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
21
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $7,496,232.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (3,433,141 | ) | ||||
Total | $ | (3,433,141 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 7,209,485 | $ | 439,149 | $ | (1,152,145 | ) | $ | (712,996 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
22
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds.
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Market Risk — Value Securities — The Fund purchases some equity securities at prices below what the Manager believes to be their fundamental value. The Fund bears the risk that the price of these securities may not increase to what the Manager believes to be their fundamental value or that the Manager may have overestimated their fundamental value.
Other principal risks of an investment in the Fund include Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Credit and Counterparty Risk (risk of default of a derivatives counterparty or borrower of the Fund's securities), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified.
23
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index).
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
24
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
25
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
26
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | (988 | ) | — | (988 | ) | |||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | (988 | ) | $ | — | $ | (988 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | 5,162 | — | 5,162 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 5,162 | $ | — | $ | 5,162 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Futures | |||||||
Average notional amount outstanding | $ | 10,921 | |||||
Highest notional amount outstanding | 39,740 | ||||||
Lowest notional amount outstanding | — |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.31% of average daily net assets. The Fund has adopted a Shareholder Service Plan underwhich the Fund pays GMO a shareholder service fee for client and shareholder service, reporting,
27
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based onaverage daily net assets at the annual rate of 0.15% for Class III shares.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.31% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fun d) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.31% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.31% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $34 and $0, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $1,457,267 and $1,398,822, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
28
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2009, 97.70% of the outstanding shares of the Fund were held by one shareholder.
As of August 31, 2009, 0.31% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 0.20% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 527 | $ | 2,656 | 3,140 | $ | 16,864 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 9,592 | 49,677 | 64,488 | 427,139 | |||||||||||||||
Shares repurchased | (4,730 | ) | (24,234 | ) | (2,738,867 | ) | (15,370,715 | ) | |||||||||||
Net increase (decrease) | 5,389 | $ | 28,099 | (2,671,239 | ) | $ | (14,926,712 | ) |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
29
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one- and five-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In
30
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, 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 to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to separate account clients and the impact on the Manager of, and expenses and risks associated with, the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and chan ges in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 facto rs, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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
31
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
32
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | $ | 1,344.00 | $ | 2.72 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 |
* Expenses are calculated using the Class's annualized expense ratio for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
33
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.3 | % | |||||
Short-Term Investments | 3.8 | ||||||
Futures Contracts | 0.1 | ||||||
Other | (0.2 | ) | |||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 19.9 | % | |||||
Software & Services | 13.1 | ||||||
Energy | 11.5 | ||||||
Health Care Equipment & Services | 8.8 | ||||||
Technology Hardware & Equipment | 8.5 | ||||||
Food, Beverage & Tobacco | 6.5 | ||||||
Retailing | 6.5 | ||||||
Food & Staples Retailing | 6.0 | ||||||
Household & Personal Products | 3.6 | ||||||
Insurance | 2.7 | ||||||
Consumer Services | 2.4 | ||||||
Capital Goods | 1.8 | ||||||
Telecommunication Services | 1.8 | ||||||
Diversified Financials | 1.6 | ||||||
Materials | 1.1 | ||||||
Media | 0.9 | ||||||
Banks | 0.8 | ||||||
Utilities | 0.7 | ||||||
Consumer Durables & Apparel | 0.7 | ||||||
Semiconductors & Semiconductor Equipment | 0.5 | ||||||
Transportation | 0.4 | ||||||
Commercial & Professional Services | 0.2 | ||||||
Automobiles & Components | 0.0 | ||||||
100.0 | % |
1
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 96.3% | |||||||||||||||
Automobiles & Components — 0.0% | |||||||||||||||
100 | Harley-Davidson, Inc. | 2,398 | |||||||||||||
100 | Johnson Controls, Inc. | 2,477 | |||||||||||||
Total Automobiles & Components | 4,875 | ||||||||||||||
Banks — 0.7% | |||||||||||||||
1,700 | BB&T Corp. | 47,498 | |||||||||||||
700 | People's United Financial, Inc. | 11,242 | |||||||||||||
1,000 | TFS Financial Corp. | 11,400 | |||||||||||||
100 | US Bancorp | 2,262 | |||||||||||||
2,700 | Wells Fargo & Co. | 74,304 | |||||||||||||
Total Banks | 146,706 | ||||||||||||||
Capital Goods — 1.7% | |||||||||||||||
1,300 | 3M Co. | 93,730 | |||||||||||||
1,150 | DigitalGlobe, Inc. * | 23,069 | |||||||||||||
400 | Fastenal Co. | 14,480 | |||||||||||||
1,400 | General Dynamics Corp. | 82,866 | |||||||||||||
200 | Goodrich Corp. | 11,032 | |||||||||||||
100 | L-3 Communications Holdings, Inc. | 7,440 | |||||||||||||
300 | Lockheed Martin Corp. | 22,494 | |||||||||||||
600 | Masco Corp. | 8,688 | |||||||||||||
900 | United Technologies Corp. | 53,424 | |||||||||||||
300 | URS Corp. * | 12,969 | |||||||||||||
100 | W.W. Grainger, Inc. | 8,747 | |||||||||||||
Total Capital Goods | 338,939 | ||||||||||||||
Commercial & Professional Services — 0.2% | |||||||||||||||
300 | Copart, Inc. * | 10,602 | |||||||||||||
100 | Dun & Bradstreet Corp. | 7,304 | |||||||||||||
200 | Manpower, Inc. | 10,340 | |||||||||||||
400 | Waste Management, Inc. | 11,972 | |||||||||||||
Total Commercial & Professional Services | 40,218 |
See accompanying notes to the financial statements.
2
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Consumer Durables & Apparel — 0.6% | |||||||||||||||
2,700 | Coach, Inc. | 76,383 | |||||||||||||
300 | Hasbro, Inc. | 8,517 | |||||||||||||
800 | Leggett & Platt, Inc. | 14,600 | |||||||||||||
8 | NVR, Inc. * | 5,402 | |||||||||||||
100 | Polo Ralph Lauren Corp. | 6,638 | |||||||||||||
1,000 | Pulte Homes, Inc. | 12,780 | |||||||||||||
Total Consumer Durables & Apparel | 124,320 | ||||||||||||||
Consumer Services — 2.3% | |||||||||||||||
2,200 | Apollo Group, Inc.-Class A * | 142,604 | |||||||||||||
300 | Darden Restaurants, Inc. | 9,879 | |||||||||||||
1,000 | H&R Block, Inc. | 17,280 | |||||||||||||
700 | ITT Educational Services, Inc. * | 73,493 | |||||||||||||
2,800 | McDonald's Corp. | 157,472 | |||||||||||||
2,300 | Starbucks Corp. * | 43,677 | |||||||||||||
60 | Strayer Education, Inc. | 12,666 | |||||||||||||
Total Consumer Services | 457,071 | ||||||||||||||
Diversified Financials — 1.5% | |||||||||||||||
80 | CME Group, Inc. | 23,283 | |||||||||||||
1,080 | Goldman Sachs Group (The), Inc. | 178,697 | |||||||||||||
100 | IntercontinentalExchange, Inc. * | 9,380 | |||||||||||||
500 | JPMorgan Chase & Co. | 21,730 | |||||||||||||
500 | Moody's Corp. | 13,620 | |||||||||||||
1,100 | Morgan Stanley | 31,856 | |||||||||||||
700 | World Acceptance Corp. * | 18,221 | |||||||||||||
Total Diversified Financials | 296,787 | ||||||||||||||
Energy — 11.1% | |||||||||||||||
300 | Baker Hughes, Inc. | 10,335 | |||||||||||||
1,100 | BJ Services Co. | 17,666 | |||||||||||||
9,500 | Chevron Corp. | 664,430 | |||||||||||||
200 | Cimarex Energy Co. | 7,808 | |||||||||||||
6,251 | ConocoPhillips | 281,482 | |||||||||||||
14,100 | Exxon Mobil Corp. | 975,015 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Energy — continued | |||||||||||||||
900 | Nabors Industries Ltd. * | 15,912 | |||||||||||||
200 | Noble Energy, Inc. | 12,092 | |||||||||||||
1,400 | Occidental Petroleum Corp. | 102,340 | |||||||||||||
200 | Patterson-UTI Energy, Inc. | 2,658 | |||||||||||||
400 | Southwestern Energy Co. * | 14,744 | |||||||||||||
800 | Sunoco, Inc. | 21,520 | |||||||||||||
2,600 | Valero Energy Corp. | 48,724 | |||||||||||||
Total Energy | 2,174,726 | ||||||||||||||
Food & Staples Retailing — 5.8% | |||||||||||||||
1,300 | CVS Caremark Corp. | 48,776 | |||||||||||||
2,500 | Kroger Co. (The) | 53,975 | |||||||||||||
365 | Supervalu, Inc. | 5,238 | |||||||||||||
500 | Sysco Corp. | 12,745 | |||||||||||||
15,300 | Wal-Mart Stores, Inc. | 778,311 | |||||||||||||
7,000 | Walgreen Co. | 237,160 | |||||||||||||
100 | Whole Foods Market, Inc. * | 2,908 | |||||||||||||
Total Food & Staples Retailing | 1,139,113 | ||||||||||||||
Food, Beverage & Tobacco — 6.3% | |||||||||||||||
800 | Archer-Daniels-Midland Co. | 23,064 | |||||||||||||
700 | Campbell Soup Co. | 21,952 | |||||||||||||
10,600 | Coca-Cola Co. (The) | 516,962 | |||||||||||||
1,300 | Coca-Cola Enterprises, Inc. | 26,273 | |||||||||||||
200 | Constellation Brands, Inc.-Class A * | 2,958 | |||||||||||||
600 | Dean Foods Co. * | 10,884 | |||||||||||||
1,300 | General Mills, Inc. | 77,649 | |||||||||||||
300 | Hansen Natural Corp. * | 9,798 | |||||||||||||
1,400 | Hershey Co. (The) | 54,922 | |||||||||||||
200 | JM Smucker Co. (The) | 10,454 | |||||||||||||
700 | Kellogg Co. | 32,963 | |||||||||||||
700 | Kraft Foods, Inc.-Class A | 19,845 | |||||||||||||
700 | Pepsi Bottling Group (The), Inc. | 25,011 | |||||||||||||
7,000 | PepsiCo, Inc. | 396,690 | |||||||||||||
Total Food, Beverage & Tobacco | 1,229,425 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Health Care Equipment & Services — 8.5% | |||||||||||||||
2,800 | AmerisourceBergen Corp. | 59,668 | |||||||||||||
900 | Baxter International, Inc. | 51,228 | |||||||||||||
1,600 | Cardinal Health, Inc. | 55,328 | |||||||||||||
400 | Cerner Corp. * | 24,684 | |||||||||||||
900 | Cigna Corp. | 26,487 | |||||||||||||
900 | Coventry Health Care, Inc. * | 19,647 | |||||||||||||
400 | DaVita, Inc. * | 20,684 | |||||||||||||
200 | Edwards Lifesciences Corp. * | 12,376 | |||||||||||||
1,000 | Express Scripts, Inc. * | 72,220 | |||||||||||||
400 | Humana, Inc. * | 14,280 | |||||||||||||
100 | Inverness Medical Innovations, Inc. * | 3,560 | |||||||||||||
2,100 | McKesson Corp. | 119,406 | |||||||||||||
300 | Medco Health Solutions, Inc. * | 16,566 | |||||||||||||
3,000 | Medtronic, Inc. | 114,900 | |||||||||||||
800 | Omnicare, Inc. | 18,312 | |||||||||||||
200 | Patterson Cos., Inc. * | 5,446 | |||||||||||||
900 | Quest Diagnostics, Inc. | 48,564 | |||||||||||||
300 | ResMed, Inc. * | 13,773 | |||||||||||||
200 | Stryker Corp. | 8,292 | |||||||||||||
20,767 | UnitedHealth Group, Inc. | 581,476 | |||||||||||||
5,100 | WellPoint, Inc. * | 269,535 | |||||||||||||
2,200 | Zimmer Holdings, Inc. * | 104,170 | |||||||||||||
Total Health Care Equipment & Services | 1,660,602 | ||||||||||||||
Household & Personal Products — 3.5% | |||||||||||||||
800 | Avon Products, Inc. | 25,496 | |||||||||||||
200 | Church & Dwight Co., Inc. | 11,426 | |||||||||||||
1,000 | Clorox Co. | 59,090 | |||||||||||||
2,500 | Colgate-Palmolive Co. | 181,750 | |||||||||||||
300 | Estee Lauder Cos. (The), Inc.-Class A | 10,755 | |||||||||||||
1,200 | Kimberly-Clark Corp. | 72,552 | |||||||||||||
5,948 | Procter & Gamble Co. (The) | 321,846 | |||||||||||||
Total Household & Personal Products | 682,915 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Insurance — 2.6% | |||||||||||||||
100 | Aflac, Inc. | 4,062 | |||||||||||||
2,500 | Allstate Corp. (The) | 73,475 | |||||||||||||
600 | Brown & Brown, Inc. | 11,922 | |||||||||||||
1,600 | Chubb Corp. | 79,024 | |||||||||||||
500 | Fidelity National Financial, Inc.-Class A | 7,510 | |||||||||||||
400 | HCC Insurance Holdings, Inc. | 10,576 | |||||||||||||
900 | Marsh & McLennan Cos., Inc. | 21,186 | |||||||||||||
300 | Odyssey Re Holdings Corp. | 15,195 | |||||||||||||
1,100 | Old Republic International Corp. | 13,101 | |||||||||||||
1,200 | Progressive Corp. (The) * | 19,824 | |||||||||||||
300 | Torchmark Corp. | 12,783 | |||||||||||||
4,100 | Travelers Cos. (The), Inc. | 206,722 | |||||||||||||
35 | Unum Group | 789 | |||||||||||||
1,300 | W.R. Berkley Corp. | 33,215 | |||||||||||||
Total Insurance | 509,384 | ||||||||||||||
Materials — 1.1% | |||||||||||||||
1,100 | Alcoa, Inc. | 13,255 | |||||||||||||
1,500 | Barrick Gold Corp. | 52,050 | |||||||||||||
2,100 | Dow Chemical Co. (The) | 44,709 | |||||||||||||
200 | Freeport-McMoRan Copper & Gold, Inc. | 12,596 | |||||||||||||
400 | Nucor Corp. | 17,816 | |||||||||||||
500 | Pactiv Corp. * | 12,425 | |||||||||||||
200 | Reliance Steel & Aluminum Co. | 7,388 | |||||||||||||
300 | Scotts Miracle-Gro Co. (The)-Class A | 12,207 | |||||||||||||
1,100 | Southern Copper Corp. | 31,086 | |||||||||||||
200 | Vulcan Materials Co. | 10,008 | |||||||||||||
Total Materials | 213,540 | ||||||||||||||
Media — 0.9% | |||||||||||||||
700 | Cablevision Systems Corp.-Class A | 15,638 | |||||||||||||
2,400 | CBS Corp.-Class B (Non Voting) | 24,840 | |||||||||||||
3,500 | Comcast Corp.-Class A | 53,620 | |||||||||||||
400 | DirecTV Group (The), Inc. * | 9,904 |
See accompanying notes to the financial statements.
6
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Media — continued | |||||||||||||||
100 | McGraw-Hill Cos. (The), Inc. | 3,361 | |||||||||||||
2,800 | News Corp.-Class A | 30,016 | |||||||||||||
566 | Time Warner Cable, Inc. | 20,897 | |||||||||||||
500 | Viacom, Inc. * | 12,520 | |||||||||||||
Total Media | 170,796 | ||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 19.2% | |||||||||||||||
7,400 | Abbott Laboratories | 334,702 | |||||||||||||
400 | Allergan, Inc. | 22,368 | |||||||||||||
8,500 | Amgen, Inc. * | 507,790 | |||||||||||||
1,000 | Biogen Idec, Inc. * | 50,210 | |||||||||||||
9,800 | Bristol-Myers Squibb Co. | 216,874 | |||||||||||||
200 | Cephalon, Inc. * | 11,386 | |||||||||||||
5,200 | Eli Lilly & Co. | 173,992 | |||||||||||||
3,600 | Forest Laboratories, Inc. * | 105,372 | |||||||||||||
1,600 | Gilead Sciences, Inc. * | 72,096 | |||||||||||||
11,120 | Johnson & Johnson | 672,093 | |||||||||||||
11,100 | Merck & Co., Inc. | 359,973 | |||||||||||||
100 | Myriad Genetics, Inc. * | 3,057 | |||||||||||||
47,090 | Pfizer, Inc. | 786,403 | |||||||||||||
2,600 | Schering-Plough Corp. | 73,268 | |||||||||||||
600 | Thermo Fisher Scientific, Inc. * | 27,126 | |||||||||||||
400 | Vertex Pharmaceuticals, Inc. * | 14,964 | |||||||||||||
6,900 | Wyeth | 330,165 | |||||||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 3,761,839 | ||||||||||||||
Retailing — 6.2% | |||||||||||||||
600 | Abercrombie & Fitch Co.-Class A | 19,374 | |||||||||||||
600 | Advance Auto Parts, Inc. | 25,380 | |||||||||||||
1,100 | Amazon.com, Inc. * | 89,309 | |||||||||||||
700 | American Eagle Outfitters, Inc. | 9,450 | |||||||||||||
600 | AutoNation, Inc. * | 11,388 | |||||||||||||
580 | AutoZone, Inc. * | 85,405 | |||||||||||||
1,500 | Bed Bath & Beyond, Inc. * | 54,720 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Retailing — continued | |||||||||||||||
1,600 | Best Buy Co., Inc. | 58,048 | |||||||||||||
600 | Dollar Tree, Inc. * | 29,964 | |||||||||||||
1,000 | Family Dollar Stores, Inc. | 30,280 | |||||||||||||
1,000 | Gap (The), Inc. | 19,650 | |||||||||||||
13,300 | Home Depot, Inc. | 362,957 | |||||||||||||
400 | J.C. Penney Co., Inc. | 12,016 | |||||||||||||
1,800 | Kohl's Corp. * | 92,862 | |||||||||||||
200 | Limited Brands, Inc. | 2,984 | |||||||||||||
5,300 | Lowe's Cos., Inc. | 113,950 | |||||||||||||
300 | Netflix, Inc. * | 13,098 | |||||||||||||
400 | Nordstrom, Inc. | 11,216 | |||||||||||||
600 | O'Reilly Automotive, Inc. * | 22,968 | |||||||||||||
600 | PetSmart, Inc. | 12,546 | |||||||||||||
80 | Priceline.com Inc. * | 12,318 | |||||||||||||
400 | Ross Stores, Inc. | 18,656 | |||||||||||||
100 | Sears Holdings Corp. * | 6,345 | |||||||||||||
800 | Sherwin-Williams Co. (The) | 48,160 | |||||||||||||
900 | Staples, Inc. | 19,449 | |||||||||||||
700 | Target Corp. | 32,900 | |||||||||||||
300 | Urban Outfitters, Inc. * | 8,529 | |||||||||||||
Total Retailing | 1,223,922 | ||||||||||||||
Semiconductors & Semiconductor Equipment — 0.5% | |||||||||||||||
600 | Altera Corp. | 11,526 | |||||||||||||
900 | Broadcom Corp.-Class A * | 25,605 | |||||||||||||
300 | Cree, Inc. * | 11,052 | |||||||||||||
1,000 | NVIDIA Corp. * | 14,520 | |||||||||||||
1,000 | Texas Instruments, Inc. | 24,590 | |||||||||||||
200 | Xilinx, Inc. | 4,448 | |||||||||||||
Total Semiconductors & Semiconductor Equipment | 91,741 | ||||||||||||||
Software & Services — 12.6% | |||||||||||||||
1,100 | Affiliated Computer Services, Inc.-Class A * | 49,280 | |||||||||||||
300 | Alliance Data Systems Corp. * | 16,668 | |||||||||||||
600 | Automatic Data Processing, Inc. | 23,010 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Software & Services — continued | |||||||||||||||
300 | BMC Software, Inc. * | 10,695 | |||||||||||||
600 | Citrix Systems, Inc. * | 21,408 | |||||||||||||
900 | Cognizant Technology Solutions Corp.-Class A * | 31,392 | |||||||||||||
300 | Computer Sciences Corp. * | 14,655 | |||||||||||||
4,200 | eBay, Inc. * | 92,988 | |||||||||||||
300 | Global Payments, Inc. | 12,732 | |||||||||||||
1,120 | Google, Inc.-Class A * | 517,070 | |||||||||||||
400 | Intuit, Inc. * | 11,108 | |||||||||||||
60 | MasterCard, Inc.-Class A | 12,158 | |||||||||||||
700 | McAfee, Inc. * | 27,846 | |||||||||||||
33,000 | Microsoft Corp. | 813,450 | |||||||||||||
12,800 | Novell, Inc. * | 55,680 | |||||||||||||
32,700 | Oracle Corp. | 715,149 | |||||||||||||
1,500 | Symantec Corp. * | 22,680 | |||||||||||||
300 | Visa, Inc.-Class A | 21,330 | |||||||||||||
Total Software & Services | 2,469,299 | ||||||||||||||
Technology Hardware & Equipment — 8.2% | |||||||||||||||
360 | Apple, Inc. * | 60,556 | |||||||||||||
26,200 | Cisco Systems, Inc. * | 565,920 | |||||||||||||
1,600 | Corning, Inc. | 24,128 | |||||||||||||
5,000 | Dell, Inc. * | 79,150 | |||||||||||||
1,800 | EMC Corp. * | 28,620 | |||||||||||||
400 | Hewlett-Packard Co. | 17,956 | |||||||||||||
1,480 | International Business Machines Corp. | 174,714 | |||||||||||||
400 | Juniper Networks, Inc. * | 9,228 | |||||||||||||
5,100 | Motorola, Inc. | 36,618 | |||||||||||||
12,532 | Qualcomm, Inc. | 581,735 | |||||||||||||
700 | SanDisk Corp. * | 12,390 | |||||||||||||
500 | Western Digital Corp. * | 17,140 | |||||||||||||
Total Technology Hardware & Equipment | 1,608,155 | ||||||||||||||
Telecommunication Services — 1.7% | |||||||||||||||
4,339 | AT&T, Inc. | 113,031 | |||||||||||||
1,000 | CenturyTel, Inc. | 32,230 | |||||||||||||
1,300 | Frontier Communications Corp. | 9,243 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Telecommunication Services — continued | |||||||||||||||
600 | MetroPCS Communications, Inc. * | 4,776 | |||||||||||||
5,684 | Verizon Communications, Inc. | 176,431 | |||||||||||||
Total Telecommunication Services | 335,711 | ||||||||||||||
Transportation — 0.4% | |||||||||||||||
300 | CH Robinson Worldwide, Inc. | 16,878 | |||||||||||||
400 | Norfolk Southern Corp. | 18,348 | |||||||||||||
900 | Southwest Airlines Co. | 7,362 | |||||||||||||
600 | United Parcel Service, Inc.-Class B | 32,076 | |||||||||||||
Total Transportation | 74,664 | ||||||||||||||
Utilities — 0.7% | |||||||||||||||
600 | Aqua America, Inc. | 10,110 | |||||||||||||
600 | Consolidated Edison, Inc. | 24,114 | |||||||||||||
200 | FPL Group, Inc. | 11,236 | |||||||||||||
300 | NSTAR | 9,492 | |||||||||||||
1,300 | PG&E Corp. | 52,767 | |||||||||||||
300 | Progress Energy, Inc. | 11,859 | |||||||||||||
600 | Southern Co. | 18,720 | |||||||||||||
Total Utilities | 138,298 | ||||||||||||||
TOTAL COMMON STOCKS (COST $19,590,831) | 18,893,046 | ||||||||||||||
SHORT-TERM INVESTMENTS — 3.8% | |||||||||||||||
Money Market Funds — 3.8% | |||||||||||||||
751,769 | State Street Institutional Treasury Money Market Fund-Institutional Class | 751,769 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $751,769) | 751,769 | ||||||||||||||
TOTAL INVESTMENTS — 100.1% (Cost $20,342,600) | 19,644,815 | ||||||||||||||
Other Assets and Liabilities (net) — (0.1%) | (12,821 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 19,631,994 |
See accompanying notes to the financial statements.
10
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
8 | S&P 500 E-Mini Index | September 2009 | $ | 407,880 | $ | 28,944 |
As of August 31, 2009, for the futures contracts held, 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.
11
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $20,342,600) (Note 2) | $ | 19,644,815 | |||||
Dividends and interest receivable | 53,717 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 36,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 5,859 | ||||||
Total assets | 19,740,391 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 45,442 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 5,452 | ||||||
Shareholder service fee | 2,477 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 81 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 3,080 | ||||||
Accrued expenses | 51,865 | ||||||
Total liabilities | 108,397 | ||||||
Net assets | $ | 19,631,994 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 31,830,369 | |||||
Accumulated undistributed net investment income | 59,830 | ||||||
Accumulated net realized loss | (11,589,364 | ) | |||||
Net unrealized depreciation | (668,841 | ) | |||||
$ | 19,631,994 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 19,631,994 | |||||
Shares outstanding: | |||||||
Class III | 2,329,393 | ||||||
Net asset value per share: | |||||||
Class III | $ | 8.43 |
See accompanying notes to the financial statements.
12
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $57) | $ | 231,835 | |||||
Total investment income | 231,835 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 31,085 | ||||||
Shareholder service fee – Class III (Note 3) | 14,130 | ||||||
Audit and tax fees | 28,152 | ||||||
Custodian, fund accounting agent and transfer agent fees | 9,844 | ||||||
Registration fees | 1,104 | ||||||
Legal fees | 368 | ||||||
Trustees fees and related expenses (Note 3) | 218 | ||||||
Miscellaneous | 184 | ||||||
Total expenses | 85,085 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (39,560 | ) | |||||
Expense reductions (Note 2) | (2 | ) | |||||
Net expenses | 45,523 | ||||||
Net investment income (loss) | 186,312 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (2,281,713 | ) | |||||
Closed futures contracts | 40,400 | ||||||
Net realized gain (loss) | (2,241,313 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 6,884,556 | ||||||
Open futures contracts | 97,554 | ||||||
Net unrealized gain (loss) | 6,982,110 | ||||||
Net realized and unrealized gain (loss) | 4,740,797 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 4,927,109 |
See accompanying notes to the financial statements.
13
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 186,312 | $ | 411,635 | |||||||
Net realized gain (loss) | (2,241,313 | ) | (5,596,096 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 6,982,110 | (3,998,033 | ) | ||||||||
Net increase (decrease) in net assets from operations | 4,927,109 | (9,182,494 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (197,016 | ) | (407,510 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | (1,946,953 | ) | (18,757,975 | ) | |||||||
Total increase (decrease) in net assets | 2,783,140 | (28,347,979 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 16,848,854 | 45,196,833 | |||||||||
End of period (including accumulated undistributed net investment income of $59,830 and $70,534, respectively) | $ | 19,631,994 | $ | 16,848,854 |
See accompanying notes to the financial statements.
14
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.54 | $ | 10.03 | $ | 12.88 | $ | 12.45 | $ | 12.24 | $ | 11.76 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.08 | 0.15 | 0.19 | 0.18 | 0.20 | 0.17 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 1.89 | (3.50 | ) | (0.96 | )(a) | 0.54 | 0.44 | 0.54 | |||||||||||||||||||
Total from investment operations | 1.97 | (3.35 | ) | (0.77 | ) | 0.72 | 0.64 | 0.71 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.08 | ) | (0.14 | ) | (0.22 | ) | (0.23 | ) | (0.15 | ) | (0.18 | ) | |||||||||||||||
From net realized gains | — | — | (1.86 | ) | (0.06 | ) | (0.28 | ) | (0.05 | ) | |||||||||||||||||
Total distributions | (0.08 | ) | (0.14 | ) | (2.08 | ) | (0.29 | ) | (0.43 | ) | (0.23 | ) | |||||||||||||||
Net asset value, end of period | $ | 8.43 | $ | 6.54 | $ | 10.03 | $ | 12.88 | $ | 12.45 | $ | 12.24 | |||||||||||||||
Total Return(b) | 30.30 | %** | (33.76 | )% | (7.30 | )% | 5.87 | % | 5.40 | % | 6.16 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 19,632 | $ | 16,849 | $ | 45,197 | $ | 188,133 | $ | 224,097 | $ | 221,661 | |||||||||||||||
Net expenses to average daily net assets | 0.48 | %(c)* | 0.48 | %(c) | 0.48 | %(c) | 0.48 | % | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 1.98 | %* | 1.67 | % | 1.52 | % | 1.46 | % | 1.68 | % | 1.43 | % | |||||||||||||||
Portfolio turnover rate | 29 | %** | 65 | % | 74 | % | 73 | % | 63 | % | 68 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.42 | %* | 0.39 | % | 0.08 | % | 0.06 | % | 0.04 | % | 0.04 | % |
(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 and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
15
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Tobacco-Free Core Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 its benchmark, the S&P 500 Index. The Fund typically makes equity investments in companies that issue stocks included in the S&P 500 Index, a U.S. stock index, and in companies with similar market capitalizations, other than tobacco-producing companies. Under normal circumstances, the Fund must invest at least 80% of its assets, and expects to invest substantially all of its assets, in investments in tobacco-free companies. The term "tobacco-free companies" refers to companies that are not listed in the Tobacco Producing Issuer industry classification maintained by Ford Investor Services. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment o bjective. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the counter derivatives, including options, futures, and swap contracts. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives)
16
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
Asset Valuation Inputs | Investments in Securities | Other Financial Instruments* | |||||||||
Level 1 - Quoted Prices | $ | 18,893,046 | $ | 28,944 | |||||||
Level 2 - Other Significant Observable Inputs | 751,769 | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | 19,644,815 | $ | 28,944 |
* Other financial instruments include futures contracts.
Liability Valuation Inputs | Investments in Securities | Other Financial Instruments | |||||||||
Level 1 - Quoted Prices | $ | — | $ | — | |||||||
Level 2 - Other Significant Observable Inputs | — | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | — | $ | — |
17
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
All of the Fund's common stocks and futures are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks. All short-term investments are classified as Level 2.
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. 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 various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
18
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility
19
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
20
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $2,211,392.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (6,261,595 | ) | ||||
Total | $ | (6,261,595 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 21,361,341 | $ | 945,796 | $ | (2,662,322 | ) | $ | (1,716,526 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
21
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds.
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Market Risk — Value Securities — The Fund purchases some equity securities at prices below what the Manager believes to be their fundamental value. The Fund bears the risk that the price of these securities may not increase to what the Manager believes to be their fundamental value or that the Manager may have overestimated their fundamental value.
Other principal risks of an investment in the Fund include Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Credit and Counterparty Risk (risk of default of a derivatives counterparty or borrower of the Fund's securities), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected).
22
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index).
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
23
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
24
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | 28,944 | — | 28,944 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 28,944 | $ | — | $ | 28,944 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
25
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options, rights & warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | 40,400 | — | 40,400 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 40,400 | $ | — | $ | 40,400 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options, rights & warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | 97,554 | — | 97,554 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 97,554 | $ | — | $ | 97,554 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Futures | |||||||
Average notional amount outstanding | $ | 395,858 | |||||
Highest notional amount outstanding | 437,140 | ||||||
Lowest notional amount outstanding | 344,540 |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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
26
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.33% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fun d) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 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.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $218 and $92, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $5,256,945 and $7,049,702, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
27
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2009, 85.05% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 448 | $ | 3,188 | 431 | $ | 3,713 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 24,352 | 179,453 | 41,507 | 366,324 | |||||||||||||||
Shares repurchased | (271,286 | ) | (2,129,594 | ) | (1,971,521 | ) | (19,128,012 | ) | |||||||||||
Net increase (decrease) | (246,486 | ) | $ | (1,946,953 | ) | (1,929,583 | ) | $ | (18,757,975 | ) |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
28
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In
29
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefi t 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
30
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (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.
Following their review, on June 15, 2009, 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, 2009.
31
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.48 | % | $ | 1,000.00 | $ | 1,303.00 | $ | 2.79 | |||||||||||
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, 2009, 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 Flexible Equities Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
GMO Flexible Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 99.8 | % | |||||
Short-Term Investments | 0.6 | ||||||
Other | (0.4 | ) | |||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
Japan | 100.0 | % | |||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments | ||||||
Capital Goods | 15.7 | % | |||||
Banks | 12.3 | ||||||
Retailing | 11.8 | ||||||
Diversified Financials | 10.8 | ||||||
Utilities | 7.7 | ||||||
Telecommunication Services | 7.2 | ||||||
Real Estate | 6.0 | ||||||
Food & Staples Retailing | 5.1 | ||||||
Transportation | 4.3 | ||||||
Consumer Durables & Apparel | 3.8 | ||||||
Food, Beverage & Tobacco | 3.2 | ||||||
Materials | 3.0 | ||||||
Commercial & Professional Services | 2.5 | ||||||
Health Care Equipment & Services | 2.4 | ||||||
Consumer Services | 2.0 | ||||||
Software & Services | 1.3 | ||||||
Media | 0.5 | ||||||
Household & Personal Products | 0.4 | ||||||
100.0 | % |
1
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 99.8% | |||||||||||||||
Japan — 99.8% | |||||||||||||||
187 | Access Co Ltd * | 501,137 | |||||||||||||
180,900 | Aeon Co Ltd | 1,914,751 | |||||||||||||
140,200 | Aeon Credit Service Co Ltd | 1,584,340 | |||||||||||||
55,500 | Aica Kogyo Co Ltd | 573,614 | |||||||||||||
386,650 | Aiful Corp | 1,154,287 | |||||||||||||
28,900 | Alfresa Holdings Corp | 1,307,600 | |||||||||||||
33,800 | Alpen Co Ltd | 570,764 | |||||||||||||
49,300 | Aoyama Trading Co Ltd | 915,045 | |||||||||||||
901,000 | Aozora Bank Ltd * | 1,336,816 | |||||||||||||
21,000 | Arcs Co Ltd | 320,283 | |||||||||||||
12,000 | Ariake Japan Co Ltd | 187,399 | |||||||||||||
722,000 | Asahi Glass Co Ltd | 6,279,817 | |||||||||||||
30,100 | Asatsu-DK Inc | 650,515 | |||||||||||||
32,300 | Autobacs Seven Co Ltd | 1,209,777 | |||||||||||||
20,000 | Bank of Ikeda Ltd (The) * | 769,702 | |||||||||||||
6,200 | Bank of Okinawa Ltd (The) | 245,342 | |||||||||||||
39,000 | Bank of Saga Ltd (The) | 134,509 | |||||||||||||
22,200 | Bank of the Ryukyus Ltd | 308,056 | |||||||||||||
580,000 | Bank of Yokohama Ltd (The) | 3,272,885 | |||||||||||||
142,600 | Belluna Co Ltd | 628,036 | |||||||||||||
164,500 | Best Denki Co Ltd | 843,125 | |||||||||||||
2,690 | BIC Camera Inc | 1,077,309 | |||||||||||||
11,000 | BML Inc | 295,970 | |||||||||||||
31,000 | Bunka Shutter Co Ltd | 118,625 | |||||||||||||
19,500 | Canon Marketing Japan Inc | 327,917 | |||||||||||||
35,800 | Cawachi Ltd | 769,039 | |||||||||||||
378,900 | Cedyna Financial Corp * | 708,133 | |||||||||||||
478,000 | Central Glass Co Ltd | 2,351,282 | |||||||||||||
174,500 | Century Tokyo Leasing Corp | 2,005,840 | |||||||||||||
289,000 | Chiba Bank Ltd | 1,818,620 | |||||||||||||
28,600 | Chiba Kogyo Bank Ltd * | 246,166 | |||||||||||||
30,300 | Chiyoda Integre Co Ltd | 357,316 |
See accompanying notes to the financial statements.
2
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
145,400 | Chubu Electric Power Co Inc | 3,380,610 | |||||||||||||
25,200 | Chugoku Electric Power Co Inc | 553,654 | |||||||||||||
771,000 | Chuo Mitsui Trust Holdings Inc | 3,242,305 | |||||||||||||
54,600 | Circle K Sunkus Co Ltd | 887,124 | |||||||||||||
17,700 | Coca-Cola Central Japan Co Ltd | 243,452 | |||||||||||||
6,500 | Cocokara Fine Holdings Inc | 133,372 | |||||||||||||
136,200 | COMSYS Holdings Corp | 1,570,138 | |||||||||||||
194,785 | Credit Saison Co Ltd | 2,605,406 | |||||||||||||
94,900 | CSK Holdings Corp * | 457,366 | |||||||||||||
138,000 | Culture Convenience Club Co Ltd | 1,019,595 | |||||||||||||
299 | DA Office Investment Corp (REIT) | 945,566 | |||||||||||||
253,000 | Dai Nippon Printing Co Ltd | 3,689,242 | |||||||||||||
25,800 | Daidoh Ltd | 191,467 | |||||||||||||
327,050 | Daiei Inc * | 1,450,695 | |||||||||||||
54,700 | Daiichikosho Co Ltd | 723,139 | |||||||||||||
34,000 | Daiken Corp | 69,419 | |||||||||||||
1,288,000 | Daikyo Inc * | 3,347,914 | |||||||||||||
56,000 | Daimei Telecom Engineering Corp | 547,761 | |||||||||||||
161,000 | Daio Paper Corp | 1,537,603 | |||||||||||||
86,900 | Daito Trust Construction Co Ltd | 4,141,274 | |||||||||||||
47,000 | Daiwa House Industry Co Ltd | 523,066 | |||||||||||||
1,089,000 | Daiwa Securities Group Inc | 6,706,820 | |||||||||||||
90,000 | Daiwabo Co Ltd | 412,492 | |||||||||||||
92,600 | DCM Japan Holdings Co Ltd | 623,336 | |||||||||||||
97,100 | Don Quijote Co Ltd | 2,324,370 | |||||||||||||
23,900 | Doshisha Co Ltd | 441,070 | |||||||||||||
17,600 | DTS Corp | 161,153 | |||||||||||||
1,431 | eAccess Ltd | 1,051,626 | |||||||||||||
329,300 | Edion Corp | 2,808,552 | |||||||||||||
30,400 | Electric Power Development Co Ltd | 922,011 | |||||||||||||
73,800 | Fast Retailing Co Ltd | 8,836,156 | |||||||||||||
20,300 | FP Corp | 964,333 | |||||||||||||
1,147,000 | Fuji Electric Holdings Co Ltd | 2,189,219 | |||||||||||||
101,800 | Fuji Oil Co Ltd | 1,428,446 |
See accompanying notes to the financial statements.
3
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
18,000 | Fuji Soft Inc | 340,197 | |||||||||||||
11,000 | Fujicco Co Ltd | 128,310 | |||||||||||||
18,000 | Futaba Corp | 309,577 | |||||||||||||
73,700 | Fuyo General Lease Co Ltd | 1,643,131 | |||||||||||||
1,145 | Geo Corp | 1,181,526 | |||||||||||||
104 | Global One REIT Co Ltd | 774,789 | |||||||||||||
72,590 | Goldcrest Co Ltd | 2,122,022 | |||||||||||||
126,000 | GS Yuasa Corp | 1,097,261 | |||||||||||||
29,280 | Gulliver International Co Ltd | 2,048,910 | |||||||||||||
69,300 | H.I.S. Co Ltd | 1,471,291 | |||||||||||||
256,000 | Hachijuni Bank Ltd (The) | 1,467,568 | |||||||||||||
13,120 | Hakuhodo DY Holdings Inc | 728,683 | |||||||||||||
473,000 | Hankyu Hanshin Holdings Inc | 2,264,787 | |||||||||||||
4,129,000 | Haseko Corp * | 4,653,843 | |||||||||||||
15,200 | Heiwado Co Ltd | 222,866 | |||||||||||||
62,000 | Higashi-Nippon Bank Ltd (The) | 143,898 | |||||||||||||
70,500 | Hikari Tsushin Inc | 1,522,417 | |||||||||||||
193,000 | Hiroshima Bank Ltd (The) | 823,734 | |||||||||||||
206,000 | Hitachi Cable Ltd | 688,018 | |||||||||||||
105,800 | Hitachi Capital Corp | 1,518,646 | |||||||||||||
27,300 | Hitachi Systems & Services Ltd | 629,060 | |||||||||||||
21,800 | Hogy Medical Co Ltd | 1,223,305 | |||||||||||||
82,700 | Hokkaido Electric Power Co Inc | 1,704,337 | |||||||||||||
71,000 | Hokuetsu Bank Ltd (The) | 144,038 | |||||||||||||
110,000 | Hokuetsu Paper Mills Ltd | 596,250 | |||||||||||||
39,300 | Hokuriku Electric Power Co | 951,929 | |||||||||||||
15,500 | Hokuto Corp | 364,580 | |||||||||||||
82,070 | Honeys Co Ltd | 628,094 | |||||||||||||
31,400 | IBJ Leasing Co Ltd | 450,893 | |||||||||||||
90,300 | Ito En Ltd | 1,655,942 | |||||||||||||
20,100 | Itoki Corp | 53,987 | |||||||||||||
37,200 | Izumi Co Ltd | 541,609 | |||||||||||||
101,000 | Izumiya Co Ltd | 618,775 | |||||||||||||
72,000 | J Front Retailing Co Ltd | 407,435 |
See accompanying notes to the financial statements.
4
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
170,000 | J-Oil Mills Inc | 629,889 | |||||||||||||
348,000 | JACCS Co Ltd | 882,123 | |||||||||||||
628 | Japan Retail Fund Investment Corp (REIT) | 3,344,730 | |||||||||||||
74,000 | Joshin Denki Co Ltd | 595,598 | |||||||||||||
136,600 | JS Group Corp | 2,416,488 | |||||||||||||
129,900 | K's Holdings Corp | 3,984,075 | |||||||||||||
1,360,000 | Kajima Corp | 3,813,030 | |||||||||||||
327 | Kakaku.com Inc | 1,222,071 | |||||||||||||
88,000 | Kamigumi Co Ltd | 744,997 | |||||||||||||
72,000 | Kandenko Co Ltd | 498,552 | |||||||||||||
20,700 | Kansai Electric Power Co Inc | 475,684 | |||||||||||||
126,000 | Kansai Urban Banking Corp | 204,912 | |||||||||||||
63,500 | Kanto Tsukuba Bank Ltd (The) * | 216,778 | |||||||||||||
32,800 | Kao Corp | 830,737 | |||||||||||||
32,000 | Kasumi Co Ltd | 153,660 | |||||||||||||
32,600 | Kato Sangyo Co Ltd | 549,933 | |||||||||||||
156 | KDDI Corp | 886,831 | |||||||||||||
103,000 | Keihan Electric Railway Co Ltd | 456,431 | |||||||||||||
260,000 | Keihin Electric Express Railway Co Ltd | 2,154,041 | |||||||||||||
41,000 | Keisei Electric Railway Co Ltd | 286,643 | |||||||||||||
39,400 | Keiyo Co Ltd | 197,635 | |||||||||||||
4,365 | Kenedix Inc * | 2,105,994 | |||||||||||||
277 | Kenedix Realty Investment Corp (REIT) | 1,036,596 | |||||||||||||
717,000 | Kintetsu Corp | 3,104,924 | |||||||||||||
116,000 | Kirin Holdings Co Ltd | 1,695,892 | |||||||||||||
11,442 | KK daVinci Holdings * | 1,753,218 | |||||||||||||
68,200 | Kohnan Shoji Co Ltd | 772,739 | |||||||||||||
151,000 | Kojima Co Ltd | 782,651 | |||||||||||||
193,000 | Krosaki Harima Corp | 381,455 | |||||||||||||
348,000 | Kurabo Industries Ltd | 765,921 | |||||||||||||
80,000 | Kyodo Printing Co Ltd | 278,485 | |||||||||||||
17,400 | Kyoritsu Maintenance Co Ltd | 287,602 | |||||||||||||
93,000 | Kyowa Exeo Corp | 936,268 | |||||||||||||
65,000 | Kyudenko Corp | 428,077 |
See accompanying notes to the financial statements.
5
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
231,300 | Kyushu Electric Power Co Inc | 5,107,640 | |||||||||||||
285,200 | Leopalace21 Corp | 2,579,725 | |||||||||||||
267,000 | Maeda Corp | 882,867 | |||||||||||||
78,000 | Maeda Road Construction Co Ltd | 686,964 | |||||||||||||
19,200 | Mandom Corp | 557,653 | |||||||||||||
67,000 | Marudai Food Co Ltd | 189,871 | |||||||||||||
723,000 | Maruha Group Inc | 1,094,923 | |||||||||||||
147,000 | Marui Group Co Ltd | 1,016,876 | |||||||||||||
22,000 | Maruzen Showa Unyu Co Ltd | 72,820 | |||||||||||||
36,600 | Matsuda Sangyo Co Ltd | 557,557 | |||||||||||||
151,800 | Matsui Securities Co Ltd | 1,405,543 | |||||||||||||
67,000 | McDonald's Holdings Co (Japan) Ltd | 1,253,511 | |||||||||||||
200,500 | Mediceo Paltac Holdings Co Ltd | 2,865,129 | |||||||||||||
20,000 | Megane TOP Co Ltd | 324,630 | |||||||||||||
53,000 | Mercian Corp | 133,251 | |||||||||||||
346 | MID REIT Inc | 766,031 | |||||||||||||
18,200 | Mikuni Coca-Cola Bottling Co Ltd | 153,479 | |||||||||||||
64,000 | Miraca Holdings Inc | 1,845,404 | |||||||||||||
852,000 | Mitsubishi Electric Corp | 6,330,819 | |||||||||||||
417,000 | Mitsubishi Paper Mills Ltd | 587,006 | |||||||||||||
2,587,600 | Mitsubishi UFJ Financial Group Inc | 16,450,064 | |||||||||||||
124,880 | Mitsubishi UFJ Lease & Finance Co Ltd | 3,957,526 | |||||||||||||
25,000 | Mitsui Home Co Ltd | 161,783 | |||||||||||||
1,990,300 | Mizuho Financial Group Inc | 4,842,212 | |||||||||||||
449,000 | Mizuho Investors Securities Co Ltd * | 530,453 | |||||||||||||
77,000 | Morinaga & Co Ltd | 165,494 | |||||||||||||
371,000 | Morinaga Milk Industry Co Ltd | 1,618,957 | |||||||||||||
255,000 | Nagoya Railroad Co Ltd | 873,997 | |||||||||||||
309,000 | Nankai Electric Railway Co Ltd | 1,365,651 | |||||||||||||
83,000 | Nanto Bank Ltd (The) | 489,563 | |||||||||||||
14,800 | NEC Fielding Ltd | 231,134 | |||||||||||||
14,300 | NEC Networks & System Integration Corp | 196,066 | |||||||||||||
584 | Net One Systems Co Ltd | �� | 960,376 | ||||||||||||
424,000 | Nichias Corp | 1,630,794 |
See accompanying notes to the financial statements.
6
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
19,200 | Nichiha Corp | 156,247 | |||||||||||||
63,800 | Nichii Gakkan Co | 737,873 | |||||||||||||
139,000 | Nihon Yamamura Glass Co Ltd | 440,686 | |||||||||||||
203 | Nippon Commercial Investment Corp (REIT) | 364,419 | |||||||||||||
146,000 | Nippon Corp | 1,262,756 | |||||||||||||
86,000 | Nippon Densetsu Kogyo Co Ltd | 851,658 | |||||||||||||
758,000 | Nippon Express Co Ltd | 3,384,019 | |||||||||||||
123,000 | Nippon Flour Mills Co Ltd | 631,269 | |||||||||||||
69,000 | Nippon Konpo Unyu Soko Co Ltd | 846,234 | |||||||||||||
125,400 | Nippon Paper Group Inc | 3,685,512 | |||||||||||||
490 | Nippon Residential Investment Corp (REIT) | 1,219,148 | |||||||||||||
62,600 | Nippon Signal Co Ltd (The) | 626,111 | |||||||||||||
394,900 | Nippon Suisan Kaisha Ltd | 1,183,715 | |||||||||||||
404,500 | Nippon Telegraph & Telephone Corp | 18,007,520 | |||||||||||||
1,272,000 | Nishimatsu Construction Co Ltd | 2,269,173 | |||||||||||||
90,200 | Nishimatsuya Chain Co Ltd | 902,367 | |||||||||||||
60,300 | Nissen Holdings Co Ltd | 200,925 | |||||||||||||
176,000 | Nisshin Oillio Group Ltd (The) | 935,721 | |||||||||||||
113,000 | Nisshinbo Holdings Inc | 1,318,407 | |||||||||||||
127,000 | Nissin Corp | 350,030 | |||||||||||||
55,250 | Nitori Co Ltd | 4,268,138 | |||||||||||||
421,000 | Nitto Boseki Co Ltd | 831,617 | |||||||||||||
19,900 | Nitto Kogyo Corp | 190,095 | |||||||||||||
595,000 | Nomura Holdings Inc | 5,272,449 | |||||||||||||
6,214 | NTT Docomo Inc | 9,567,177 | |||||||||||||
816,000 | Obayashi Corp | 3,671,939 | |||||||||||||
244,000 | Odakyu Electric Railway Co Ltd | 2,190,104 | |||||||||||||
329,000 | OJI Paper Co Ltd | 1,550,164 | |||||||||||||
36,000 | Okamura Corp | 204,644 | |||||||||||||
124 | Okinawa Cellular Telephone Co | 245,562 | |||||||||||||
21,200 | Okinawa Electric Power Co | 1,262,777 | |||||||||||||
11,000 | Okuwa Co Ltd | 135,189 | |||||||||||||
50,000 | Olympus Corp | 1,355,543 | |||||||||||||
105,000 | Onward Holdings Co Ltd | 763,695 | |||||||||||||
977,000 | Orient Corp * | 1,069,521 |
See accompanying notes to the financial statements.
7
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
29,500 | Oriental Land Co Ltd | 1,994,401 | |||||||||||||
223,370 | ORIX Corp | 17,115,797 | |||||||||||||
245,000 | Osaka Gas Co Ltd | 846,724 | |||||||||||||
18,000 | Paris Miki Holdings Inc | 175,957 | |||||||||||||
85,300 | Park24 Co Ltd | 860,705 | |||||||||||||
349 | Pasona Group Inc | 251,064 | |||||||||||||
1,159,500 | Penta Ocean Construction Co Ltd * | 1,582,252 | |||||||||||||
15,300 | Pigeon Corp | 633,094 | |||||||||||||
126 | PILOT Corp | 147,466 | |||||||||||||
35,500 | PLENUS Co Ltd | 524,627 | |||||||||||||
42,260 | Point Inc | 2,583,338 | |||||||||||||
131 | Premier Investment Corp (REIT) | 550,320 | |||||||||||||
76,900 | QP Corp | 825,871 | |||||||||||||
1,577 | Rakuten Inc | 952,602 | |||||||||||||
669,600 | Resona Holdings Inc | 9,120,906 | |||||||||||||
20,000 | Resorttrust Inc | 247,547 | |||||||||||||
61,700 | Ricoh Leasing Co Ltd | 1,339,869 | |||||||||||||
34,700 | Right On Co Ltd | 327,516 | |||||||||||||
195,100 | Round One Corp | 1,767,551 | |||||||||||||
33,900 | Ryohin Keikaku Co Ltd | 1,547,067 | |||||||||||||
25,800 | Ryoshoku Ltd | 604,101 | |||||||||||||
144,000 | Sagami Railway Co Ltd | 620,644 | |||||||||||||
22,600 | Saint Marc Holdings Co Ltd | 726,280 | |||||||||||||
30,900 | Saizeriya Co Ltd | 511,982 | |||||||||||||
16,300 | Sakata Seed Corp | 248,740 | |||||||||||||
6,800 | San-A Co Ltd | 263,590 | |||||||||||||
21,600 | Sanei-International Co Ltd | 315,640 | |||||||||||||
57,000 | Sanki Engineering | 475,856 | |||||||||||||
595,000 | Sankyo-Tateyama Holdings Inc * | 645,867 | |||||||||||||
361,000 | Sankyu Inc | 1,625,816 | |||||||||||||
234,000 | Sanwa Shutter Corp | 860,260 | |||||||||||||
140,000 | Sanyo Shokai Ltd | 470,828 | |||||||||||||
101,000 | Sapporo Hokuyo Holdings Inc * | 366,446 | |||||||||||||
2,534 | SBI Holdings Inc | 566,943 | |||||||||||||
27,100 | Secom Co Ltd | 1,222,269 |
See accompanying notes to the financial statements.
8
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
211,000 | Seiko Holdings Corp | 571,327 | |||||||||||||
216,000 | Seino Holdings Co Ltd | 1,921,515 | |||||||||||||
64,400 | Seiren Co Ltd | 417,899 | |||||||||||||
121,000 | Sekisui Chemical Co Ltd | 771,718 | |||||||||||||
355,000 | Sekisui House Ltd | 3,402,624 | |||||||||||||
48,000 | Senko Co Ltd | 189,100 | |||||||||||||
19,900 | Senshukai Co Ltd | 139,612 | |||||||||||||
607,200 | Seven & I Holdings Co Ltd | 14,654,567 | |||||||||||||
371 | Seven Bank Ltd | 941,387 | |||||||||||||
47,200 | Shikoku Electric Power Co Inc | 1,459,981 | |||||||||||||
23,100 | Shimamura Co Ltd | 2,067,432 | |||||||||||||
323,000 | Shimizu Corp | 1,330,761 | |||||||||||||
199,000 | Shinko Securities Co Ltd | 747,639 | |||||||||||||
62,000 | Shizuoka Gas Co Ltd | 462,566 | |||||||||||||
25,400 | SHO-BOND Holdings Co Ltd | 491,561 | |||||||||||||
49,000 | Shochiku Co Ltd | 424,447 | |||||||||||||
83,100 | Shoei Co Ltd | 668,720 | |||||||||||||
35,000 | Showa Sangyo Co Ltd | 112,144 | |||||||||||||
105,000 | Snow Brand Milk Products Co Ltd | 379,211 | |||||||||||||
309,700 | SoftBank Corp | 6,934,783 | |||||||||||||
1,081,700 | Sumitomo Electric Industries Ltd | 13,956,217 | |||||||||||||
218,700 | Sumitomo Forestry Co Ltd | 1,812,546 | |||||||||||||
409,000 | Sumitomo Osaka Cement Co Ltd | 869,193 | |||||||||||||
1,969,311 | Sumitomo Trust & Banking Co Ltd | 12,012,858 | |||||||||||||
11,300 | Sundrug Co Ltd | 289,826 | |||||||||||||
42,000 | Suzuken Co Ltd | 1,384,905 | |||||||||||||
776,000 | SWCC Showa Holdings Co Ltd * | 899,931 | |||||||||||||
756 | T-Gaia Corp | 1,331,742 | |||||||||||||
296,000 | Taihei Kogyo Co Ltd | 906,542 | |||||||||||||
1,664,000 | Taiheiyo Cement Co Ltd | 2,876,336 | |||||||||||||
20,500 | Taikisha Ltd | 277,453 | |||||||||||||
2,184,000 | Taisei Corp | 4,787,664 | |||||||||||||
89,000 | Takaoka Electric MFG Co Ltd | 313,739 | |||||||||||||
108,000 | Takara Standard Co Ltd | 635,172 | |||||||||||||
41,000 | Takasago Thermal Engineering Co Ltd | 365,641 |
See accompanying notes to the financial statements.
9
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
158,600 | Takefuji Corp | 810,284 | |||||||||||||
535,000 | TOA Corp | 655,538 | |||||||||||||
51,300 | Toho Holdings Co Ltd | 759,337 | |||||||||||||
96,500 | Tohoku Electric Power Co Inc | 2,088,595 | |||||||||||||
226,000 | Tokai Tokyo Financial Holdings | 814,795 | |||||||||||||
24,140 | Token Corp | 873,823 | |||||||||||||
534,300 | Tokyo Electric Power Co Inc (The) | 13,917,853 | |||||||||||||
1,147,000 | Tokyo Gas Co Ltd | 4,593,201 | |||||||||||||
146,000 | Tokyo Tatemono Co Ltd | 862,433 | |||||||||||||
30,500 | Tokyo Tomin Bank Ltd (The) | 554,242 | |||||||||||||
57,760 | Tokyu Construction Co Ltd * | 177,513 | |||||||||||||
276,000 | Tokyu Land Corp | 1,290,853 | |||||||||||||
76 | Top REIT Inc | 316,044 | |||||||||||||
53,200 | Toppan Forms Co Ltd | 744,178 | |||||||||||||
394,000 | Toppan Printing Co Ltd | 3,884,289 | |||||||||||||
85,000 | Toshiba Plant Systems & Services Corp | 1,153,421 | |||||||||||||
1,062,000 | Toyo Construction Co Ltd | 637,113 | |||||||||||||
91,000 | Toyo Securities Co Ltd * | 216,661 | |||||||||||||
47,300 | Toyo Seikan Kaisha Ltd | 985,469 | |||||||||||||
36,000 | Toyo Suisan Kaisha Ltd | 916,199 | |||||||||||||
466,000 | Toyobo Co Ltd | 891,170 | |||||||||||||
92,000 | Uchida Yoko Co Ltd | 308,717 | |||||||||||||
49,300 | United Arrows Ltd | 419,995 | |||||||||||||
135 | United Urban Investment Corp (REIT) | 751,191 | |||||||||||||
955,000 | Unitika Ltd * | 923,694 | |||||||||||||
369,700 | UNY Co Ltd | 3,124,396 | |||||||||||||
45,220 | USS Co Ltd | 2,847,223 | |||||||||||||
52,000 | Valor Co Ltd | 476,449 | |||||||||||||
42,100 | WATAMI Co Ltd | 881,850 | |||||||||||||
16,000 | Wood One Co Ltd | 56,362 | |||||||||||||
46,400 | Xebio Co Ltd | 1,007,778 | |||||||||||||
19,500 | Yachiyo Bank Ltd (The) | 582,190 | |||||||||||||
2,092 | Yahoo Japan Corp | 710,823 | |||||||||||||
33,250 | Yamada Denki Co Ltd | 2,260,642 | |||||||||||||
81,000 | Yamaguchi Financial Group Inc | 929,987 |
See accompanying notes to the financial statements.
10
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
46,000 | Yamato Holdings Co Ltd | 759,803 | |||||||||||||
51,000 | Yamazaki Baking Co Ltd | 690,838 | |||||||||||||
7,000 | Yaoko Co Ltd | 227,028 | |||||||||||||
52,000 | Yokogawa Bridge Holdings Corp | 425,283 | |||||||||||||
29,000 | Yokohama Reito Co Ltd | 189,302 | |||||||||||||
24,500 | Yonekyu Corp | 242,176 | |||||||||||||
17,000 | Yurtec Corp | 110,760 | |||||||||||||
44,400 | Yusen Air & Sea Service Co Ltd | 618,884 | |||||||||||||
56,900 | Zensho Co Ltd | 414,622 | |||||||||||||
Total Japan | 492,580,009 | ||||||||||||||
TOTAL COMMON STOCKS (COST $443,407,899) | 492,580,009 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.6% | |||||||||||||||
USD | 600,000 | BNP Paribas Time Deposit, 0.18%, due 09/01/09 | 600,000 | ||||||||||||
USD | 16,455 | Brown Brothers Harriman Time Deposit, 0.03%, due 09/01/09 | 16,455 | ||||||||||||
USD | 600,000 | Commerzbank Time Deposit, 0.15%, due 09/01/09 | 600,000 | ||||||||||||
JPY | 9,654,221 | HSBC Bank (Hong Kong) Time Deposit, 0.01%, due 09/01/09 | 103,753 | ||||||||||||
USD | 600,000 | HSBC Bank (USA) Time Deposit, 0.13%, due 09/01/09 | 600,000 | ||||||||||||
USD | 500,000 | Royal Bank of Canada Time Deposit, 0.15%, due 09/01/09 | 500,000 | ||||||||||||
USD | 600,000 | Societe Generale Time Deposit, 0.13%, due 09/01/09 | 600,000 | ||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $3,020,208) | 3,020,208 | ||||||||||||||
TOTAL INVESTMENTS — 100.4% (Cost $446,428,107) | 495,600,217 | ||||||||||||||
Other Assets and Liabilities (net) — (0.4%) | (2,064,496 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 493,535,721 |
See accompanying notes to the financial statements.
11
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
* Non-income producing security.
Currency Abbreviations:
JPY - Japanese Yen
USD - United States Dollar
See accompanying notes to the financial statements.
12
GMO Flexible Equities Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $446,428,107) (Note 2) | $ | 495,600,217 | |||||
Receivable for investments sold | 2,627,690 | ||||||
Dividends and interest receivable | 732,120 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 25,854 | ||||||
Total assets | 498,985,881 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 5,000,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 224,821 | ||||||
Shareholder service fee | 27,093 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 852 | ||||||
Payable for foreign currency purchased | 562 | ||||||
Accrued expenses | 196,832 | ||||||
Total liabilities | 5,450,160 | ||||||
Net assets | $ | 493,535,721 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 464,057,854 | |||||
Accumulated undistributed net investment income | 2,446,221 | ||||||
Accumulated net realized loss | (22,145,062 | ) | |||||
Net unrealized appreciation | 49,176,708 | ||||||
$ | 493,535,721 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 54,204,093 | |||||
Class VI shares | $ | 439,331,628 | |||||
Shares outstanding: | |||||||
Class III | 2,655,130 | ||||||
Class VI | 21,504,112 | ||||||
Net asset value per share: | |||||||
Class III | $ | 20.41 | |||||
Class VI | $ | 20.43 |
See accompanying notes to the financial statements.
13
GMO Flexible Equities Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $353,410) | $ | 4,727,822 | |||||
Interest | 2,050 | ||||||
Total investment income | 4,729,872 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 1,200,191 | ||||||
Shareholder service fee – Class III (Note 3) | 40,129 | ||||||
Shareholder service fee – Class VI (Note 3) | 105,305 | ||||||
Custodian and fund accounting agent fees | 176,874 | ||||||
Audit and tax fees | 35,604 | ||||||
Transfer agent fees | 20,332 | ||||||
Legal fees | 8,188 | ||||||
Trustees fees and related expenses (Note 3) | 3,849 | ||||||
Miscellaneous | 5,336 | ||||||
Total expenses | 1,595,808 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (244,402 | ) | |||||
Expense reductions (Note 2) | (36 | ) | |||||
Net expenses | 1,351,370 | ||||||
Net investment income (loss) | 3,378,502 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (23,688,767 | ) | |||||
Closed futures contracts | 1,358,572 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 199,383 | ||||||
Net realized gain (loss) | (22,130,812 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 140,594,237 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 28,809 | ||||||
Net unrealized gain (loss) | 140,623,046 | ||||||
Net realized and unrealized gain (loss) | 118,492,234 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 121,870,736 |
See accompanying notes to the financial statements.
14
GMO Flexible Equities Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Period from December 12, 2008 (commencement of operations) through February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 3,378,502 | $ | 465,195 | |||||||
Net realized gain (loss) | (22,130,812 | ) | (1,376,630 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 140,623,046 | (91,446,338 | ) | ||||||||
Net increase (decrease) in net assets from operations | 121,870,736 | (92,357,773 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (2,863 | ) | ||||||||
Class VI | — | (32,233 | ) | ||||||||
Total distributions from net investment income | — | (35,096 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (4,292,369 | ) | 55,644,468 | ||||||||
Class VI | 22,103,696 | 390,602,059 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 17,811,327 | 446,246,527 | |||||||||
Total increase (decrease) in net assets | 139,682,063 | 353,853,658 | |||||||||
Net assets: | |||||||||||
Beginning of period | 353,853,658 | — | |||||||||
End of period (including accumulated undistributed net investment income of $2,446,221 and distributions in excess of net investment income of $932,281, respectively) | $ | 493,535,721 | $ | 353,853,658 |
See accompanying notes to the financial statements.
15
GMO Flexible Equities Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2009 (Unaudited) | Period from December 12, 2008 (commencement of operations) through February 28, 2009 | ||||||||||
Net asset value, beginning of period | $ | 15.39 | $ | 20.00 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)† | 0.13 | 0.02 | |||||||||
Net realized and unrealized gain (loss) | 4.89 | (4.63 | ) | ||||||||
Total from investment operations | 5.02 | (4.61 | ) | ||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | — | (0.00 | )(a) | ||||||||
Total distributions | — | (0.00 | ) | ||||||||
Net asset value, end of period | $ | 20.41 | $ | 15.39 | |||||||
Total Return(b) | 32.62 | %** | (23.04 | )%** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 54,204 | $ | 43,788 | |||||||
Net expenses to average daily net assets | 0.70 | %(c)* | 0.70 | %* | |||||||
Net investment income to average daily net assets | 1.42 | %* | 0.56 | %* | |||||||
Portfolio turnover rate | 31 | %** | 7 | %** | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.11 | %* | 0.26 | %* |
(a) Distributions from net investment income were less than $0.01 per share.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
16
GMO Flexible Equities Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2009 (Unaudited) | Period from December 12, 2008 (commencement of operations) through February 28, 2009 | ||||||||||
Net asset value, beginning of period | $ | 15.39 | $ | 20.00 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)† | 0.14 | 0.03 | |||||||||
Net realized and unrealized gain (loss) | 4.90 | (4.64 | ) | ||||||||
Total from investment operations | 5.04 | (4.61 | ) | ||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | — | (0.00 | )(a) | ||||||||
Total distributions | — | (0.00 | ) | ||||||||
Net asset value, end of period | $ | 20.43 | $ | 15.39 | |||||||
Total Return(b) | 32.75 | %** | (23.04 | )%** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 439,332 | $ | 310,066 | |||||||
Net expenses to average daily net assets | 0.61 | %(c)* | 0.61 | %* | |||||||
Net investment income to average daily net assets | 1.57 | %* | 0.69 | %* | |||||||
Portfolio turnover rate | 31 | %** | 7 | %** | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.11 | %* | 0.26 | %* |
(a) Distributions from net investment income were less than $0.01 per share.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
17
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Flexible Equities Fund (the "Fund"), which commenced operations on December 12, 2008, is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the MSCI World Index. The Manager plans to pursue the Fund's investment objective principally by investing in equity securities traded in any of the world's securities markets based on the Manager's assessment of relative opportunities in those markets. Under normal circumstances, the Fund invests at least 80% of its assets in equity investments (which include common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depository receipts). The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. If the Fund takes temporary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund is permitted to (but is not obligated to) use a wide variety of exchange-traded and over-the-cou nter ("OTC") derivatives, including options, futures, and swap contracts. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
For the period ended August 31, 2009, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
As of August 31, 2009, shares of the Fund are not publicly offered and are principally available only to other series of the Trust and certain accredited investors. On July 17, 2009, the Fund filed an initial registration statement to seek to register its shares under the Securities Act of 1933.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
18
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 99.81% of the net assets of the Fund were valued using fair value prices base d on models used by a third party vendor and are classified as using Level 2 inputs in the table below.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation or quoted prices for similar securities.
Level 3 – Valuations based on inputs that are unobservable and significant.
19
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Japan | $ | — | $ | 492,580,009 | $ | — | $ | 492,580,009 | |||||||||||
TOTAL COMMON STOCKS | — | 492,580,009 | — | 492,580,009 | |||||||||||||||
Short-Term Investments | 3,020,208 | — | — | 3,020,208 | |||||||||||||||
Total Investments | $ | 3,020,208 | $ | 492,580,009 | $ | — | $ | 495,600,217 |
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at
20
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the time it was opened and the value at the time it was closed. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because many foreign exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign futures in those markets or on 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, the Fund generally values foreign futures using fair value prices, which are based on adjustments to closing price s supplied by a third party vendor based on that vendor's proprietary models. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set
21
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to th e risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset
22
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
23
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if 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.
24
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October currency losses of $932,281.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 447,877,948 | $ | 62,436,153 | $ | (14,713,884 | ) | $ | 47,722,269 |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are
25
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 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.
Brown Brothers Harriman & Co. ("BBH") serves as custodian and fund accounting agent of the Fund. State Street Bank and Trust Company ("State Street") serves as transfer agent of the Fund. BBH and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Management Risk — This is the risk that the Manager's strategies and techniques will fail to produce the desired results.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Focused Investment Risk — Focusing investments in countries, regions, sectors, or a limited number of companies with high positive correlations to one another creates additional risk. This risk may be
26
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
particularly pronounced for the Fund because it may invest a significant portion of its assets in a particular geographic region or foreign country or in the securities of a limited number of issuers. A decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund invested in the securities of a larger number of issuers.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices.
• Smaller Company Risk — The securities of small companies typically are less widely held, trade less frequently and in lesser quantities, and have market prices that may fluctuate more than those of securities of larger capitalization companies.
Other principal risks of an investment in the Fund include Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), Market Disruption and Geopolitical Risk (the risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Leveraging Risk (increased risks from use of reverse repurchase agreements and other derivatives and securities lending), Credit and Counterparty Risk (risk of default of a derivatives counterparty or borrower of the Fund's securities), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expecte d). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
27
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are
28
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
29
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
30
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | 1,358,572 | — | 1,358,572 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 1,358,572 | $ | — | $ | 1,358,572 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Futures | |||||||
Average notional amount outstanding | $ | 2,136,875 | |||||
Highest notional amount outstanding | 10,856,130 | ||||||
Lowest notional amount outstanding | — |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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
31
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.55% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fun d) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 to the extent that the sum of (i) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses) and (ii) the amount of fees and expenses incurred indirectly by the Fund through its investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.55% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.55% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009, was $3,389 and $1,932, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $158,752,196 and $129,406,929 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
32
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2009, 64.84% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholders owned more than 10% of the outstanding shares of the Fund. Two of the shareholders are other funds of the Trust.
As of August 31, 2009, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and all of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Period from December 12, 2008, (commencement of operations) through February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 215,917 | $ | 3,765,882 | 2,853,090 | $ | 55,792,551 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 92 | 1,917 | |||||||||||||||
Shares repurchased | (406,189 | ) | (8,058,251 | ) | (7,780 | ) | (150,000 | ) | |||||||||||
Net increase (decrease) | (190,272 | ) | $ | (4,292,369 | ) | 2,845,402 | $ | 55,644,468 | |||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Period from December 12, 2008, (commencement of operations) through February 28, 2009 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,924,416 | $ | 31,765,623 | 20,213,445 | $ | 392,035,724 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 1,571 | 32,233 | |||||||||||||||
Shares repurchased | (562,693 | ) | (9,661,927 | ) | (72,627 | ) | (1,465,898 | ) | |||||||||||
Net increase (decrease) | 1,361,723 | $ | 22,103,696 | 20,142,389 | $ | 390,602,059 |
33
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
34
GMO Flexible Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance since inception in 2008, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered that the Fund is intended to complement other strategies offered by the Manager and is not intended to stand on its own, and concluded that the usefulness of the Fund's performance relative to its benchmark was limited because the Fund is not managed to a benchmark. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those person nel 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 third-party data services
35
GMO Flexible Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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
36
GMO Flexible Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
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.
Following their review, on June 15, 2009, 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, 2009.
37
GMO Flexible Equities Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | $ | 1,326.20 | $ | 4.10 | |||||||||||
2) Hypothetical | 0.70 | % | $ | 1,000.00 | $ | 1,021.68 | $ | 3.57 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.61 | % | $ | 1,000.00 | $ | 1,327.50 | $ | 3.58 | |||||||||||
2) Hypothetical | 0.61 | % | $ | 1,000.00 | $ | 1,022.13 | $ | 3.11 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
38
GMO Taiwan Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 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.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
GMO Taiwan Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 95.3 | % | |||||
Short-Term Investments | 3.2 | ||||||
Other | 1.5 | ||||||
100.0 | % | ||||||
Industry Summary | % of Equity Investments | ||||||
Computers & Peripherals | |||||||
Computer Hardware | 16.7 | % | |||||
Computer Storage & Peripherals | 8.8 | ||||||
Semiconductors & Semiconductor Equipment | 23.2 | ||||||
Electronic Equipment, Instruments & Components | 19.6 | ||||||
Chemicals | 9.1 | ||||||
Commercial Banks | 5.2 | ||||||
Metals & Mining | 3.6 | ||||||
Diversified Telecommunication Services | 3.6 | ||||||
Wireless Telecommunication Services | 3.1 | ||||||
Capital Markets | 1.3 | ||||||
Industrial Conglomerates | 1.3 | ||||||
Air Freight & Logistics | 1.0 | ||||||
Marine | 0.9 | ||||||
Leisure Equipment & Products | 0.7 | ||||||
Electrical Equipment | 0.5 | ||||||
Specialty Retail | 0.5 | ||||||
Construction Materials | 0.3 | ||||||
Oil, Gas & Consumable Fuels | 0.1 | ||||||
Hotels, Restaurants & Leisure | 0.1 | ||||||
Diversified Financial Services | 0.1 | ||||||
Multiline Retail | 0.1 | ||||||
Real Estate Management & Development | 0.1 | ||||||
Machinery | 0.1 | ||||||
Household Durables | 0.0 | ||||||
Office Electronics | 0.0 | ||||||
Food Products | 0.0 | ||||||
Automobiles | 0.0 | ||||||
IT Services | 0.0 | ||||||
Construction & Engineering | 0.0 | ||||||
Communications Equipment | 0.0 | ||||||
Textiles, Apparel & Luxury Goods | 0.0 | ||||||
100.0 | % |
1
GMO Taiwan Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 95.3% | |||||||||||
Taiwan — 95.3% | |||||||||||
77,770 | Acer Inc | 176,896 | |||||||||
7,314 | Altek Corp | 12,047 | |||||||||
5,084 | Arima Computer Corp * | 256 | |||||||||
104,030 | Asia Cement Corp | 110,723 | |||||||||
519,540 | Asia Optical Co Inc | 780,325 | |||||||||
1,944,480 | Asustek Computer Inc | 3,088,841 | |||||||||
3,287,874 | AU Optronics Corp | 3,274,485 | |||||||||
518,000 | Catcher Technology Co Ltd | 1,335,561 | |||||||||
3,201,394 | Chi Mei Optoelectronics Corp * | 1,567,768 | |||||||||
4,686,000 | China Bills Finance Corp | 1,293,433 | |||||||||
431,806 | China Development Financial Holding Corp * | 99,371 | |||||||||
4,530 | China Motor Corp * | 2,494 | |||||||||
4,456,992 | China Steel Corp | 4,042,190 | |||||||||
8,304,628 | Chinatrust Financial Holding Co Ltd | 4,610,230 | |||||||||
7,000 | Chunghwa Picture Tubes Ltd * | 775 | |||||||||
2,344,525 | Chunghwa Telecom Co Ltd | 4,014,557 | |||||||||
2,846,994 | Compal Electronics Inc | 2,866,305 | |||||||||
5,700 | Continental Engineering Corp | 2,274 | |||||||||
95,060 | Coretronic Corp | 109,712 | |||||||||
71,000 | CSBC Corp * | 69,852 | |||||||||
2,136 | D-Link Corp | 1,639 | |||||||||
32,048 | Delta Electronics Inc | 85,500 | |||||||||
384,774 | DFI Inc | 447,904 | |||||||||
1,790,380 | Dimerco Express Taiwan Corp | 1,185,089 | |||||||||
197,000 | Epistar Corp | 577,714 | |||||||||
102,363 | Far Eastern Department Stores Ltd | 89,127 | |||||||||
1,498,058 | Far Eastern Textile Co Ltd | 1,489,872 | |||||||||
1,764,507 | Far Eastone Telecommunications Co Ltd | 1,989,776 | |||||||||
1,445,584 | Formosa Chemicals & Fibre Co | 2,529,796 | |||||||||
8,900 | Formosa International Hotels Corp | 105,569 | |||||||||
46,759 | Formosa Petrochemical Corp | 110,952 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
Taiwan — continued | |||||||||||
2,665,063 | Formosa Plastics Corp | 4,786,837 | |||||||||
57,000 | Foxconn Technology Co Ltd | 145,217 | |||||||||
113,000 | Fubon Financial Holding Co Ltd * | 105,355 | |||||||||
2,000 | Gigabyte Technology Co Ltd | 1,562 | |||||||||
49,973 | Gloria Material Technology Corp | 26,417 | |||||||||
8,691,000 | HannStar Display Corp * | 1,818,123 | |||||||||
515,366 | High Tech Computer Corp | 5,172,856 | |||||||||
3,347,977 | Hon Hai Precision Industry Co Ltd | 11,272,367 | |||||||||
1,000 | Hotai Motor Company Ltd | 2,249 | |||||||||
42,000 | Huaku Development Co Ltd | 90,462 | |||||||||
1,487,198 | Innolux Display Corp | 1,661,734 | |||||||||
222,610 | KGI Securities Co Ltd | 93,970 | |||||||||
25,594 | Kinpo Electronics * | 6,590 | |||||||||
9,180 | Largan Precision Co Ltd | 111,391 | |||||||||
738,369 | Les Enphants Co Ltd | 588,815 | |||||||||
3,061,639 | Lite-On Technology Corp | 3,425,932 | |||||||||
613,407 | Macronix International Co Ltd | 291,276 | |||||||||
787,723 | MediaTek Inc | 11,418,290 | |||||||||
5,250 | Mercuries & Associates Ltd | 1,943 | |||||||||
1,132 | Micro-Star International Co Ltd | 702 | |||||||||
2,056,000 | Mitac International Corp | 835,430 | |||||||||
32,671 | Motech Industries Inc | 81,606 | |||||||||
2,033,180 | Nan Ya Plastics Corp | 2,828,127 | |||||||||
30,600 | Nan Ya Printed Circuit Board Corp | 99,746 | |||||||||
1,000 | Nien Hsing Textile Co Ltd | 484 | |||||||||
370,995 | Novatek Microelectronics Corp Ltd | 869,363 | |||||||||
9,109 | Oriental Union Chemical | 5,180 | |||||||||
874,750 | Powertech Technology Inc | 2,385,695 | |||||||||
17,000 | Prodisc Technology Inc * | 300 | |||||||||
10,800 | Qisda Corp * | 4,976 | |||||||||
2,771,656 | Quanta Computer Inc | 5,736,232 | |||||||||
9,840 | Radiant Opto-Electronics Corp | 12,522 | |||||||||
14,802 | Sampo Corp * | 2,224 |
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, 2009 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
Taiwan — continued | |||||||||||
2,521 | Shinkong Synthetic Fibers | 596 | |||||||||
1,444,000 | Siliconware Precision Industries Co | 1,789,886 | |||||||||
231,290 | Silitech Technology Corp | 533,851 | |||||||||
839,000 | Sincere Navigation Corp | 954,250 | |||||||||
2,055,900 | Synnex Technology International Corp | 3,585,704 | |||||||||
2,403 | Systex Corp * | 2,431 | |||||||||
3,622,000 | Taishin Financial Holding Co Ltd * | 1,197,420 | |||||||||
182,607 | Taiwan Cement Corp | 197,648 | |||||||||
33,000 | Taiwan Fertilizer Co Ltd | 95,475 | |||||||||
962,539 | Taiwan Mobile Co Ltd | 1,510,317 | |||||||||
4,906,828 | Taiwan Semiconductor Manufacturing Co Ltd | 8,816,728 | |||||||||
9,889 | Tsann Kuen Enterprises Co Ltd | 9,952 | |||||||||
2,529 | TXC Corp | 3,072 | |||||||||
54,000 | U-Ming Marine Transport Corp | 87,255 | |||||||||
5,481 | Uni-President Enterprises Corp | 5,671 | |||||||||
136,789 | Unimicron Technology Corp | 143,706 | |||||||||
16,000 | USI Corp | 7,083 | |||||||||
9,760 | Wan Hai Lines Ltd * | 4,838 | |||||||||
381,933 | Waterland Financial Holdings | 116,364 | |||||||||
1,994,857 | Wistron Corp | 3,860,758 | |||||||||
2,968,195 | Ya Hsin Industrial Co Ltd * (a) (b) | 902 | |||||||||
14,716 | Yang Ming Marine Transport | 5,466 | |||||||||
3,084 | Yieh Phui Enterprise | 1,183 | |||||||||
2,000 | Yungtay Engineering Co Ltd | 1,268 | |||||||||
Total Taiwan | 112,886,830 | ||||||||||
TOTAL COMMON STOCKS (COST $95,849,816) | 112,886,830 | ||||||||||
SHORT-TERM INVESTMENTS — 3.2% | |||||||||||
82,575 | Bank of Ireland Time Deposit, 0.03%, due 09/01/09 | 82,575 | |||||||||
1,000,000 | BNP Paribas Time Deposit, 0.18%, due 09/01/09 | 1,000,000 | |||||||||
1,000,000 | HSBC Bank (USA) Time Deposit, 0.13%, due 09/01/09 | 1,000,000 |
See accompanying notes to the financial statements.
4
GMO Taiwan Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
1,000,000 | Royal Bank of Canada Time Deposit, 0.15%, due 09/01/09 | 1,000,000 | |||||||||
700,000 | Societe Generale Time Deposit, 0.13%, due 09/01/09 | 700,000 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $3,782,575) | 3,782,575 | ||||||||||
TOTAL INVESTMENTS — 98.5% (Cost $99,632,391) | 116,669,405 | ||||||||||
Other Assets and Liabilities (net) — 1.5% | 1,747,505 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 118,416,910 |
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).
See accompanying notes to the financial statements.
5
GMO Taiwan Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $99,632,391) (Note 2) | $ | 116,669,405 | |||||
Foreign currency, at value (cost $608,846) (Note 2) | 608,818 | ||||||
Dividends and interest receivable | 1,445,968 | ||||||
Total assets | 118,724,191 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 93,824 | ||||||
Shareholder service fee | 17,375 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 288 | ||||||
Accrued expenses | 195,794 | ||||||
Total liabilities | 307,281 | ||||||
Net assets | $ | 118,416,910 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 150,445,072 | |||||
Accumulated undistributed net investment income | 2,693,558 | ||||||
Accumulated net realized loss | (51,754,931 | ) | |||||
Net unrealized appreciation | 17,033,211 | ||||||
$ | 118,416,910 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 118,416,910 | |||||
Shares outstanding: | |||||||
Class III | 7,133,198 | ||||||
Net asset value per share: | |||||||
Class III | $ | 16.60 |
See accompanying notes to the financial statements.
6
GMO Taiwan Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $898,891) | $ | 3,559,474 | |||||
Interest | 1,566 | ||||||
Total investment income | 3,561,040 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 523,561 | ||||||
Shareholder service fee – Class III (Note 3) | 96,955 | ||||||
Custodian and fund accounting agent fees | 170,068 | ||||||
Audit and tax fees | 39,284 | ||||||
Transfer agent fees | 13,800 | ||||||
Legal fees | 2,392 | ||||||
Trustees fees and related expenses (Note 3) | 1,316 | ||||||
Miscellaneous | 1,748 | ||||||
Total expenses | 849,124 | ||||||
Net investment income (loss) | 2,711,916 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 3,585,499 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 78,170 | ||||||
Net realized gain (loss) | 3,663,669 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 44,868,962 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (1,989 | ) | |||||
Net unrealized gain (loss) | 44,866,973 | ||||||
Net realized and unrealized gain (loss) | 48,530,642 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 51,242,558 |
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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 2,711,916 | $ | 5,422,735 | |||||||
Net realized gain (loss) | 3,663,669 | (54,476,670 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 44,866,973 | (38,083,635 | ) | ||||||||
Net increase (decrease) in net assets from operations | 51,242,558 | (87,137,570 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (2,166,818 | ) | (2,600,079 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (7,935,155 | ) | ||||||||
(2,166,818 | ) | (10,535,234 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (31,084,114 | ) | (22,811,861 | ) | |||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 249,224 | 301,595 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | (30,834,890 | ) | (22,510,266 | ) | |||||||
Total increase (decrease) in net assets | 18,240,850 | (120,183,070 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 100,176,060 | 220,359,130 | |||||||||
End of period (including accumulated undistributed net investment income of $2,693,558 and $2,148,460, respectively) | $ | 118,416,910 | $ | 100,176,060 |
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.06 | $ | 22.42 | $ | 30.98 | $ | 28.34 | $ | 26.79 | $ | 29.67 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.32 | 0.59 | 0.61 | 0.46 | 0.52 | 0.13 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 5.47 | (10.80 | ) | 1.50 | 4.32 | 1.91 | (1.45 | ) | |||||||||||||||||||
Total from investment operations | 5.79 | (10.21 | ) | 2.11 | 4.78 | 2.43 | (1.32 | ) | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.25 | ) | (0.30 | ) | (0.85 | ) | (0.39 | ) | (0.59 | ) | — | ||||||||||||||||
From net realized gains | — | (0.85 | ) | (9.82 | ) | (1.75 | ) | (0.29 | ) | (1.56 | ) | ||||||||||||||||
Total distributions | (0.25 | ) | (1.15 | ) | (10.67 | ) | (2.14 | ) | (0.88 | ) | (1.56 | ) | |||||||||||||||
Net asset value, end of period | $ | 16.60 | $ | 11.06 | $ | 22.42 | $ | 30.98 | $ | 28.34 | $ | 26.79 | |||||||||||||||
Total Return(a) | 52.47 | %** | (47.14 | )% | 6.97 | %(b) | 17.12 | % | 9.13 | % | (3.82 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 118,417 | $ | 100,176 | $ | 220,359 | $ | 316,887 | $ | 291,250 | $ | 224,466 | |||||||||||||||
Net expenses to average daily net assets | 1.31 | %* | 1.32 | %(c) | 1.29 | %(c) | 1.26 | % | 1.28 | % | 1.34 | % | |||||||||||||||
Net investment income to average daily net assets | 4.20 | %* | 3.42 | % | 1.98 | % | 1.56 | % | 1.95 | % | 0.53 | % | |||||||||||||||
Portfolio turnover rate | 55 | %** | 88 | % | 94 | % | 41 | % | 31 | % | 88 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.03 | $ | 0.03 | $ | 0.06 | $ | 0.03 | $ | 0.04 | $ | 0.05 |
(a) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder and assumes the effect of reinvested distributions.
(b) The effect of losses in the amount of $56,687, resulting from compliance violations and the Manager's reimbursement of such losses, had no effect on the total return.
(c) The net expense ratio does not include the effect of expense reductions.
† 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, 2009 (Unaudited)
1. Organization
GMO Taiwan Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the MSCI Taiwan Index. The Fund typically makes equity investments in companies doing business in, or otherwise tied economically to, Taiwan. Under normal circumstances, the Fund invests at least 80% of its assets in investments tied economically to Taiwan. From time to time, the Fund may invest a significant portion of its assets in securities of issuers in industries with high positive correlations to one another (e.g., different industries within broad sectors, such as technology or financial services). The Fund generally seeks to be fully invested, and normally does not take temporary defensive positions through investment in cash and cash equivalents. If the Fund takes temporary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund is permitted to (but is not obligated to) use a wide variety of exchange - -traded and over-the-counter ("OTC") derivatives, including options, futures, warrants, and swap contracts. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
As of August 31, 2009, shares of the Fund were not publicly offered and were principally available only to other series of the Trust and certain accredited investors. On July 17, 2009, the Fund filed an initial registration statement to seek to register its shares under the Securities Act of 1933.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported
10
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sal e, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 95.33% of the net assets of the Fund were valued using fair value prices based on models used by a third party vendor and are classified as using Level 2 inputs in the table below.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation or quoted prices for similar securities.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund considered certain bankrupt securities to be worthless.
11
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Taiwan | $ | — | $ | 112,885,928 | $ | 902 | $ | 112,886,830 | |||||||||||
TOTAL COMMON STOCKS | — | 112,885,928 | 902 | 112,886,830 | |||||||||||||||
Short-Term Investments | 3,782,575 | — | — | 3,782,575 | |||||||||||||||
Total Investments | $ | 3,782,575 | $ | 112,885,928 | $ | 902 | $ | 116,669,405 |
The aggregate net value of the Fund's direct investments in securities using Level 3 inputs was less than 0.01% of total net assets.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Common Stocks | |||||||||||||||||||||||||||||||
Taiwan | $ | 1,320 | $ | — | $ | — | $ | — | $ | (118 | ) | $ | (300 | ) | $ | 902 | |||||||||||||||
Total | $ | 1,320 | $ | — | $ | — | $ | — | $ | (118 | ) | $ | (300 | ) | $ | 902 |
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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
12
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set
13
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
14
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price
15
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on Taiwan-source interest and dividend income are withheld in accordance with applicable Taiwanese law.
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 gain, 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.
16
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
The Fund is currently subject to a Taiwanese security transaction tax of 0.30% of the transaction amount on equities, which must be paid by the Fund upon the sale or transfer of any portfolio securities subject to that tax.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $32,757,923.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (15,146,428 | ) | ||||
Total | $ | (15,146,428 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 103,841,063 | $ | 16,752,280 | $ | (3,923,938 | ) | $ | 12,828,342 |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement
17
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis Ta iwanese companies typically declare dividends in the third calendar quarter of each 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.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds.
Brown Brothers Harriman & Co. ("BBH") serves as custodian and fund accounting agent of the Fund. State Street Bank and Trust Company ("State Street") serves as transfer agent of the Fund. BBH and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the six-month period ended August 31, 2009, the premium on cash purchases of Fund shares was 0.15% of the amount invested and the fee on cash redemptions was 0.45% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by
18
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redempti on fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Foreign Investor Licensing Risk — The Fund's ability to continue to invest directly in Taiwan is subject to the risk that the Manager's QFII license or the Fund's sub-account under the Manager's QFII may be terminated or suspended by the Securities and Futures Commission. If the license were terminated or
19
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
suspended, the Fund could be required to liquidate or seek exposure to the Taiwanese market through the purchase of American Depositary and Global Depository Receipts, shares of other funds which are licensed to invest directly, or derivative instruments.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Focused Investment Risk — Focusing investments in countries, regions, or industries with high positive correlations to one another creates additional risk. This risk is particularly pronounced for the Fund because it principally invests in investments tied economically to a single country.
Other principal risks of an investment in the Fund include Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), Liquidity Risk (difficulty in selling Fund investments), Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market cap italizations), Credit and Counterparty Risk (risk of default of a derivatives counterparty or borrower of the Fund's securities), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Leveraging Risk (increased risks from use of reverse repurchase agreements and other derivatives and securities lending), Market Disruption and Geopolitical Risk (the risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the ma rket value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund adopted SFAS 161 on March 1, 2009. As of August 31, 2009, the Fund held no derivative contracts for the purposes of SFAS 161.
20
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 average daily net assets at the annual rate of 0.15% for Class III shares.
The Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 for an amount equal to the fees and expenses incurred indirectly by the Fund through its investment in GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses, which include fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) a nd 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes)).
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and Chief Compliance Officer ("CCO") during the period ended August 31, 2009 was $1,040 and $552, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $67,712,202 and $101,559,911, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
21
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2009, all of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares.
As of August 31, 2009, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and all of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,170,348 | $ | 17,711,891 | 2,164,635 | $ | 25,246,074 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 137,663 | 2,166,818 | 646,035 | 10,535,234 | |||||||||||||||
Shares repurchased | (3,230,445 | ) | (50,962,823 | ) | (3,583,100 | ) | (58,593,169 | ) | |||||||||||
Purchase premiums | — | 24,933 | — | 37,926 | |||||||||||||||
Redemption fees | — | 224,291 | — | 263,669 | |||||||||||||||
Net increase (decrease) | (1,922,434 | ) | $ | (30,834,890 | ) | (772,430 | ) | $ | (22,510,266 | ) |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure.
22
GMO Taiwan Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one- and five-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager,
23
GMO Taiwan Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to incr ease assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and expanding existing client 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
24
GMO Taiwan Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (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.
Following their review, on June 15, 2009, 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, 2009.
25
GMO Taiwan Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 1.31 | % | $ | 1,000.00 | $ | 1,524.70 | $ | 8.34 | |||||||||||
2) Hypothetical | 1.31 | % | $ | 1,000.00 | $ | 1,018.60 | $ | 6.67 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended August 31, 2009, 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 Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit GMO's 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.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling (617) 346-7646 (collect).
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Investments Concentration Summary (a)
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Debt Obligations | 0.0 | % | |||||
Other | 100.0 | ||||||
100.0 | % |
(a) GMO SPV I, LLC is a 74.9% owned subsidiary of GMO Special Purpose Holding Fund.
1
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 0.0% (a) | |||||||||||||||
Asset-Backed Securities — 0.0% | |||||||||||||||
Health Care Receivables — 0.0% | |||||||||||||||
Interest related to the Bankruptcy Estate of NPF VI Inc. Series 02-1 Class A (b) (c) | — | ||||||||||||||
Interest related to the Bankruptcy Estate of NPF XII Inc. Series 00-3 Class A (b) (c) | — | ||||||||||||||
Interest related to the Bankruptcy Estate of NPF XII Inc. Series 02-1 Class A (b) (c) | — | ||||||||||||||
— | |||||||||||||||
Total Asset-Backed Securities | — | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $0) | — | ||||||||||||||
SHORT-TERM INVESTMENTS — 10.9% | |||||||||||||||
Money Market Funds — 10.9% | |||||||||||||||
18,968 | State Street Institutional Liquid Reserves Fund-Institutional Class | 18,968 | |||||||||||||
18,968 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 18,968 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $37,936) | 37,936 | ||||||||||||||
TOTAL INVESTMENTS — 10.9% (Cost $37,936) | 37,936 | ||||||||||||||
Other Assets and Liabilities (net) — 89.1% | 309,619 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 347,555 |
Notes to Consolidated Schedule of Investments:
(a) Owned by GMO SPV I, LLC. GMO SPV I, LLC is a 74.9% subsidiary of GMO Special Purpose Holding Fund.
(b) Security in default.
(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)
Consolidating Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
GMO Special Purpose Holding Fund | GMO SPV I, LLC | Minority Interest | Eliminations | Consolidated Totals | |||||||||||||||||||
Assets: | |||||||||||||||||||||||
Investments in affiliated issuers, at value (cost $0) (Note 2) | $ | 217,535 | $ | — | $ | — | $ | (217,535 | ) | $ | — | ||||||||||||
Investments in unaffiliated issuers, at value (cost $37,936) (Note 2) | 37,936 | — | — | — | 37,936 | ||||||||||||||||||
Cash | 154,372 | 339,134 | — | — | 493,506 | ||||||||||||||||||
Dividends receivable | 5 | — | — | — | 5 | ||||||||||||||||||
Receivable for expenses reimbursed by Manager (Note 3) | 4,867 | 3,255 | — | — | 8,122 | ||||||||||||||||||
Total assets | 414,715 | 342,389 | — | (217,535 | ) | 539,569 | |||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Accrued expenses | 67,160 | 56,562 | — | — | 123,722 | ||||||||||||||||||
Minority interest | — | — | 68,292 | — | 68,292 | ||||||||||||||||||
Total liabilities | 67,160 | 56,562 | 68,292 | — | 192,014 | ||||||||||||||||||
Net assets | $ | 347,555 | $ | 285,827 | $ | (68,292 | ) | $ | (217,535 | ) | $ | 347,555 | |||||||||||
Shares outstanding | 554,071 | 554,071 | |||||||||||||||||||||
Net asset value per share | $ | 0.63 | $ | 0.63 |
See accompanying notes to the financial statements.
3
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidating Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
GMO Special Purpose Holding Fund | GMO SPV I, LLC | Minority Interest | Eliminations | Consolidated Totals | |||||||||||||||||||
Investment Income: | |||||||||||||||||||||||
Interest | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
Dividends | 47 | — | — | — | 47 | ||||||||||||||||||
Total income | 47 | — | — | — | 47 | ||||||||||||||||||
Expenses: | |||||||||||||||||||||||
Legal fees | — | 86,552 | — | — | 86,552 | ||||||||||||||||||
Audit and tax fees | 28,336 | 5,336 | — | — | 33,672 | ||||||||||||||||||
Custodian and transfer agent fees | 552 | 13,800 | — | — | 14,352 | ||||||||||||||||||
Trustees fees and related expenses (Note 3) | 3 | — | — | — | 3 | ||||||||||||||||||
Miscellaneous | — | 184 | — | — | 184 | ||||||||||||||||||
Total expenses | 28,891 | 105,872 | — | — | 134,763 | ||||||||||||||||||
Fees and expenses reimbursed by Manager (Note 3) | (28,888 | ) | (19,320 | ) | — | — | (48,208 | ) | |||||||||||||||
Expense Reduction | (3 | ) | (10 | ) | (13 | ) | |||||||||||||||||
Net expenses | — | 86,542 | — | — | 86,542 | ||||||||||||||||||
Net income (loss) | 47 | (86,542 | ) | — | — | (86,495 | ) | ||||||||||||||||
Minority Interest | — | — | 20,688 | — | 20,688 | ||||||||||||||||||
Net investment income (loss) after minority interest | 47 | (86,542 | ) | 20,688 | — | (65,807 | ) | ||||||||||||||||
Realized and unrealized gain (loss): | |||||||||||||||||||||||
Net realized gain (loss) on: | |||||||||||||||||||||||
Investments in unaffiliated issuers | — | — | — | — | — | ||||||||||||||||||
Realized gains distributions from affiliated issuers | — | — | — | — | — | ||||||||||||||||||
Net realized gain (loss) | — | — | — | — | — | ||||||||||||||||||
Change in net unrealized appreciation (depreciation) on: | |||||||||||||||||||||||
Investments | (59,327 | ) | — | — | 59,327 | — | |||||||||||||||||
Net unrealized gain (loss) | (59,327 | ) | — | — | 59,327 | — | |||||||||||||||||
Net realized and unrealized gain (loss) | (59,327 | ) | — | — | 59,327 | — | |||||||||||||||||
Minority interest in realized and unrealized gain (loss) | — | — | 6,527 | — | 6,527 | ||||||||||||||||||
Net increase (decrease) in net assets resulting from operations | $ | (59,280 | ) | $ | (86,542 | ) | $ | 27,215 | $ | 59,327 | $ | (59,280 | ) |
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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | (65,807 | ) | $ | 1,220 | ||||||
Net realized gain (loss) | — | 1,294,501 | |||||||||
Change in net unrealized appreciation (depreciation) | — | — | |||||||||
(65,807 | ) | 1,295,721 | |||||||||
Minority Interest | 6,527 | (330,967 | ) | ||||||||
Net increase (decrease) in net assets from operations | (59,280 | ) | 964,754 | ||||||||
Cash distributions to shareholders | — | (1,254,756 | ) | ||||||||
— | (1,254,756 | ) | |||||||||
Fund share transactions: (Note 7) | |||||||||||
Proceeds from sale of shares | — | — | |||||||||
Cost of shares repurchased | — | — | |||||||||
Net increase (decrease) from Fund share transactions | — | — | |||||||||
Total increase (decrease) in net assets | (59,280 | ) | (290,002 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 406,835 | 696,837 | |||||||||
End of period | $ | 347,555 | $ | 406,835 |
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited)(a) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 0.73 | $ | 1.26 | $ | 1.41 | $ | 8.22 | $ | 15.51 | $ | 24.11 | |||||||||||||||
Income from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | (0.12 | ) | 0.00 | (b) | 0.06 | 0.02 | (0.08 | ) | 0.41 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.02 | 1.73 | 6.28 | 41.16 | 8.57 | 9.08 | |||||||||||||||||||||
Total from investment operations | (0.10 | ) | 1.73 | 6.34 | 41.18 | 8.49 | 9.49 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | — | — | — | — | (0.74 | ) | ||||||||||||||||||||
From cash distributions | — | (2.26 | ) | (6.49 | ) | (47.99 | ) | (15.78 | ) | (17.29 | ) | ||||||||||||||||
From return of capital | — | — | — | — | — | (0.06 | ) | ||||||||||||||||||||
Total distributions | — | (2.26 | ) | (6.49 | ) | (47.99 | ) | (15.78 | ) | (18.09 | ) | ||||||||||||||||
Net asset value, end of period | $ | 0.63 | $ | 0.73 | $ | 1.26 | $ | 1.41 | $ | 8.22 | $ | 15.51 | |||||||||||||||
Total Return(c)(d) | (13.70 | )%** | 137.67 | % | 517.54 | % | 3613.95 | % | 124.75 | % | 36.35 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 348 | $ | 407 | $ | 697 | $ | 780 | $ | 4,553 | $ | 8,595 | |||||||||||||||
Net expenses to average daily net assets | 31.91 | %*(e) | 0.81 | % | 0.00 | %(f) | 0.85 | % | 1.26 | % | (0.01 | )% | |||||||||||||||
Net investment income to average daily net assets | (32.40 | )%* | 0.25 | % | 3.91 | % | 1.05 | % | (0.65 | )% | 1.83 | % | |||||||||||||||
Portfolio turnover rate | 0 | %** | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 21.35 | %* | 15.56 | % | 8.84 | % | 3.74 | % | 1.39 | % | 0.67 | % |
(a) For the period ended August 31, 2009, the Fund's financial results are reflective of a legal expense adjustment related to pending litigation against various entities related to the default of the NPF Securities. See Note 1.
(b) Net investment income (loss) 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 and assumes the effect of reinvested distributions.
(d) Had the effect of reinvested distributions not been assumed and income from investment operations been retained, the total returns would have been (0.11)% for the six months ended August 31, 2009, 1.93%, 7.61%, 97.84%, 25.27%, and 39.36% for the fiscal years ended 2009, 2008, 2007, 2006, and 2005, respectively.
(e) The net expense ratio does not include the effect of expense reductions.
(f) Net expenses 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 Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Special Purpose Holding Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 act. 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's investments consist primarily of: (i) units of GMO SPV I, LLC ("SPV"), a special purpose vehicle that holds an interest in liquidating trusts (described below) related to certain defaulted asset-backed securities (the "NPF Securities") issued by NPF VI, Inc. and NPF XII, Inc. (the "Issuers"), and (ii) cash and cash items. The Fund expects that any new investments will be made primarily in cash, cash items, and high quality debt securities. The cash items and high quality debt securities in which the Fund may invest may include securities issued by the U.S. government and agencies thereof (including securities neither guaranteed nor insured by the U.S. government), bankers' acceptances, commercial paper, bank certificates of deposit, and money market mutual funds. The Fund is also permitted to invest in debt securities of any quality or type, including governmental and corporate and other private issuers.
The Fund's principal investment is units of SPV, which in turn holds an interest in liquidating trusts related to the NPF Securities. In November 2002, National Century Financial Enterprises, which organized and administered the Issuers and the NPF Securities, defaulted on its obligations with respect to the NPF Securities (health care asset-backed receivables). The NPF Securities had been acquired by the Fund prior to this default.
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.
The Fund has litigation pending against various entities related to the default of the NPF Securities. For the six-month period ended August 31, 2009, the Fund received no distributions in conjunction with a settlement agreement related to the default of those securities. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of
7
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the Fund. To the extent additional recoveries are realized, such recoveries may be material to the net asset value of the Fund.
Shares of the Fund are not publicly offered and are principally available only to other series of the Trust and certain accredited investors.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements include the accounts of the 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 interfund accounts and transactions have been eliminated in consolidation.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day, or (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the manager deems the price in the private market to be more relevant in determining market value than the price on an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
8
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund valued interests related to bankruptcy proceedings to be worthless (See Note 1).
The following is a summary of the fair valuations according to inputs used as of August 31, 2009 in valuing the Fund's investments at value:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | $ | — | $ | — | $ | 0 | * | $ | — | ||||||||||
Short-Term Investments | $ | — | $ | 37,936 | $ | — | $ | 37,936 | |||||||||||
Total Investments | $ | — | $ | 37,936 | $ | — | $ | 37,936 |
* Represents the interest in securities that are defaulted and have no value at February 28, 2009 or August 31, 2009.
Taxes
Effective April 1, 2004, the Fund elected to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Fund is not itself subject to federal income tax. Instead, each shareholder is required to take into account in determining its tax liability its distributive share of items of Fund income, gain, loss, deduction, credit, and tax preference for each taxable year substantially as though such items have been realized directly by the shareholder and without regard to whether any distribution by the Fund has been or will be received. Accordingly, no provision (benefit) for federal and state income taxes is reflected in the accompanying financial statements.
9
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 37,936 | $ | — | $ | — | $ | — |
SPV is also treated as a partnership for U.S. federal income tax purposes and subject to the same rules as the Fund with respect to federal income taxation of partnerships.
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Distributions
The Fund will distribute proceeds and other cash receipts received from its underlying investments. Distributions made by the Fund, other than a distribution in partial or complete redemption of a shareholder's interest in the Fund, are reported in the Fund's financial statements as cash distributions.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds.
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
10
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. Many of these risks are more pronounced as a result of current global economic conditions that began to unfold in 2008. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Litigation-Related Risk — The ultimate amount of the Fund's recovery (through its investment in SPV) of losses on the defaulted NPF Securities and the total costs the Fund may incur with respect to its funding of litigation related to the NPF Securities is unknown at this time. Therefore, the Fund is subject to the risk that SPV may ultimately be unable to recover certain losses related to the NPF Securities.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. Liquidity risk is particularly pronounced for the Fund due to the nature and size of its investment in the NPF Securities (through the SPV).
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Credit Risk — This is the risk that the issuer or guarantor of a fixed income security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise to honor its obligations. This risk is particularly acute in environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund is subject to this risk to the extent that it directly or indirectly acquires or holds below investment grade securities.
Other principal risks of an investment in the Fund include Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally) and Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133
11
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund adopted SFAS 161 on March 1, 2009. As of August 31, 2009, the Fund held no derivative contracts for the purposes of SFAS 161.
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 expenses incurred by the Fund through at least June 30, 2010 (excluding fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraor dinary, non-recurring and certain other unusual expenses (including 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 for the purposes of the expense reimbursement as extraordinary expenses and are therefore not reimbursable by the Manager.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $3 and $0, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Consolidating Statement of Operations. 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 period ended August 31, 2009.
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
12
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2009, 61.72% of the shares outstanding of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
As of August 31, 2009, no shares of the Fund were held by senior management of the Manager and GMO Trust officers, and 99.95% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Shares sold | — | — | |||||||||
Shares repurchased | — | — | |||||||||
Net decrease | — | — | |||||||||
Fund shares: | |||||||||||
Beginning of period | 554,071 | 554,071 | |||||||||
End of period | 554,071 | 554,071 |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
13
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 took note of the fact that the Fund has a limited investment program and primarily serves as a limited purpose holding vehicle. The Trustees also took into account the time and attention devoted by the Manager's senior management and other personnel to the Fund. The Trustees considered the business reputation of the Manager, its financial resources, and its professional liability insurance coverage.
The Trustees considered the Fund's investment performance and 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. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, and the overall competence of the Manager.
The Trustees also 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 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
14
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
15
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, 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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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* | ||||||||||||||||
1) Actual | 31.91 | % | $ | 1,000.00 | $ | 863.00 | $ | 149.84 | |||||||||||
2) Hypothetical | 31.91 | % | $ | 1,000.00 | $ | 864.34 | $ | 149.95 |
* Expenses are calculated using each annualized expense ratio for the six months ended August 31, 2009, 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. Growth Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO U.S. Growth Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.3 | % | |||||
Short-Term Investments | 3.5 | ||||||
Futures Contracts | 0.1 | ||||||
Other | 0.1 | ||||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 16.7 | % | |||||
Technology Hardware & Equipment | 14.2 | ||||||
Software & Services | 13.0 | ||||||
Food, Beverage & Tobacco | 12.9 | ||||||
Household & Personal Products | 7.9 | ||||||
Retailing | 7.4 | ||||||
Food & Staples Retailing | 6.3 | ||||||
Health Care Equipment & Services | 5.9 | ||||||
Capital Goods | 3.9 | ||||||
Consumer Services | 3.0 | ||||||
Energy | 2.8 | ||||||
Semiconductors & Semiconductor Equipment | 1.0 | ||||||
Transportation | 1.0 | ||||||
Materials | 1.0 | ||||||
Insurance | 0.7 | ||||||
Diversified Financials | 0.5 | ||||||
Consumer Durables & Apparel | 0.5 | ||||||
Telecommunication Services | 0.4 | ||||||
Commercial & Professional Services | 0.4 | ||||||
Media | 0.2 | ||||||
Utilities | 0.2 | ||||||
Banks | 0.1 | ||||||
100.0 | % |
1
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 96.3% | |||||||||||||||
Banks — 0.1% | |||||||||||||||
2,800 | First Horizon National Corp. * | 37,464 | |||||||||||||
Capital Goods — 3.7% | |||||||||||||||
8,500 | 3M Co. | 612,850 | |||||||||||||
700 | Carlisle Cos., Inc. | 23,093 | |||||||||||||
1,000 | Cooper Industries Ltd.-Class A | 32,250 | |||||||||||||
2,100 | Goodrich Corp. | 115,836 | |||||||||||||
2,300 | Lennox International, Inc. | 82,524 | |||||||||||||
1,100 | Lockheed Martin Corp. | 82,478 | |||||||||||||
2,900 | Toro Co. (The) | 109,997 | |||||||||||||
6,700 | United Technologies Corp. | 397,712 | |||||||||||||
3,100 | URS Corp. * | 134,013 | |||||||||||||
1,200 | W.W. Grainger, Inc. | 104,964 | |||||||||||||
Total Capital Goods | 1,695,717 | ||||||||||||||
Commercial & Professional Services — 0.3% | |||||||||||||||
6,200 | Robert Half International, Inc. | 162,998 | |||||||||||||
Consumer Durables & Apparel — 0.5% | |||||||||||||||
1,900 | Nike, Inc.-Class B | 105,241 | |||||||||||||
2,900 | Phillips-Van Heusen Corp. | 109,562 | |||||||||||||
Total Consumer Durables & Apparel | 214,803 | ||||||||||||||
Consumer Services — 2.9% | |||||||||||||||
1,400 | Apollo Group, Inc.-Class A * | 90,748 | |||||||||||||
8,900 | Brinker International, Inc. | 129,584 | |||||||||||||
1,200 | Career Education Corp. * | 28,500 | |||||||||||||
900 | Choice Hotels International, Inc. | 26,550 | |||||||||||||
1,500 | Darden Restaurants, Inc. | 49,395 | |||||||||||||
1,200 | ITT Educational Services, Inc. * | 125,988 | |||||||||||||
13,000 | McDonald's Corp. | 731,120 | |||||||||||||
7,100 | Starbucks Corp. * | 134,829 | |||||||||||||
Total Consumer Services | 1,316,714 |
See accompanying notes to the financial statements.
2
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Diversified Financials — 0.5% | |||||||||||||||
300 | Goldman Sachs Group (The), Inc. | 49,638 | |||||||||||||
6,600 | Morgan Stanley | 191,136 | |||||||||||||
Total Diversified Financials | 240,774 | ||||||||||||||
Energy — 2.7% | |||||||||||||||
13,400 | Exxon Mobil Corp. | 926,610 | |||||||||||||
5,300 | Frontier Oil Corp. | 67,999 | |||||||||||||
16,000 | Tesoro Corp. | 225,280 | |||||||||||||
Total Energy | 1,219,889 | ||||||||||||||
Food & Staples Retailing — 6.1% | |||||||||||||||
4,100 | Costco Wholesale Corp. | 209,018 | |||||||||||||
3,800 | CVS Caremark Corp. | 142,576 | |||||||||||||
6,600 | Kroger Co. (The) | 142,494 | |||||||||||||
15,200 | Sysco Corp. | 387,448 | |||||||||||||
27,600 | Wal-Mart Stores, Inc. | 1,404,012 | |||||||||||||
13,600 | Walgreen Co. | 460,768 | |||||||||||||
Total Food & Staples Retailing | 2,746,316 | ||||||||||||||
Food, Beverage & Tobacco — 12.4% | |||||||||||||||
25,384 | Altria Group, Inc. | 464,019 | |||||||||||||
3,700 | Brown-Forman Corp.-Class B | 165,464 | |||||||||||||
4,700 | Campbell Soup Co. | 147,392 | |||||||||||||
23,000 | Coca-Cola Co. (The) | 1,121,710 | |||||||||||||
11,400 | Dean Foods Co. * | 206,796 | |||||||||||||
1,400 | Flowers Foods, Inc. | 33,278 | |||||||||||||
3,700 | General Mills, Inc. | 221,001 | |||||||||||||
5,100 | Hansen Natural Corp. * | 166,566 | |||||||||||||
5,300 | Hershey Co. (The) | 207,919 | |||||||||||||
3,700 | HJ Heinz Co. | 142,450 | |||||||||||||
3,600 | Hormel Foods Corp. | 133,020 | |||||||||||||
1,000 | JM Smucker Co. (The) | 52,270 | |||||||||||||
4,900 | Kellogg Co. | 230,741 | |||||||||||||
1,200 | Kraft Foods, Inc.-Class A | 34,020 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Food, Beverage & Tobacco — continued | |||||||||||||||
4,900 | Lorillard, Inc. | 356,573 | |||||||||||||
5,700 | McCormick & Co., Inc. (Non Voting) | 185,649 | |||||||||||||
1,500 | Pepsi Bottling Group (The), Inc. | 53,595 | |||||||||||||
19,400 | PepsiCo, Inc. | 1,099,398 | |||||||||||||
12,784 | Philip Morris International, Inc. | 584,357 | |||||||||||||
Total Food, Beverage & Tobacco | 5,606,218 | ||||||||||||||
Health Care Equipment & Services — 5.7% | |||||||||||||||
10,300 | AmerisourceBergen Corp. | 219,493 | |||||||||||||
5,600 | Baxter International, Inc. | 318,752 | |||||||||||||
1,900 | Cerner Corp. * | 117,249 | |||||||||||||
3,200 | Cigna Corp. | 94,176 | |||||||||||||
4,700 | Coventry Health Care, Inc. * | 102,601 | |||||||||||||
800 | Edwards Lifesciences Corp. * | 49,504 | |||||||||||||
5,700 | Humana, Inc. * | 203,490 | |||||||||||||
2,200 | Lincare Holdings, Inc. * | 58,058 | |||||||||||||
4,000 | McKesson Corp. | 227,440 | |||||||||||||
14,200 | Medtronic, Inc. | 543,860 | |||||||||||||
6,600 | Omnicare, Inc. | 151,074 | |||||||||||||
3,300 | Quest Diagnostics, Inc. | 178,068 | |||||||||||||
3,394 | UnitedHealth Group, Inc. | 95,032 | |||||||||||||
4,100 | WellPoint, Inc. * | 216,685 | |||||||||||||
Total Health Care Equipment & Services | 2,575,482 | ||||||||||||||
Household & Personal Products — 7.6% | |||||||||||||||
5,300 | Alberto-Culver Co. | 139,867 | |||||||||||||
7,300 | Avon Products, Inc. | 232,651 | |||||||||||||
3,300 | Church & Dwight Co., Inc. | 188,529 | |||||||||||||
7,000 | Clorox Co. | 413,630 | |||||||||||||
7,300 | Colgate-Palmolive Co. | 530,710 | |||||||||||||
900 | Energizer Holdings, Inc. * | 58,887 | |||||||||||||
3,800 | Estee Lauder Cos. (The), Inc.-Class A | 136,230 | |||||||||||||
6,200 | Kimberly-Clark Corp. | 374,852 | |||||||||||||
24,800 | Procter & Gamble Co. (The) | 1,341,928 | |||||||||||||
Total Household & Personal Products | 3,417,284 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Insurance — 0.7% | |||||||||||||||
2,300 | Brown & Brown, Inc. | 45,701 | |||||||||||||
2,000 | Fidelity National Financial, Inc.-Class A | 30,040 | |||||||||||||
1,900 | Prudential Financial, Inc. | 96,102 | |||||||||||||
6,100 | W.R. Berkley Corp. | 155,855 | |||||||||||||
Total Insurance | 327,698 | ||||||||||||||
Materials — 1.0% | |||||||||||||||
3,000 | Ball Corp. | 145,380 | |||||||||||||
1,300 | International Flavors & Fragrances, Inc. | 46,306 | |||||||||||||
6,100 | Scotts Miracle-Gro Co. (The)-Class A | 248,209 | |||||||||||||
Total Materials | 439,895 | ||||||||||||||
Media — 0.2% | |||||||||||||||
2,500 | McGraw-Hill Cos. (The), Inc. | 84,025 | |||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 16.1% | |||||||||||||||
21,500 | Abbott Laboratories | 972,445 | |||||||||||||
11,900 | Amgen, Inc. * | 710,906 | |||||||||||||
5,000 | Biogen Idec, Inc. * | 251,050 | |||||||||||||
35,200 | Bristol-Myers Squibb Co. | 778,976 | |||||||||||||
11,500 | Eli Lilly & Co. | 384,790 | |||||||||||||
9,400 | Gilead Sciences, Inc. * | 423,564 | |||||||||||||
28,464 | Johnson & Johnson | 1,720,364 | |||||||||||||
20,400 | Merck & Co., Inc. | 661,572 | |||||||||||||
400 | Millipore Corp. * | 26,492 | |||||||||||||
18,000 | Mylan, Inc. * | 264,060 | |||||||||||||
26,176 | Pfizer, Inc. | 437,139 | |||||||||||||
10,900 | Schering-Plough Corp. | 307,162 | |||||||||||||
1,000 | Watson Pharmaceuticals, Inc. * | 35,290 | |||||||||||||
6,200 | Wyeth | 296,670 | |||||||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 7,270,480 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Retailing — 7.1% | |||||||||||||||
4,000 | Advance Auto Parts, Inc. | 169,200 | |||||||||||||
600 | Amazon.com, Inc. * | 48,714 | |||||||||||||
9,300 | American Eagle Outfitters, Inc. | 125,550 | |||||||||||||
2,000 | AutoNation, Inc. * | 37,960 | |||||||||||||
1,660 | AutoZone, Inc. * | 244,435 | |||||||||||||
6,700 | Bed Bath & Beyond, Inc. * | 244,416 | |||||||||||||
2,800 | Best Buy Co., Inc. | 101,584 | |||||||||||||
4,000 | Dollar Tree, Inc. * | 199,760 | |||||||||||||
8,400 | Family Dollar Stores, Inc. | 254,352 | |||||||||||||
2,600 | Foot Locker, Inc. | 27,716 | |||||||||||||
4,000 | Home Depot, Inc. | 109,160 | |||||||||||||
7,200 | Kohl's Corp. * | 371,448 | |||||||||||||
12,768 | Lowe's Cos., Inc. | 274,512 | |||||||||||||
1,800 | Nordstrom, Inc. | 50,472 | |||||||||||||
4,300 | O'Reilly Automotive, Inc. * | 164,604 | |||||||||||||
9,900 | PetSmart, Inc. | 207,009 | |||||||||||||
2,500 | Ross Stores, Inc. | 116,600 | |||||||||||||
4,500 | Sherwin-Williams Co. (The) | 270,900 | |||||||||||||
2,900 | Staples, Inc. | 62,669 | |||||||||||||
1,900 | Target Corp. | 89,300 | |||||||||||||
1,600 | Williams-Sonoma, Inc. | 30,608 | |||||||||||||
Total Retailing | 3,200,969 | ||||||||||||||
Semiconductors & Semiconductor Equipment — 1.0% | |||||||||||||||
2,800 | Broadcom Corp.-Class A * | 79,660 | |||||||||||||
6,700 | Cypress Semiconductor Corp. * | 67,804 | |||||||||||||
13,108 | Intel Corp. | 266,355 | |||||||||||||
1,500 | Novellus System, Inc. * | 28,740 | |||||||||||||
Total Semiconductors & Semiconductor Equipment | 442,559 | ||||||||||||||
Software & Services — 12.5% | |||||||||||||||
3,500 | Affiliated Computer Services, Inc.-Class A * | 156,800 | |||||||||||||
2,000 | Citrix Systems, Inc. * | 71,360 | |||||||||||||
8,800 | Fidelity National Information Services, Inc. | 216,128 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Software & Services — continued | |||||||||||||||
2,500 | Fiserv, Inc. * | 120,625 | |||||||||||||
2,360 | Google, Inc.-Class A * | 1,089,541 | |||||||||||||
11,000 | IAC/InterActiveCorp * | 203,720 | |||||||||||||
7,100 | Intuit, Inc. * | 197,167 | |||||||||||||
3,600 | McAfee, Inc. * | 143,208 | |||||||||||||
92,800 | Microsoft Corp. | 2,287,520 | |||||||||||||
52,800 | Oracle Corp. | 1,154,736 | |||||||||||||
Total Software & Services | 5,640,805 | ||||||||||||||
Technology Hardware & Equipment — 13.6% | |||||||||||||||
6,260 | Apple, Inc. * | 1,052,995 | |||||||||||||
1,400 | Arrow Electronics, Inc. * | 38,696 | |||||||||||||
2,400 | Avnet, Inc. * | 63,960 | |||||||||||||
64,700 | Cisco Systems, Inc. * | 1,397,520 | |||||||||||||
600 | F5 Networks, Inc. * | 20,694 | |||||||||||||
22,100 | Hewlett-Packard Co. | 992,069 | |||||||||||||
13,980 | International Business Machines Corp. | 1,650,339 | |||||||||||||
16,300 | Qualcomm, Inc. | 756,646 | |||||||||||||
10,500 | SanDisk Corp. * | 185,850 | |||||||||||||
Total Technology Hardware & Equipment | 6,158,769 | ||||||||||||||
Telecommunication Services — 0.4% | |||||||||||||||
2,645 | AT&T, Inc. | 68,902 | |||||||||||||
1,400 | CenturyTel, Inc. | 45,122 | |||||||||||||
6,700 | Frontier Communications Corp. | 47,637 | |||||||||||||
3,600 | Windstream Corp. | 30,852 | |||||||||||||
Total Telecommunication Services | 192,513 | ||||||||||||||
Transportation — 1.0% | |||||||||||||||
40,400 | AMR Corp. * | 220,584 | |||||||||||||
9,200 | Delta Air Lines, Inc. * | 66,424 | |||||||||||||
2,900 | United Parcel Service, Inc.-Class B | 155,034 | |||||||||||||
Total Transportation | 442,042 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Utilities — 0.2% | |||||||||||||||
3,800 | NV Energy, Inc. | 45,828 | |||||||||||||
800 | PG&E Corp. | 32,472 | |||||||||||||
Total Utilities | 78,300 | ||||||||||||||
TOTAL COMMON STOCKS (COST $42,554,489) | 43,511,714 | ||||||||||||||
SHORT-TERM INVESTMENTS — 3.5% | |||||||||||||||
Money Market Funds — 3.5% | |||||||||||||||
1,563,843 | State Street Institutional Treasury Money Market Fund-Institutional Class | 1,563,843 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $1,563,843) | 1,563,843 | ||||||||||||||
TOTAL INVESTMENTS — 99.8% (Cost $44,118,332) | 45,075,557 | ||||||||||||||
Other Assets and Liabilities (net) — 0.2% | 100,066 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 45,175,623 |
See accompanying notes to the financial statements.
8
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
18 | S&P 500 E-Mini Index | September 2009 | $ | 917,730 | $ | 67,264 |
As of August 31, 2009, for the futures contracts held, 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.
9
GMO U.S. Growth Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $44,118,332) (Note 2) | $ | 45,075,557 | |||||
Dividends receivable | 101,357 | ||||||
Foreign taxes receivable | 50 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 81,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 9,889 | ||||||
Total assets | 45,267,853 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 11,808 | ||||||
Shareholder service fee | 5,638 | ||||||
Administration fee – Class M | 99 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 32 | ||||||
Payable for 12b-1 fee – Class M | 249 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 6,930 | ||||||
Accrued expenses | 67,474 | ||||||
Total liabilities | 92,230 | ||||||
Net assets | $ | 45,175,623 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 71,524,685 | |||||
Accumulated undistributed net investment income | 125,261 | ||||||
Accumulated net realized loss | (27,498,812 | ) | |||||
Net unrealized appreciation | 1,024,489 | ||||||
$ | 45,175,623 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 44,581,529 | |||||
Class M shares | $ | 594,094 | |||||
Shares outstanding: | |||||||
Class III | 3,351,595 | ||||||
Class M | 44,766 | ||||||
Net asset value per share: | |||||||
Class III | $ | 13.30 | |||||
Class M | $ | 13.27 |
See accompanying notes to the financial statements.
10
GMO U.S. Growth Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 489,095 | |||||
Total investment income | 489,095 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 63,699 | ||||||
Shareholder service fee – Class III (Note 3) | 30,391 | ||||||
12b-1 fee – Class M (Note 3) | 717 | ||||||
Administration fee – Class M (Note 3) | 573 | ||||||
Audit and tax fees | 28,152 | ||||||
Custodian, fund accounting agent and transfer agent fees | 25,484 | ||||||
Registration fees | 11,776 | ||||||
Legal fees | 736 | ||||||
Trustees fees and related expenses (Note 3) | 439 | ||||||
Miscellaneous | 368 | ||||||
Total expenses | 162,335 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (66,332 | ) | |||||
Net expenses | 96,003 | ||||||
Net investment income (loss) | 393,092 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (6,488,521 | ) | |||||
Closed futures contracts | 74,553 | ||||||
Net realized gain (loss) | (6,413,968 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 15,743,464 | ||||||
Open futures contracts | 218,814 | ||||||
Net unrealized gain (loss) | 15,962,278 | ||||||
Net realized and unrealized gain (loss) | 9,548,310 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 9,941,402 |
See accompanying notes to the financial statements.
11
GMO U.S. Growth Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 393,092 | $ | 1,166,736 | |||||||
Net realized gain (loss) | (6,413,968 | ) | (16,522,474 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 15,962,278 | (440,166 | ) | ||||||||
Net increase (decrease) in net assets from operations | 9,941,402 | (15,795,904 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (358,414 | ) | (1,064,873 | ) | |||||||
Class M | (4,276 | ) | (246,973 | ) | |||||||
Total distributions from net investment income | (362,690 | ) | (1,311,846 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | 378,700 | (77,034,776 | ) | ||||||||
Class M | (64,884 | ) | (68,971,923 | ) | |||||||
Increase (decrease) in net assets resulting from net share transactions | 313,816 | (146,006,699 | ) | ||||||||
Total increase (decrease) in net assets | 9,892,528 | (163,114,449 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 35,283,095 | 198,397,544 | |||||||||
End of period (including accumulated undistributed net investment income of $125,261 and $94,859, respectively) | $ | 45,175,623 | $ | 35,283,095 |
See accompanying notes to the financial statements.
12
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.47 | $ | 15.82 | $ | 17.24 | $ | 18.17 | $ | 18.26 | $ | 19.03 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.12 | 0.18 | 0.17 | 0.15 | 0.15 | 0.16 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.82 | (5.32 | ) | (1.06 | ) | 0.07 | 0.86 | (0.02 | )(a) | ||||||||||||||||||
Total from investment operations | 2.94 | (5.14 | ) | (0.89 | ) | 0.22 | 1.01 | 0.14 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.11 | ) | (0.21 | ) | (0.17 | ) | (0.15 | ) | (0.16 | ) | (0.14 | ) | |||||||||||||||
From net realized gains | — | — | (0.36 | ) | (1.00 | ) | (0.94 | ) | (0.77 | ) | |||||||||||||||||
Total distributions | (0.11 | ) | (0.21 | ) | (0.53 | ) | (1.15 | ) | (1.10 | ) | (0.91 | ) | |||||||||||||||
Net asset value, end of period | $ | 13.30 | $ | 10.47 | $ | 15.82 | $ | 17.24 | $ | 18.17 | $ | 18.26 | |||||||||||||||
Total Return(b) | 28.19 | %** | (32.84 | )% | (5.49 | )% | 1.24 | % | 5.64 | % | 0.94 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 44,582 | $ | 34,758 | $ | 129,666 | $ | 224,554 | $ | 342,203 | $ | 357,499 | |||||||||||||||
Net expenses to average daily net assets | 0.46 | %* | 0.46 | %(c) | 0.46 | %(c) | 0.46 | % | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 1.92 | %* | 1.19 | % | 0.94 | % | 0.85 | % | 0.84 | % | 0.89 | % | |||||||||||||||
Portfolio turnover rate | 69 | %** | 70 | % | 97 | % | 111 | % | 94 | % | 136 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.32 | %* | 0.19 | % | 0.07 | % | 0.05 | % | 0.04 | % | 0.04 | % |
(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 and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
13
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.45 | $ | 15.76 | $ | 17.16 | $ | 18.10 | $ | 18.19 | $ | 18.97 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.10 | 0.13 | 0.11 | 0.10 | 0.10 | 0.11 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.81 | (5.30 | ) | (1.05 | ) | 0.06 | 0.85 | (0.02 | )(a) | ||||||||||||||||||
Total from investment operations | 2.91 | (5.17 | ) | (0.94 | ) | 0.16 | 0.95 | 0.09 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.09 | ) | (0.14 | ) | (0.10 | ) | (0.10 | ) | (0.10 | ) | (0.10 | ) | |||||||||||||||
From net realized gains | — | — | (0.36 | ) | (1.00 | ) | (0.94 | ) | (0.77 | ) | |||||||||||||||||
Total distributions | (0.09 | ) | (0.14 | ) | (0.46 | ) | (1.10 | ) | (1.04 | ) | (0.87 | ) | |||||||||||||||
Net asset value, end of period | $ | 13.27 | $ | 10.45 | $ | 15.76 | $ | 17.16 | $ | 18.10 | $ | 18.19 | |||||||||||||||
Total Return(b) | 27.96 | %** | (33.01 | )% | (5.79 | )% | 0.91 | % | 5.33 | % | 0.65 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 594 | $ | 525 | $ | 68,732 | $ | 85,714 | $ | 253,332 | $ | 269,227 | |||||||||||||||
Net expenses to average daily net assets | 0.76 | %* | 0.76 | %(c) | 0.76 | %(c) | 0.76 | % | 0.77 | % | 0.78 | % | |||||||||||||||
Net investment income to average daily net assets | 1.63 | %* | 0.80 | % | 0.64 | % | 0.56 | % | 0.54 | % | 0.61 | % | |||||||||||||||
Portfolio turnover rate | 69 | %** | 70 | % | 97 | % | 111 | % | 94 | % | 136 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.32 | %* | 0.10 | % | 0.07 | % | 0.05 | % | 0.04 | % | 0.04 | % |
(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 and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
14
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO U.S. Growth Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 long-term capital growth. The Fund seeks to achieve its objective by outperforming its benchmark, the Russell 1000 Growth Index. The Fund typically makes equity investments in U.S. companies that issue stocks included in the Russell 1000 Index, a U.S. stock index, and in companies with similar market capitalizations. Under normal circumstances, the Fund invests at least 80% of its assets in investments tied economically to the U.S. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the counter derivatives, including options, futures, and swap contracts. The Fund also may invest in unaffilia ted money market funds and in GMO U.S. Treasury Fund.
Throughout the period ended August 31, 2009, 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 they bear.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported
15
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sal e, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
Asset Valuation Inputs | Investments in Securities | Other Financial Instruments* | |||||||||
Level 1 - Quoted Prices | $ | 43,511,714 | $ | 67,264 | |||||||
Level 2 - Other Significant Observable Inputs | 1,563,843 | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | 45,075,557 | $ | 67,264 |
* Other financial instruments include futures contracts.
16
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Liability Valuation Inputs | Investments in Securities | Other Financial Instruments | |||||||||
Level 1 - Quoted Prices | $ | — | $ | — | |||||||
Level 2 - Other Significant Observable Inputs | — | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | — | $ | — |
All of the Fund's common stocks are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks. All short-term investments are classified as Level 2.
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. 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 various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
17
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
18
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing
19
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $4,390,997.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2011 | $ | (2,843,668 | ) | ||||
2/29/2012 | (782,016 | ) | |||||
2/28/2017 | (11,615,801 | ) | |||||
Total | $ | (15,241,485 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 44,968,483 | $ | 1,753,223 | $ | (1,646,149 | ) | $ | 107,074 |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of
20
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's operations.
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Market Risk — Growth Securities — Growth securities typically trade at higher multiples of current earnings than other securities. The market prices of growth securities are often more sensitive to market fluctuations because of their heavy dependence on future earnings expectations.
Other principal risks of an investment in the Fund include Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Credit and Counterparty Risk (risk of default of a
21
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
derivatives counterparty or borrower of the Fund's securities), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index).
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be
22
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictability of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
23
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | 67,264 | — | 67,264 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 67,264 | $ | — | $ | 67,264 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
24
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | 74,553 | — | 74,553 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 74,553 | $ | — | $ | 74,553 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | 218,814 | — | 218,814 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 218,814 | $ | — | $ | 218,814 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Futures | |||||||
Average notional amount outstanding | $ | 850,047 | |||||
Highest notional amount outstanding | 935,180 | ||||||
Lowest notional amount outstanding | 734,200 |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 average daily net assets at the annual rate of 0.15% for Class III shares.
25
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Holders of Class M shares of the Fund pay GMO an administration fee for support services provided to Class M shareholders. That fee is paid monthly at the annual rate of 0.20% of the average net assets daily of Class M shares. Pursuant to a Rule 12b-1 distribution and service plan adopted by the Fund, holders of Class M shares of the Fund may pay a fee, at the annual rate of up to 1.00% of average daily net assets of Class M shares for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or the provision of services to Class M shareholders. The Trustees currently limit payments on Class M shares to 0.25% of the Fund's average daily net assets of Class M shares.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.31% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, administration fees, distribution (12b-1) fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an inve stment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.31% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.31% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $439 and $184, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $27,973,097 and $27,257,554, respectively.
26
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 92.52% of the outstanding shares of the Fund were held by one shareholder.
As of August 31, 2009, less than 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 0.04% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 2,626 | $ | 30,777 | 108,893 | $ | 1,725,962 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 30,340 | 357,985 | 72,485 | 1,064,140 | |||||||||||||||
Shares repurchased | (930 | ) | (10,062 | ) | (5,059,040 | ) | (79,824,878 | ) | |||||||||||
Net increase (decrease) | 32,036 | $ | 378,700 | (4,877,662 | ) | $ | (77,034,776 | ) |
27
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | 93,630 | $ | 1,517,398 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 363 | 4,275 | 15,520 | 246,973 | |||||||||||||||
Shares repurchased | (5,854 | ) | (69,159 | ) | (4,419,327 | ) | (70,736,294 | ) | |||||||||||
Net increase (decrease) | (5,491 | ) | $ | (64,884 | ) | (4,310,177 | ) | $ | (68,971,923 | ) |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
28
GMO U.S. Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature.
29
GMO U.S. Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, 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 to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to separate account clients and the impact on the Manager of, and expenses and risks associated with, the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and c hanges in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 fa ctors, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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
30
GMO U.S. Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
31
GMO U.S. Growth Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | $ | 1,281.90 | $ | 2.65 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 0.76 | % | $ | 1,000.00 | $ | 1,279.60 | $ | 4.37 | |||||||||||
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, 2009, 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 Currency Hedged International Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 86.8 | % | |||||
Short-Term Investments | 13.1 | ||||||
Options Purchased | 2.3 | ||||||
Futures | 0.6 | ||||||
Loan Participations | 0.2 | ||||||
Loan Assignments | 0.1 | ||||||
Swaps | 0.1 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Written Options | (0.7 | ) | |||||
Reverse Repurchase Agreements | (2.4 | ) | |||||
Other | (0.2 | ) | |||||
100.0 | % | ||||||
Country/Region Summary** | % of Investments | ||||||
Euro Region*** | 89.2 | % | |||||
United Kingdom | 20.0 | ||||||
Canada | 6.0 | ||||||
Emerging | 4.0 | ||||||
Australia | 2.9 | ||||||
Sweden | 0.5 | ||||||
United States | (3.9 | ) | |||||
Japan | (18.7 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts. The table is based on duration-adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative contracts. Duration is based on the Manager's models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and negative) are factored into the duration-adjusted exposure using the reference security and applying the same methodology to that security.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia 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, 2009 (Unaudited)
Par Value / Shares / Principal Amount | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 14.6% | |||||||||||||||
France — 5.4% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
EUR | 5,000,000 | Government of France, 4.00%, due 10/25/38 | 7,038,972 | ||||||||||||
Germany — 6.1% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
EUR | 5,000,000 | Republic of Deutschland, 4.75%, due 07/04/34 (a) | 7,907,734 | ||||||||||||
United States — 3.1% | |||||||||||||||
U.S. Government | |||||||||||||||
USD | 3,983,840 | U.S. Treasury Inflation Indexed Bond, 0.88%, due 04/15/10 (a) (b) | 3,977,617 | ||||||||||||
TOTAL DEBT OBLIGATIONS (COST $17,837,642) | 18,924,323 | ||||||||||||||
MUTUAL FUNDS — 81.5% | |||||||||||||||
United States — 81.5% | |||||||||||||||
Affiliated Issuers | |||||||||||||||
547,014 | GMO Emerging Country Debt Fund, Class III | 4,212,006 | |||||||||||||
4,332,356 | GMO Short-Duration Collateral Fund | 69,534,312 | |||||||||||||
5,496 | GMO Special Purpose Holding Fund (c) | 3,462 | |||||||||||||
429,172 | GMO U.S. Treasury Fund | 10,733,599 | |||||||||||||
1,107,586 | GMO World Opportunity Overlay Fund | 21,442,864 | |||||||||||||
Total United States | 105,926,243 | ||||||||||||||
TOTAL MUTUAL FUNDS (COST $126,366,922) | 105,926,243 | ||||||||||||||
OPTIONS PURCHASED — 0.1% | |||||||||||||||
Currency Options — 0.1% | |||||||||||||||
EUR | 30,000,000 | EUR Interest Rate Call, Expires 05/18/10, Strike 2.31 | 197,235 | ||||||||||||
TOTAL OPTIONS PURCHASED (COST $260,208) | 197,235 |
See accompanying notes to the financial statements.
2
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 3.0% | |||||||||||||||
Money Market Funds — 2.9% | |||||||||||||||
3,774,372 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 3,774,372 | |||||||||||||
Other Short-Term Investments — 0.1% | |||||||||||||||
100,000 | U.S. Treasury Bill, 0.38%, due 07/29/10 (a) (d) | 99,654 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $3,874,009) | 3,874,026 | ||||||||||||||
TOTAL INVESTMENTS — 99.2% (Cost $148,338,781) | 128,921,827 | ||||||||||||||
Other Assets and Liabilities (net) — 0.8% | 1,047,911 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 129,969,738 |
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, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales # | |||||||||||||||||||
10/06/09 | EUR | 10,600,000 | $ | 15,196,641 | $ | 62,483 |
# Fund sells foreign currency; buys USD.
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
13 | Australian Government Bond 10 Yr. | September 2009 | $ | 1,147,128 | $ | 9,367 | |||||||||||||
22 | Australian Government Bond 3 Yr. | September 2009 | 1,904,233 | (19,081 | ) | ||||||||||||||
53 | Canadian Government Bond 10 Yr. | December 2009 | 5,815,160 | 22,500 | |||||||||||||||
210 | Euro Bund | September 2009 | 36,955,838 | 1,178,608 | |||||||||||||||
114 | UK Gilt Long Bond | December 2009 | 22,013,252 | 62,619 | |||||||||||||||
2 | U.S. Treasury Note 5 Yr. (CBT) | December 2009 | 230,500 | 996 | |||||||||||||||
$ | 68,066,111 | $ | 1,255,009 | ||||||||||||||||
Sales | |||||||||||||||||||
28 | Euro BOBL | September 2009 | $ | 4,672,695 | $ | (38,564 | ) | ||||||||||||
15 | Japanese Government Bond 10 Yr. (TSE) | September 2009 | 22,497,151 | (424,730 | ) | ||||||||||||||
8 | U.S. Treasury Note 2 Yr. (CBT) | December 2009 | 1,730,750 | (3,978 | ) | ||||||||||||||
27 | U.S. Treasury Note 10 Yr. (CBT) | December 2009 | 3,164,906 | (18,222 | ) | ||||||||||||||
1 | U.S. Treasury Bond (CBT) | December 2009 | 119,750 | (655 | ) | ||||||||||||||
$ | 32,185,252 | $ | (486,149 | ) |
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, 2009 (Unaudited)
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
28,000,000 | USD | 3/20/2014 | Deutsche | (Pay) | 1.70 | % | 0.71 | % | Republic of | NA | $ | (1,280,342 | ) | ||||||||||||||||||||||||||||||
Bank AG | Italy | ||||||||||||||||||||||||||||||||||||||||||
20,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.66 | % | 0.77 | % | Republic of Italy | 20,000,000 | USD | 1,479,710 | |||||||||||||||||||||||||||||||
$ | 199,368 | ||||||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
^ Receive - Fund receives premium and sells credit protection.
(Pay) - Fund pays premium and buys credit protection.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2009, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider (i.e. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to make as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
40,000,000 | EUR | 1/23/2012 | Deutsche Bank AG | Receive | 2.71 | % | 6 month EUR LIBOR | $ | 597,579 | ||||||||||||||||||||||
$ | 597,579 | ||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
As of August 31, 2009, for the futures and/or swap contracts held, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
5
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Notes to Schedule of Investments:
BOBL - Bundesobligationen
EUR LIBOR - London Interbank Offered Rate denominated in Euros.
(a) All or a portion of this security has been pledged to cover margin requirements on open financial futures contracts and/or collateral on open swap contracts (Note 2).
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic.
(c) Underlying investment represents interests in defaulted securities.
(d) Rate shown represents yield-to-maturity.
Currency Abbreviations:
EUR - Euro
USD - United States Dollar
See accompanying notes to the financial statements.
6
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $21,971,859) (Note 2) | $ | 22,995,584 | |||||
Investments in affiliated issuers, at value (cost $126,366,922) (Notes 2 and 8) | 105,926,243 | ||||||
Dividends and interest receivable | 315,070 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 62,483 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 1,790,153 | ||||||
Receivable for open swap contracts (Note 2) | 2,077,289 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 9,967 | ||||||
Total assets | 133,176,789 | ||||||
Liabilities: | |||||||
Foreign currency due to custodian | 6,826 | ||||||
Payable for investments purchased | 2,461 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 27,161 | ||||||
Shareholder service fee | 16,297 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 267 | ||||||
Payable to broker for closed futures contracts | 1,797,792 | ||||||
Payable for open swap contracts (Note 2) | 1,280,342 | ||||||
Accrued expenses | 75,905 | ||||||
Total liabilities | 3,207,051 | ||||||
Net assets | $ | 129,969,738 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 160,081,547 | |||||
Distributions in excess of net investment income | (21,295,172 | ) | |||||
Accumulated net realized gain | 8,988,756 | ||||||
Net unrealized depreciation | (17,805,393 | ) | |||||
$ | 129,969,738 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 129,969,738 | |||||
Shares outstanding: | |||||||
Class III | 17,405,512 | ||||||
Net asset value per share: | |||||||
Class III | $ | 7.47 |
See accompanying notes to the financial statements.
7
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 650,410 | |||||
Interest | 298,975 | ||||||
Dividends | 5,901 | ||||||
Total investment income | 955,286 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 159,937 | ||||||
Shareholder service fee – Class III (Note 3) | 95,962 | ||||||
Audit and tax fees | 34,776 | ||||||
Custodian, fund accounting agent and transfer agent fees | 29,072 | ||||||
Legal fees | 3,496 | ||||||
Trustees fees and related expenses (Note 3) | 1,250 | ||||||
Registration fees | 736 | ||||||
Miscellaneous | 1,011 | ||||||
Total expenses | 326,240 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (67,528 | ) | |||||
Expense reductions (Note 2) | (17 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (7,472 | ) | |||||
Shareholder service fee waived (Note 3) | (2,758 | ) | |||||
Net expenses | 248,465 | ||||||
Net investment income (loss) | 706,821 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 7,639 | ||||||
Closed futures contracts | (1,165,114 | ) | |||||
Closed swap contracts | (33,109 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (1,069,655 | ) | |||||
Net realized gain (loss) | (2,260,239 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 1,168,400 | ||||||
Investments in affiliated issuers | 13,942,939 | ||||||
Open futures contracts | 505,749 | ||||||
Open swap contracts | 828,780 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 67,111 | ||||||
Net unrealized gain (loss) | 16,512,979 | ||||||
Net realized and unrealized gain (loss) | 14,252,740 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 14,959,561 |
See accompanying notes to the financial statements.
8
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 706,821 | $ | 4,559,356 | |||||||
Net realized gain (loss) | (2,260,239 | ) | 4,849,166 | ||||||||
Change in net unrealized appreciation (depreciation) | 16,512,979 | (30,289,598 | ) | ||||||||
Net increase (decrease) in net assets from operations | 14,959,561 | (20,881,076 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (4,307,890 | ) | (9,430,411 | ) | |||||||
Return of capital | |||||||||||
Class III | (2,492,110 | ) | — | ||||||||
(6,800,000 | ) | (9,430,411 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (5,378,862 | ) | 1,411,572 | ||||||||
Redemption fees (Notes 2 and 7): | |||||||||||
Class III | 107,884 | 29,275 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (5,270,978 | ) | 1,440,847 | ||||||||
Total increase (decrease) in net assets | 2,888,583 | (28,870,640 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 127,081,155 | 155,951,795 | |||||||||
End of period (including distributions in excess of net investment income of $21,295,172 and $17,694,103, respectively) | $ | 129,969,738 | $ | 127,081,155 |
See accompanying notes to the financial statements.
9
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.00 | $ | 8.79 | $ | 9.21 | $ | 9.04 | $ | 9.59 | $ | 9.16 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.04 | 0.26 | 0.33 | 0.17 | 0.18 | 0.14 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.82 | (1.49 | ) | (0.62 | ) | 0.15 | 0.39 | 0.44 | |||||||||||||||||||
Total from investment operations | 0.86 | (1.23 | ) | (0.29 | ) | 0.32 | 0.57 | 0.58 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.24 | ) | (0.56 | ) | (0.01 | ) | — | (1.00 | )(b) | (0.15 | ) | ||||||||||||||||
From net realized gains | — | — | — | (0.14 | ) | (0.12 | ) | — | |||||||||||||||||||
Return of capital | (0.15 | ) | — | (0.12 | ) | (0.01 | ) | — | — | ||||||||||||||||||
Total distributions | (0.39 | ) | (0.56 | ) | (0.13 | ) | (0.15 | ) | (1.12 | ) | (0.15 | ) | |||||||||||||||
Net asset value, end of period | $ | 7.47 | $ | 7.00 | $ | 8.79 | $ | 9.21 | $ | 9.04 | $ | 9.59 | |||||||||||||||
Total Return(c) | 12.62 | %** | (13.93 | )% | (3.08 | )% | 3.58 | % | 6.01 | % | 6.35 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 129,970 | $ | 127,081 | $ | 155,952 | $ | 274,422 | $ | 953,894 | $ | 1,015,009 | |||||||||||||||
Net expenses to average daily net assets(e) | 0.39 | %(d)* | 0.39 | %(d) | 0.38 | %(d) | 0.39 | % | 0.39 | % | 0.39 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 1.10 | %* | 3.24 | % | 3.62 | % | 1.93 | % | 1.91 | % | 1.51 | % | |||||||||||||||
Portfolio turnover rate | 15 | %** | 28 | % | 55 | % | 25 | % | 49 | % | 44 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.12 | %* | 0.13 | % | 0.09 | % | 0.06 | % | 0.06 | % | 0.09 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.00 | (f) | — | — | — | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) 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.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) The net expense ratio does not include the effect of expense reductions.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(f) 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.
10
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Currency Hedged International Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the J.P. Morgan Non-U.S. Government Bond Index (Hedged) (ex-Japan). The Fund typically invests in bonds included in the Fund's benchmark and in securities and instruments with similar characteristics. The Fund seeks additional returns by seeking to exploit differences in global interest rates, sectors, and credit, currency, and emerging country debt markets. The Fund may implement its strategies: (i) synthetically by using exchange-traded and over-the-counter ("OTC") derivatives and investing in other series of the Trust and/or (ii) directly by purchasing bonds denominated in various currencies. The Fund has historically gained its investment exposure primarily through the use of derivatives and investments in other series of the Trust. As a result, the Fund has substantial holdings of GMO Short-Duration Collateral Fund ("SDCF") (a Fund that invests primarily in ass et-backed securities) and GMO World Opportunity Overlay Fund ("Overlay Fund") (a Fund that invests in asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Under normal circumstances, the Fund invests directly or indirectly at least 80% of its assets in bonds. For these purposes, the term "bond" includes (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by using a futures contract, swap contract, currency forward or option. To implement its investment strategies, the Fund may invest in or hold: investment-grade bonds denominated in various currencies, including foreign and U.S. government securities and asset-backed securities issued by foreign governments and U.S. government agencies ( including securities neither guaranteed nor insured by the U.S. government), corporate bonds, and mortgage-backed and other asset-backed securities issued by private issuers; derivatives, including without limitation, futures contracts, currency options, currency forwards, credit default swaps and other swap contracts (to gain exposure to the global interest rate, credit, and currency markets); shares of SDCF (to gain exposure to asset-backed securities); shares of Overlay Fund (to attempt to exploit misvaluations in world interest rates, currencies, and credit markets); shares of GMO Emerging Country Debt Fund ("ECDF") (to gain exposure to sovereign debt of emerging countries); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). Because of the deterioration in credit markets that became acute in 2008, the Fund through its investment in SDCF and Overlay Fund currently holds and may continue to hold material positions of below investment grade securities. This is in addition to the Fund' s emerging country debt investments. The Fund generally
11
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
attempts to hedge at least 75% of its net foreign currency exposure into U.S. dollars. The Fund also may invest in unaffiliated money market funds.
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). As of August 31, 2009, shares of SDCF, GMO Special Purpose Holding Fund ("SPHF") and Overlay Fund were not publicly available for direct purchase.
From prior to March 1, 2009 through July 12, 2009, the Fund had a policy to effect redemptions of its shares in-kind above de minimis levels. The Fund had established de minimis amounts below which redemptions would be honored for cash. Beginning July 13, 2009, the Fund had a policy to pay redemption requests with cash (less a redemption fee).
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
As of August 31, 2009, a significant portion of the Fund's dividends received from other GMO funds is expected to be a return of capital for U.S. federal income tax purposes. Accordingly, "dividends from affiliated issuers" reported in the Statement of Operations has been reduced by the portion estimated to be a return of capital as of August 31, 2009. The estimated return of capital is $14,510,913. In addition, all applicable related income disclosures throughout this Semiannual Report have been adjusted by the estimated return of capital. Furthermore, the "distributions to shareholders from return of capital" disclosed in the Statement of Changes in Net Assets and Financial Highlights are also estimates as of August 31, 2009. Both the dividends from affiliated issuers and distributions to shareholders from return of capital are subject to change and will not be finalized until February 28, 2010, the Fund's upcoming fiscal year - -end. Finally, in early 2010, applicable shareholders will receive Form 1099-DIV that will indicate the appropriate tax character of all distributions paid by the Fund in 2009.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for
12
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by the Fund, those alternative sources would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fu nd. As of August 31, 2009, the total value of securities held directly and indirectly that were fair valued or for which no alternative pricing source was available represented 20.15% of the net assets of the Fund.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund utilizes third party valuation services (which use industry standard models and inputs from pricing vendors) to value credit default swaps.
13
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Foreign Government Obligations | $ | — | $ | 14,946,706 | $ | — | $ | 14,946,706 | |||||||||||
U.S. Government | — | 3,977,617 | — | 3,977,617 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 18,924,323 | — | 18,924,323 | |||||||||||||||
Mutual Funds | 14,945,605 | 90,980,638 | — | 105,926,243 | |||||||||||||||
Options Purchased | 197,235 | — | 197,235 | ||||||||||||||||
Short-Term Investments | 99,654 | 3,774,372 | — | 3,874,026 | |||||||||||||||
Total Investments | 15,045,259 | 113,876,568 | — | 128,921,827 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | — | 62,483 | — | 62,483 | |||||||||||||||
Futures Contracts | 1,274,090 | — | — | 1,274,090 | |||||||||||||||
Swap Agreements | — | 597,579 | 1,479,710 | 2,077,289 | |||||||||||||||
Total | $ | 16,319,349 | $ | 114,536,630 | $ | 1,479,710 | $ | 132,335,689 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Futures Contracts | $ | (505,230 | ) | $ | — | $ | — | $ | (505,230 | ) | |||||||||
Swap Agreements | — | — | (1,280,342 | ) | (1,280,342 | ) | |||||||||||||
Total | $ | (505,230 | ) | $ | — | $ | (1,280,342 | ) | $ | (1,785,572 | ) |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 56.59% and 0.01% of total net assets, respectively.
14
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Mutual Funds | $ | 4,012 | $ | — | $ | — | $ | — | $ | (550 | ) | $ | (3,462 | ) | $ | — | |||||||||||||||
Swaps | (50,843 | ) | 33,109 | — | (33,109 | ) | 250,211 | — | 199,368 | ||||||||||||||||||||||
Total | $ | (46,831 | ) | $ | 33,109 | $ | — | $ | (33,109 | ) | $ | 249,661 | $ | (3,462 | ) | $ | 199,368 |
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
15
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. Options contracts purchased by the Fund and outstanding at the end of the period are listed in the Fund's Schedule of Investments.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
16
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
17
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at a later date at a fixed price. The Fund can use the proceeds received from entering into a reverse repurchase agreement to
18
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
make additional investments, which can cause the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the perio d.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, if any, at least annually. The Fund is permitted to, and will from time to time, declare and pay distributions from net investment income, if any, more frequently (e.g. monthly). 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
19
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $5,084,075.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (3,082,431 | ) | ||||
Total | $ | (3,082,431 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 150,938,490 | $ | 1,094,182 | $ | (23,110,845 | ) | $ | (22,016,663 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
20
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
From prior to March 1, 2009 until August 2, 2009, the fee on cash redemptions was 2.00% of the amount redeemed. From August 3, 2009 through August 31, 2009, the fee on cash redemptions was 1.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relatin g to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to t he Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. Many of these risks are more pronounced as a result of current global economic conditions that began to unfold in 2008.This summary is not intended to include
21
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to an OTC derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses OTC derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments where financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. The Fund may be required to sell certain less liquid securities at distressed prices or meet redemption requests in-kind. Recent changes in credit markets have reduced the liquidity of all types of fixed income securities, including in particular the asset-backed securities held by the Fund through SDCF and Overlay Fund.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected.
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Leveraging Risk (increased risks from use of reverse repurchase agreeme nts and other derivatives and securities lending), Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies), Focused Investment Risk (increased risk from the Fund's focus on investments in countries, regions, or sectors with high positive correlations to one another), and Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's
22
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
performance more than if the Fund were diversified. Certain of the above-referenced risks will be more pronounced for the Fund as a result of its investment in ECDF. For more information about reverse repurchase agreements and other derivatives, please refer to the descriptions of financial instruments (e.g. reverse repurchase agreements, swaps, futures and other types of derivative contracts) in Note 2 above as well as the discussion of the Fund's use of derivatives below.
The Fund invests (including through investment in underlying funds) in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of u nderlying assets or other support available to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities generally. These events reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not continue or that they will not deteriorate further. Also, government actions and proposals affecting the terms of underl ying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the
23
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
The Fund uses its cash balance to meet its collateral obligations and for other purposes. There is no assurance that the Fund's cash balance will be sufficient to meet those obligations. If it is not, the Fund would be required to liquidate portfolio positions. To manage the Fund's cash collateral needs, the Manager reserves the right to reduce or eliminate the Fund's derivative exposures. A reduction in those exposures may cause the performance of the Fund to track its benchmark less closely and make the Fund's performance more dependent on the performance of the asset-backed securities it holds directly or indirectly.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund uses derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund uses derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps (including credit default swaps) or other derivatives on an index, a single security or a basket of securities to gain investment exposures. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. For example, the Fund may use credit default swaps to take an active short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
24
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may attempt to alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed vs. variable and shorter duration vs. longer duration. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
25
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
26
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | 197,235 | $ | — | $ | — | $ | — | $ | — | $ | 197,235 | |||||||||||||||
Unrealized appreciation on futures contracts* | 1,274,090 | — | — | — | — | 1,274,090 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 62,483 | — | — | — | 62,483 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | 597,579 | — | 1,479,710 | — | — | 2,077,289 | |||||||||||||||||||||
Total | $ | 2,068,904 | $ | 62,483 | $ | 1,479,710 | $ | — | $ | — | $ | 3,611,097 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | (505,230 | ) | — | — | — | — | (505,230 | ) | |||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | (1,280,342 | ) | — | — | (1,280,342 | ) | |||||||||||||||||||
Total | $ | (505,230 | ) | $ | — | $ | (1,280,342 | ) | $ | — | $ | — | $ | (1,785,572 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
27
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | (1,165,114 | ) | — | — | — | — | (1,165,114 | ) | |||||||||||||||||||
Swaps contracts | — | — | (33,109 | ) | — | — | (33,109 | ) | |||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | (1,180,027 | ) | — | — | — | (1,180,027 | ) | |||||||||||||||||||
Total | $ | (1,165,114 | ) | $ | (1,180,027 | ) | $ | (33,109 | ) | $ | — | $ | — | $ | (2,378,250 | ) | |||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | (62,973 | ) | $ | — | $ | — | $ | — | $ | — | $ | (62,973 | ) | |||||||||||||
Futures contracts | — | 505,749 | — | — | — | 505,749 | |||||||||||||||||||||
Swaps contracts | 578,569 | — | 250,211 | — | — | 828,780 | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 62,483 | — | — | — | 62,483 | |||||||||||||||||||||
Total | $ | 515,596 | $ | 568,232 | $ | 250,211 | $ | — | $ | — | $ | 1,334,039 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Forwards | Futures | Swaps | Options | ||||||||||||||||
Average notional amount outstanding | $ | 11,745,403 | $ | 129,738,815 | $ | 113,067,325 | $ | 24,234,824 | |||||||||||
Highest notional amount outstanding | 15,196,641 | 265,874,202 | 116,710,000 | 42,893,909 | |||||||||||||||
Lowest notional amount outstanding | — | 90,433,361 | 105,191,879 | — |
Other matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF.
28
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan underwhich the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, an 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 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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.25% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes) (collectively, "Excluded Fund Fees and Expenses"). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 to the extent that the sum of (a) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses); (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in ECDF (excluding ECDF's Excluded Fund Fees and Expenses); and (c) the amount of fees and expenses incurred indirectly (through investment in other underlying funds) by the Fund through its (direct or indirect) investment in GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.25% of the Fund's average daily net assets, subject to a maximum total reimbursement to such Fund equal to 0.25% of the Fund's average daily net assets.
29
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009 , these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.017 | % | 0.005 | % | 0.009 | % | 0.031 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $1,066 and $644, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $43,652,194 and $18,800,000, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 90.60% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 90.60% of the Fund's shares were held by accounts for which the Manager had investment discretion.
30
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 639 | $ | 4,508 | 1,419 | $ | 10,498 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,523 | 10,842 | 1,349,847 | 9,367,939 | |||||||||||||||
Shares repurchased | (757,607 | ) | (5,394,212 | ) | (940,742 | ) | (7,966,865 | ) | |||||||||||
Redemption fees | — | 107,884 | — | 29,275 | |||||||||||||||
Net increase (decrease) | (755,445 | ) | $ | (5,270,978 | ) | 410,524 | $ | 1,440,847 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 | $ | 3,145,736 | $ | 64,689 | $ | — | $ | 64,689 | $ | — | $ | 4,212,006 | |||||||||||||||
GMO Short-Duration Collateral Fund | 74,083,286 | — | — | 563,794 | — | 69,534,312 | |||||||||||||||||||||
GMO Special Purpose Holding Fund | 4,012 | — | — | — | — | 3,462 | |||||||||||||||||||||
GMO U.S. Treasury Fund | — | 29,521,927 | 18,800,000 | 21,927 | — | 10,733,599 | |||||||||||||||||||||
GMO World Opportunity Overlay Fund | 20,324,202 | — | — | — | — | 21,442,864 | o | ||||||||||||||||||||
Totals | $ | 97,557,236 | $ | 29,586,616 | $ | 18,800,000 | $ | 650,410 | $ | — | $ | 105,926,243 |
o The Fund received return of capital distributions in the amount of $1,857,269.
31
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. On September 14, 2009, the Fund's redemption fee was eliminated.
32
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The
33
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for advisory fees, shareholder fees and most other expenses of the underlying funds 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management
34
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
35
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including 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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.42 | % | $ | 1,000.00 | $ | 1,126.20 | $ | 2.25 | |||||||||||
2) Hypothetical | 0.42 | % | $ | 1,000.00 | $ | 1,023.09 | $ | 2.14 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
36
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 94.3 | % | |||||
Short-Term Investments | 2.6 | ||||||
Futures Contracts | 0.0 | ||||||
Other | 3.1 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
United States | 89.9 | % | |||||
Switzerland | 3.6 | ||||||
United Kingdom | 3.1 | ||||||
France | 2.3 | ||||||
Netherlands | 0.6 | ||||||
Japan | 0.5 | ||||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 24.6 | % | |||||
Software & Services | 18.0 | ||||||
Energy | 11.6 | ||||||
Food, Beverage & Tobacco | 11.5 | ||||||
Technology Hardware & Equipment | 10.2 | ||||||
Household & Personal Products | 7.4 | ||||||
Food & Staples Retailing | 7.0 | ||||||
Health Care Equipment & Services | 3.2 | ||||||
Telecommunication Services | 2.2 | ||||||
Capital Goods | 2.0 | ||||||
Retailing | 1.1 | ||||||
Consumer Durables & Apparel | 0.6 | ||||||
Consumer Services | 0.6 | ||||||
Transportation | 0.0 | ||||||
100.0 | % |
1
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 94.3% | |||||||||||||||
Capital Goods — 1.9% | |||||||||||||||
2,123,200 | 3M Co. | 153,082,720 | |||||||||||||
1,417,100 | United Technologies Corp. | 84,119,056 | |||||||||||||
Total Capital Goods | 237,201,776 | ||||||||||||||
Consumer Durables & Apparel — 0.5% | |||||||||||||||
1,192,900 | Nike, Inc.-Class B | 66,074,731 | |||||||||||||
Consumer Services — 0.5% | |||||||||||||||
1,141,300 | McDonald's Corp. | 64,186,712 | |||||||||||||
Energy — 10.9% | |||||||||||||||
15,165,265 | BP Plc | 129,975,472 | |||||||||||||
6,677,400 | Chevron Corp. | 467,017,356 | |||||||||||||
7,166,900 | Exxon Mobil Corp. | 495,591,135 | |||||||||||||
3,084,368 | Royal Dutch Shell Group-Class A | 85,308,691 | |||||||||||||
2,823,060 | Total SA | 161,986,316 | |||||||||||||
Total Energy | 1,339,878,970 | ||||||||||||||
Food & Staples Retailing — 6.7% | |||||||||||||||
555,000 | Sysco Corp. | 14,146,950 | |||||||||||||
13,629,000 | Wal-Mart Stores, Inc. | 693,307,230 | |||||||||||||
3,199,000 | Walgreen Co. | 108,382,120 | |||||||||||||
Total Food & Staples Retailing | 815,836,300 | ||||||||||||||
Food, Beverage & Tobacco — 10.8% | |||||||||||||||
341,300 | Campbell Soup Co. | 10,703,168 | |||||||||||||
11,922,500 | Coca-Cola Co. (The) | 581,460,325 | |||||||||||||
671,300 | General Mills, Inc. | 40,096,749 | |||||||||||||
443,400 | Hershey Co. (The) | 17,394,582 | |||||||||||||
27,000 | HJ Heinz Co. | 1,039,500 | |||||||||||||
891,800 | Kellogg Co. | 41,994,862 | |||||||||||||
780,600 | Kraft Foods, Inc.-Class A | 22,130,010 | |||||||||||||
2,586,885 | Nestle SA | 107,699,930 |
See accompanying notes to the financial statements.
2
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Food, Beverage & Tobacco — continued | |||||||||||||||
7,672,100 | PepsiCo, Inc. | 434,777,907 | |||||||||||||
2,474,961 | Unilever NV | 69,342,834 | |||||||||||||
Total Food, Beverage & Tobacco | 1,326,639,867 | ||||||||||||||
Health Care Equipment & Services — 3.0% | |||||||||||||||
420,100 | Express Scripts, Inc. * | 30,339,622 | |||||||||||||
4,865,230 | Medtronic, Inc. | 186,338,309 | |||||||||||||
240,000 | Quest Diagnostics, Inc. | 12,950,400 | |||||||||||||
3,672,594 | UnitedHealth Group, Inc. | 102,832,632 | |||||||||||||
659,700 | WellPoint, Inc. * | 34,865,145 | |||||||||||||
Total Health Care Equipment & Services | 367,326,108 | ||||||||||||||
Household & Personal Products — 7.0% | |||||||||||||||
1,334,100 | Avon Products, Inc. | 42,517,767 | |||||||||||||
432,700 | Clorox Co. | 25,568,243 | |||||||||||||
2,191,200 | Colgate-Palmolive Co. | 159,300,240 | |||||||||||||
536,600 | Estee Lauder Cos. (The), Inc.-Class A | 19,237,110 | |||||||||||||
1,081,500 | Kimberly-Clark Corp. | 65,387,490 | |||||||||||||
9,985,500 | Procter & Gamble Co. (The) | 540,315,405 | |||||||||||||
Total Household & Personal Products | 852,326,255 | ||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 23.2% | |||||||||||||||
5,425,505 | Abbott Laboratories | 245,395,591 | |||||||||||||
3,691,960 | Amgen, Inc. * | 220,557,690 | |||||||||||||
1,350,500 | Bristol-Myers Squibb Co. | 29,886,565 | |||||||||||||
632,400 | Gilead Sciences, Inc. * | 28,495,944 | |||||||||||||
7,512,615 | GlaxoSmithKline Plc | 146,704,780 | |||||||||||||
11,924,100 | Johnson & Johnson | 720,692,604 | |||||||||||||
7,137,100 | Merck & Co., Inc. | 231,456,153 | |||||||||||||
3,074,083 | Novartis AG (Registered) | 142,800,730 | |||||||||||||
37,961,500 | Pfizer, Inc. | 633,957,050 | |||||||||||||
1,010,330 | Roche Holding AG | 160,920,947 | |||||||||||||
1,576,888 | Sanofi-Aventis | 107,366,562 | |||||||||||||
3,715,320 | Wyeth | 177,778,062 | |||||||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 2,846,012,678 |
See accompanying notes to the financial statements.
3
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Retailing — 1.1% | |||||||||||||||
3,886,200 | Home Depot, Inc. | 106,054,398 | |||||||||||||
1,137,800 | Lowe's Cos., Inc. | 24,462,700 | |||||||||||||
4,900 | Target Corp. | 230,300 | |||||||||||||
Total Retailing | 130,747,398 | ||||||||||||||
Software & Services — 17.0% | |||||||||||||||
2,953,273 | eBay, Inc. * | 65,385,464 | |||||||||||||
715,420 | Google, Inc.-Class A * | 330,287,952 | |||||||||||||
573,170 | MasterCard, Inc.-Class A | 116,141,437 | |||||||||||||
29,669,000 | Microsoft Corp. | 731,340,850 | |||||||||||||
31,271,000 | Oracle Corp. | 683,896,770 | |||||||||||||
2,185,200 | Visa, Inc.-Class A | 155,367,720 | |||||||||||||
Total Software & Services | 2,082,420,193 | ||||||||||||||
Technology Hardware & Equipment — 9.6% | |||||||||||||||
211,700 | Apple, Inc. * | 35,610,057 | |||||||||||||
21,854,600 | Cisco Systems, Inc. * | 472,059,360 | |||||||||||||
1,643,800 | Dell, Inc. * | 26,021,354 | |||||||||||||
1,022,900 | Hewlett-Packard Co. | 45,917,981 | |||||||||||||
2,393,760 | International Business Machines Corp. | 282,583,368 | |||||||||||||
6,764,900 | Qualcomm, Inc. | 314,026,658 | |||||||||||||
Total Technology Hardware & Equipment | 1,176,218,778 | ||||||||||||||
Telecommunication Services — 2.1% | |||||||||||||||
4,594,095 | AT&T, Inc. | 119,676,175 | |||||||||||||
37,244 | NTT Docomo Inc | 57,341,474 | |||||||||||||
2,620,400 | Verizon Communications, Inc. | 81,337,216 | |||||||||||||
Total Telecommunication Services | 258,354,865 | ||||||||||||||
Transportation — 0.0% | |||||||||||||||
60,400 | United Parcel Service, Inc.-Class B | 3,228,984 | |||||||||||||
TOTAL COMMON STOCKS (COST $11,493,627,303) | 11,566,453,615 |
See accompanying notes to the financial statements.
4
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 2.6% | |||||||||||||||
Money Market Funds — 0.7% | |||||||||||||||
88,325,399 | State Street Institutional Treasury Money Market Fund-Institutional Class | 88,325,399 | |||||||||||||
Other Short-Term Investments — 1.9% | |||||||||||||||
100,000,000 | U.S. Treasury Bill, 0.26%, due 04/08/10 (a) | 99,844,900 | |||||||||||||
140,000,000 | U.S. Treasury Bill, 0.17%, due 01/21/10 (a) | 139,908,860 | |||||||||||||
239,753,760 | |||||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $327,889,821) | 328,079,159 | ||||||||||||||
TOTAL INVESTMENTS — 96.9% (Cost $11,821,517,124) | 11,894,532,774 | ||||||||||||||
Other Assets and Liabilities (net) — 3.1% | 376,763,637 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 12,271,296,411 |
See accompanying notes to the financial statements.
5
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
3,515 | S&P 500 E-Mini Index | September 2009 | $ | 179,212,275 | $ | 185,962 |
As of August 31, 2009, for the futures contracts held, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
* Non-income producing security.
(a) Rate shown represents yield-to-maturity.
See accompanying notes to the financial statements.
6
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $11,821,517,124) (Note 2) | $ | 11,894,532,774 | |||||
Cash | 253,020,979 | ||||||
Foreign currency, at value (cost $40,376) (Note 2) | 40,370 | ||||||
Receivable for Fund shares sold | 123,605,300 | ||||||
Dividends and interest receivable | 38,411,577 | ||||||
Foreign taxes receivable | 564,884 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 15,817,500 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 136,152 | ||||||
Total assets | 12,326,129,536 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 41,454,790 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 3,347,820 | ||||||
Shareholder service fee | 873,326 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 20,045 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 761,530 | ||||||
Payable for collateral on open futures contracts (Note 2) | 7,785,000 | ||||||
Accrued expenses | 590,614 | ||||||
Total liabilities | 54,833,125 | ||||||
Net assets | $ | 12,271,296,411 |
See accompanying notes to the financial statements.
7
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 13,582,835,274 | |||||
Accumulated undistributed net investment income | 46,450,437 | ||||||
Accumulated net realized loss | (1,431,176,447 | ) | |||||
Net unrealized appreciation | 73,187,147 | ||||||
$ | 12,271,296,411 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 3,210,628,500 | |||||
Class IV shares | $ | 1,129,000,145 | |||||
Class V shares | $ | 769,904,238 | |||||
Class VI shares | $ | 7,161,763,528 | |||||
Shares outstanding: | |||||||
Class III | 182,530,321 | ||||||
Class IV | 64,139,534 | ||||||
Class V | 43,768,839 | ||||||
Class VI | 407,072,164 | ||||||
Net asset value per share: | |||||||
Class III | $ | 17.59 | |||||
Class IV | $ | 17.60 | |||||
Class V | $ | 17.59 | |||||
Class VI | $ | 17.59 |
See accompanying notes to the financial statements.
8
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $1,129,396) | $ | 144,938,272 | |||||
Interest | 341,339 | ||||||
Total investment income | 145,279,611 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 17,554,068 | ||||||
Shareholder service fee – Class III (Note 3) | 2,000,127 | ||||||
Shareholder service fee – Class IV (Note 3) | 474,835 | ||||||
Shareholder service fee – Class V (Note 3) | 341,518 | ||||||
Shareholder service fee – Class VI (Note 3) | 1,722,593 | ||||||
Custodian, fund accounting agent and transfer agent fees | 526,332 | ||||||
Legal fees | 195,776 | ||||||
Trustees fees and related expenses (Note 3) | 102,197 | ||||||
Registration fees | 31,096 | ||||||
Audit and tax fees | 28,152 | ||||||
Miscellaneous | 76,360 | ||||||
Total expenses | 23,053,054 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (810,612 | ) | |||||
Expense reductions (Note 2) | (13,181 | ) | |||||
Net expenses | 22,229,261 | ||||||
Net investment income (loss) | 123,050,350 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (613,016,505 | ) | |||||
Closed futures contracts | 4,893,547 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (482,531 | ) | |||||
Net realized gain (loss) | (608,605,489 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 2,846,108,798 | ||||||
Open futures contracts | 5,130,457 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (14,465 | ) | |||||
Net unrealized gain (loss) | 2,851,224,790 | ||||||
Net realized and unrealized gain (loss) | 2,242,619,301 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 2,365,669,651 |
See accompanying notes to the financial statements.
9
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 123,050,350 | $ | 192,133,660 | |||||||
Net realized gain (loss) | (608,605,489 | ) | (801,095,631 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 2,851,224,790 | (2,483,861,816 | ) | ||||||||
Net increase (decrease) in net assets from operations | 2,365,669,651 | (3,092,823,787 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (29,548,689 | ) | (34,569,204 | ) | |||||||
Class IV | (10,246,076 | ) | (7,116,929 | ) | |||||||
Class V | (9,289,428 | ) | (12,924,490 | ) | |||||||
Class VI | (72,553,746 | ) | (118,045,144 | ) | |||||||
Total distributions from net investment income | (121,637,939 | ) | (172,655,767 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (11,560,804 | ) | ||||||||
Class IV | — | (2,647,196 | ) | ||||||||
Class V | — | (3,886,453 | ) | ||||||||
Class VI | — | (33,978,058 | ) | ||||||||
Total distributions from net realized gains | — | (52,072,511 | ) | ||||||||
(121,637,939 | ) | (224,728,278 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 704,738,002 | 635,314,415 | |||||||||
Class IV | 149,496,434 | 511,082,914 | |||||||||
Class V | (38,638,854 | ) | 200,968,133 | ||||||||
Class VI | 560,189,017 | 2,284,883,800 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 1,375,784,599 | 3,632,249,262 | |||||||||
Total increase (decrease) in net assets | 3,619,816,311 | 314,697,197 | |||||||||
Net assets: | |||||||||||
Beginning of period | 8,651,480,100 | 8,336,782,903 | |||||||||
End of period (including accumulated undistributed net investment income of $46,450,437 and $45,038,026, respectively) | $ | 12,271,296,411 | $ | 8,651,480,100 |
See accompanying notes to the financial statements.
10
GMO Quality Fund
(formerly 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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.17 | $ | 20.56 | $ | 21.78 | $ | 20.81 | $ | 20.03 | $ | 19.93 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.18 | 0.37 | 0.39 | 0.35 | 0.32 | 0.39 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 3.42 | (6.30 | ) | (0.70 | ) | 1.12 | 0.72 | (0.05 | ) | ||||||||||||||||||
Total from investment operations | 3.60 | (5.93 | ) | (0.31 | ) | 1.47 | 1.04 | 0.34 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.18 | ) | (0.34 | ) | (0.36 | ) | (0.34 | ) | (0.22 | ) | (0.24 | ) | |||||||||||||||
From net realized gains | — | (0.12 | ) | (0.55 | ) | (0.16 | ) | (0.04 | ) | — | |||||||||||||||||
Total distributions | (0.18 | ) | (0.46 | ) | (0.91 | ) | (0.50 | ) | (0.26 | ) | (0.24 | ) | |||||||||||||||
Net asset value, end of period | $ | 17.59 | $ | 14.17 | $ | 20.56 | $ | 21.78 | $ | 20.81 | $ | 20.03 | |||||||||||||||
Total Return(a) | 25.57 | %** | (29.37 | )% | (1.76 | )% | 7.18 | % | 5.28 | % | 1.72 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 3,210,629 | $ | 1,952,579 | $ | 2,003,758 | $ | 1,575,300 | $ | 1,108,088 | $ | 463,848 | |||||||||||||||
Net expenses to average daily net assets | 0.48 | %(b)* | 0.48 | %(b) | 0.48 | %(b) | 0.48 | % | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 2.26 | %* | 2.03 | % | 1.74 | % | 1.64 | % | 1.58 | % | 1.98 | % | |||||||||||||||
Portfolio turnover rate | 19 | %** | 36 | % | 46 | % | 50 | % | 52 | % | 66 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % | 0.04 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
11
GMO Quality Fund
(formerly 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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.19 | $ | 20.57 | $ | 21.80 | $ | 20.82 | $ | 20.03 | $ | 19.93 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.19 | 0.39 | 0.40 | 0.37 | 0.32 | 0.38 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 3.41 | (6.30 | ) | (0.71 | ) | 1.11 | 0.74 | (0.03 | ) | ||||||||||||||||||
Total from investment operations | 3.60 | (5.91 | ) | (0.31 | ) | 1.48 | 1.06 | 0.35 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.19 | ) | (0.35 | ) | (0.37 | ) | (0.34 | ) | (0.23 | ) | (0.25 | ) | |||||||||||||||
From net realized gains | — | (0.12 | ) | (0.55 | ) | (0.16 | ) | (0.04 | ) | — | |||||||||||||||||
Total distributions | (0.19 | ) | (0.47 | ) | (0.92 | ) | (0.50 | ) | (0.27 | ) | (0.25 | ) | |||||||||||||||
Net asset value, end of period | $ | 17.60 | $ | 14.19 | $ | 20.57 | $ | 21.80 | $ | 20.82 | $ | 20.03 | |||||||||||||||
Total Return(a) | 25.49 | %** | (29.27 | )% | (1.77 | )% | 7.19 | % | 5.37 | % | 1.75 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,129,000 | $ | 787,276 | $ | 432,046 | $ | 800,458 | $ | 2,005,417 | $ | 938,586 | |||||||||||||||
Net expenses to average daily net assets | 0.44 | %(b)* | 0.44 | %(b) | 0.44 | %(b) | 0.44 | % | 0.44 | % | 0.44 | % | |||||||||||||||
Net investment income to average daily net assets | 2.29 | %* | 2.11 | % | 1.78 | % | 1.79 | % | 1.62 | % | 1.92 | % | |||||||||||||||
Portfolio turnover rate | 19 | %** | 36 | % | 46 | % | 50 | % | 52 | % | 66 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % | 0.04 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
12
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Financial Highlights
(For a Class V share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 14.17 | $ | 20.56 | $ | 21.79 | $ | 21.91 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.19 | 0.39 | 0.41 | 0.07 | |||||||||||||||
Net realized and unrealized gain (loss) | 3.42 | (6.30 | ) | (0.72 | ) | 0.04 | |||||||||||||
Total from investment operations | 3.61 | (5.91 | ) | (0.31 | ) | 0.11 | |||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.19 | ) | (0.36 | ) | (0.37 | ) | (0.09 | ) | |||||||||||
From net realized gains | — | (0.12 | ) | (0.55 | ) | (0.14 | ) | ||||||||||||
Total distributions | (0.19 | ) | (0.48 | ) | (0.92 | ) | (0.23 | ) | |||||||||||
Net asset value, end of period | $ | 17.59 | $ | 14.17 | $ | 20.56 | $ | 21.79 | |||||||||||
Total Return(b) | 25.60 | %** | (29.31 | )% | (1.75 | )% | 0.49 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 769,904 | $ | 637,834 | $ | 663,616 | $ | 259,430 | |||||||||||
Net expenses to average daily net assets | 0.42 | %(c)* | 0.42 | %(c) | 0.42 | %(c) | 0.42 | %* | |||||||||||
Net investment income to average daily net assets | 2.31 | %* | 2.11 | % | 1.83 | % | 1.40 | %* | |||||||||||
Portfolio turnover rate | 19 | %** | 36 | % | 46 | % | 50 | %†† | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.02 | % | 0.02 | %* |
(a) Period from December 8, 2006 (commencement of operations) through February 28, 2007.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
13
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 14.18 | $ | 20.57 | $ | 21.79 | $ | 21.91 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.19 | 0.40 | 0.41 | 0.07 | |||||||||||||||
Net realized and unrealized gain (loss) | 3.41 | (6.31 | ) | (0.70 | ) | 0.04 | |||||||||||||
Total from investment operations | 3.60 | (5.91 | ) | (0.29 | ) | 0.11 | |||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.19 | ) | (0.36 | ) | (0.38 | ) | (0.09 | ) | |||||||||||
From net realized gains | — | (0.12 | ) | (0.55 | ) | (0.14 | ) | ||||||||||||
Total distributions | (0.19 | ) | (0.48 | ) | (0.93 | ) | (0.23 | ) | |||||||||||
Net asset value, end of period | $ | 17.59 | $ | 14.18 | $ | 20.57 | $ | 21.79 | |||||||||||
Total Return(b) | 25.53 | %** | (29.28 | )% | (1.67 | )% | 0.49 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 7,161,764 | $ | 5,273,791 | $ | 5,237,363 | $ | 2,588,116 | |||||||||||
Net expenses to average daily net assets | 0.39 | %(c)* | 0.39 | %(c) | 0.39 | %(c) | 0.39 | %* | |||||||||||
Net investment income to average daily net assets | 2.34 | %* | 2.16 | % | 1.84 | % | 1.43 | %* | |||||||||||
Portfolio turnover rate | 19 | %** | 36 | % | 46 | % | 50 | %†† | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.02 | % | 0.02 | %* |
(a) Period from December 8, 2006 (commencement of operations) through February 28, 2007.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
14
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Quality Fund (formerly GMO U.S. Quality Equity Fund) (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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.
Effective June 1, 2009, the Fund seeks high total return through investment in equities the Manager believes to be high quality. The Fund may make security investments in companies whose stocks are traded in any of the world's securities markets. The Fund may hold fewer than 100 stocks. The Fund does not seek to control risk relative to the S&P 500 Index, MSCI ACWI (All Country World Index) Index, or any other securities market index or benchmark. The Fund reserves the right to make tactical allocations of up to 20% of its net assets to investments in cash and high quality debt investments. The Fund may make investments in emerging countries. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the counter derivatives, including options, futures, and swap contracts. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
Prior to June 1, 2009, the Fund sought high total return. The Fund sought to achieve its objective by outperforming its benchmark, the S&P 500 Index. The Fund typically made equity investments in companies that issue stocks included in the S&P 500 Index, a U.S. stock index, and in companies with similar market capitalizations. Under normal circumstances, the Fund invested at least 80% of its assets in equity investments tied economically to the U.S.
As of August 31, 2009, the Fund had four classes of shares outstanding: Class III, Class IV, Class V and Class VI. Each class of shares bears a different shareholder service fee.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
15
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 9.53% of the net assets of the Fund were valued using fair value prices based on models used by a third party vendor and are classified as using Level 2 inputs in the table below.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation or quoted prices for similar securities.
Level 3 – Valuations based on inputs that are unobservable and significant.
16
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
France | $ | — | $ | 269,352,878 | $ | — | $ | 269,352,878 | |||||||||||
Japan | — | 57,341,474 | — | 57,341,474 | |||||||||||||||
Netherlands | — | 69,342,834 | — | 69,342,834 | |||||||||||||||
Switzerland | — | 411,421,607 | — | 411,421,607 | |||||||||||||||
United Kingdom | — | 361,988,943 | — | 361,988,943 | |||||||||||||||
United States | 10,397,005,879 | — | — | 10,397,005,879 | |||||||||||||||
TOTAL COMMON STOCKS | 10,397,005,879 | 1,169,447,736 | — | 11,566,453,615 | |||||||||||||||
Short-Term Investments | 239,753,760 | 88,325,399 | — | 328,079,159 | |||||||||||||||
Total Investments | 10,636,759,639 | 1,257,773,135 | — | 11,894,532,774 | |||||||||||||||
Derivatives | |||||||||||||||||||
Futures | 185,962 | — | — | 185,962 | |||||||||||||||
Total | $ | 10,636,945,601 | $ | 1,257,773,135 | $ | — | $ | 11,894,718,736 |
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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.
17
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. 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 various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party
18
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exposure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to
19
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $269,802,905.
20
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (288,464,155 | ) | ||||
Total | $ | (288,464,155 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 12,173,888,533 | $ | 237,026,879 | $ | (516,382,638 | ) | $ | (279,355,759 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 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.
21
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time. In addition, while each GMO Fund is exposed to some level of management risk, that risk may be particularly pronounced for this Fund because it does not seek to control risk relative to, or to outperform, a particular securities market index or benchmark.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Market Risk — Value Securities — The Fund purchases some equity securities at prices below what the Manager believes to be their fundamental value. The Fund bears the risk that the price of these securities may not increase to what the Manager believes to be their fundamental value or that the Manager may have overestimated their fundamental value.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Focused Investment Risk — Focusing investments in a limited number of companies or in industries with high positive correlations to one another creates additional risk. This risk is particularly pronounced for the Fund, which invests its assets in the securities of a limited number of issuers, and a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund invested in the securities of a larger number of issuers.
22
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Other principal risks of an investment in the Fund include Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected). The Fund i s a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a
23
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC
24
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in cases where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
25
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | 185,962 | — | 185,962 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 185,962 | $ | — | $ | 185,962 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
26
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | 4,893,547 | — | 4,893,547 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | ��� | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 4,893,547 | $ | — | $ | 4,893,547 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | 5,130,457 | — | 5,130,457 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 5,130,457 | $ | — | $ | 5,130,457 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Futures | |||||||
Average notional amount outstanding | $ | 113,416,573 | |||||
Highest notional amount outstanding | 179,212,275 | ||||||
Lowest notional amount outstanding | 38,150,400 |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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
27
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.33% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fun d) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 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.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $81,313 and $47,104, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $3,159,139,374 and $1,951,725,511, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
28
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2009, 20.01% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 0.38% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 58.55% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 52,799,675 | $ | 838,028,016 | 56,850,636 | $ | 949,977,379 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,317,559 | 20,852,384 | 1,903,117 | 35,704,632 | |||||||||||||||
Shares repurchased | (9,335,728 | ) | (154,142,398 | ) | (18,454,345 | ) | (350,367,596 | ) | |||||||||||
Net increase (decrease) | 44,781,506 | $ | 704,738,002 | 40,299,408 | $ | 635,314,415 | |||||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 12,310,847 | $ | 209,423,992 | 61,336,699 | $ | 958,117,182 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 409,206 | 6,468,950 | 341,350 | 6,328,384 | |||||||||||||||
Shares repurchased | (4,079,954 | ) | (66,396,508 | ) | (27,177,224 | ) | (453,362,652 | ) | |||||||||||
Net increase (decrease) | 8,640,099 | $ | 149,496,434 | (34,500,825 | ) | $ | 511,082,914 |
29
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class V: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 9,992,349 | $ | 156,377,740 | 55,629,177 | $ | 871,553,660 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 587,187 | 9,289,428 | 839,435 | 15,553,597 | |||||||||||||||
Shares repurchased | (11,809,597 | ) | (204,306,022 | ) | (43,740,533 | ) | (686,139,124 | ) | |||||||||||
Net increase (decrease) | (1,230,061 | ) | $ | (38,638,854 | ) | 12,728,079 | $ | 200,968,133 | |||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 67,959,237 | $ | 1,029,537,655 | 207,622,713 | $ | 3,716,913,789 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 4,411,462 | 69,772,740 | 7,874,939 | 146,139,703 | |||||||||||||||
Shares repurchased | (37,300,824 | ) | (539,121,378 | ) | (98,156,063 | ) | (1,578,169,692 | ) | |||||||||||
Net increase (decrease) | 35,069,875 | $ | 560,189,017 | 117,341,589 | $ | 2,284,883,800 |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
30
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one- and five-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In
31
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, 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 to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to separate account clients and the impact on the Manager of, and expenses and risks associated with, the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and chan ges in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 facto rs, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered
32
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
33
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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.
34
GMO Quality Fund
(formerly GMO U.S. Quality Equity Fund)
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 2009 (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 | $ | 1,255.70 | $ | 2.73 | |||||||||||
2) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.79 | $ | 2.45 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.44 | % | $ | 1,000.00 | $ | 1,254.90 | $ | 2.50 | |||||||||||
2) Hypothetical | 0.44 | % | $ | 1,000.00 | $ | 1,022.99 | $ | 2.24 | |||||||||||
Class V | |||||||||||||||||||
1) Actual | 0.42 | % | $ | 1,000.00 | $ | 1,256.00 | $ | 2.39 | |||||||||||
2) Hypothetical | 0.42 | % | $ | 1,000.00 | $ | 1,023.09 | $ | 2.14 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.39 | % | $ | 1,000.00 | $ | 1,255.30 | $ | 2.22 | |||||||||||
2) Hypothetical | 0.39 | % | $ | 1,000.00 | $ | 1,023.24 | $ | 1.99 |
* Expenses are calculated using each Class's annualized expense ratio for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
35
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 98.9 | % | |||||
Short-Term Investments | 2.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Swaps | (0.2 | ) | |||||
Reverse Repurchase Agreements | (0.6 | ) | |||||
Other | (0.1 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in GMO Short-Duration Collateral Fund.
Industry Summary** | % of Debt Obligations | ||||||
Credit Cards | 22.7 | % | |||||
Auto Financing | 13.3 | ||||||
Residential Asset-Backed Securities (United States) | 12.3 | ||||||
Insured Auto Financing | 7.8 | ||||||
CMBS | 7.4 | ||||||
Business Loans | 6.0 | ||||||
Residential Mortgage-Backed Securities (European) | 6.0 | ||||||
Student Loans | 4.7 | ||||||
Residential Mortgage-Backed Securities (Australian) | 3.6 | ||||||
Investment Grade Corporate Collateralized Debt Obligations | 3.1 | ||||||
Insured Other | 2.8 | ||||||
Equipment Leases | 1.6 | ||||||
U.S. AIDS | 1.3 | ||||||
Rate Reduction Bonds | 1.2 | ||||||
Bank Loan Collateralized Debt Obligations | 1.1 | ||||||
CMBS Collateralized Debt Obligations | 1.0 | ||||||
Insurance Premiums | 0.9 | ||||||
Insured High Yield Collateralized Debt Obligations | 0.7 | ||||||
U.S. Government & Agencies | 0.7 | ||||||
Insured Time Share | 0.5 | ||||||
Insured Residential Mortgage-Backed Securities (United States) | 0.4 | ||||||
Airlines | 0.4 | ||||||
Insured Transportation | 0.1 | ||||||
Time Share | 0.1 | ||||||
Residential Mortgage-Backed Securities (United States) | 0.1 | ||||||
Insured Residential Asset-Backed Securities (United States) | 0.1 | ||||||
Insured Business Loans | 0.1 | ||||||
Collateralized Loan Obligations | 0.0 | ||||||
ABS Collateralized Debt Obligations | 0.0 | ||||||
100.0 | % |
** The table above incorporates aggregate indirect industry sector exposure associated with investments in GMO Short-Duration Collateral Fund.
1
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
MUTUAL FUNDS — 98.9% | |||||||||||
Affiliated Issuers — 98.9% | |||||||||||
1,879,509 | GMO Short-Duration Collateral Fund | 30,166,126 | |||||||||
TOTAL MUTUAL FUNDS (COST $32,811,394) | 30,166,126 | ||||||||||
SHORT-TERM INVESTMENTS — 1.2% | |||||||||||
Money Market Funds — 1.2% | |||||||||||
375,242 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 375,242 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $375,242) | 375,242 | ||||||||||
TOTAL INVESTMENTS — 100.1% (Cost $33,186,636) | 30,541,368 | ||||||||||
Other Assets and Liabilities (net) — (0.1%) | (38,191 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 30,503,177 |
See accompanying notes to the financial statements.
2
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $375,242) (Note 2) | $ | 375,242 | |||||
Investments in affiliated issuers, at value (cost $32,811,394) (Notes 2 and 8) | 30,166,126 | ||||||
Dividends receivable | 9 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 2,852 | ||||||
Total assets | 30,544,229 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 1,289 | ||||||
Shareholder service fee | 3,866 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 87 | ||||||
Accrued expenses | 35,810 | ||||||
Total liabilities | 41,052 | ||||||
Net assets | $ | 30,503,177 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 37,968,669 | |||||
Accumulated undistributed net investment income | 39,746 | ||||||
Accumulated net realized loss | (4,859,970 | ) | |||||
Net unrealized depreciation | (2,645,268 | ) | |||||
$ | 30,503,177 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 30,503,177 | |||||
Shares outstanding: | |||||||
Class III | 1,860,560 | ||||||
Net asset value per share: | |||||||
Class III | $ | 16.39 |
See accompanying notes to the financial statements.
3
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 219,560 | |||||
Dividends | 131 | ||||||
Total investment income | 219,691 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 7,121 | ||||||
Shareholder service fee – Class III (Note 3) | 21,364 | ||||||
Audit and tax fees | 15,640 | ||||||
Registration fees | 1,748 | ||||||
Custodian, fund accounting agent and transfer agent fees | 920 | ||||||
Legal fees | 552 | ||||||
Trustees fees and related expenses (Note 3) | 235 | ||||||
Miscellaneous | 552 | ||||||
Total expenses | 48,132 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (19,228 | ) | |||||
Expense reductions (Note 2) | (5 | ) | |||||
Net expenses | 28,899 | ||||||
Net investment income (loss) | 190,792 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | — | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in affiliated issuers | 3,999,661 | ||||||
Net realized and unrealized gain (loss) | 3,999,661 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 4,190,453 |
See accompanying notes to the financial statements.
4
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 190,792 | $ | 1,459,448 | |||||||
Net realized gain (loss) | — | (461,840 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 3,999,661 | (5,988,117 | ) | ||||||||
Net increase (decrease) in net assets from operations | 4,190,453 | (4,990,509 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (151,046 | ) | (1,520,770 | ) | |||||||
Return of capital | |||||||||||
Class III | (5,033,954 | ) | (2,186,109 | ) | |||||||
(5,185,000 | ) | (3,706,879 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 4,618,626 | 24,925,353 | |||||||||
Redemption fees (Notes 2 and 7): | |||||||||||
Class III | 1,119 | 12,814 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | 4,619,745 | 24,938,167 | |||||||||
Total increase (decrease) in net assets | 3,625,198 | 16,240,779 | |||||||||
Net assets: | |||||||||||
Beginning of period | 26,877,979 | 10,637,200 | |||||||||
End of period (including accumulated undistributed net investment income of $39,746 and $0, respectively) | $ | 30,503,177 | $ | 26,877,979 |
See accompanying notes to the financial statements.
5
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 17.08 | $ | 23.39 | $ | 25.05 | $ | 24.82 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)(b)† | 0.11 | 1.17 | 1.07 | (0.01 | ) | ||||||||||||||
Net realized and unrealized gain (loss) | 2.28 | (4.92 | ) | (1.38 | ) | 0.24 | |||||||||||||
Total from investment operations | 2.39 | (3.75 | ) | (0.31 | ) | 0.23 | |||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.09 | ) | (0.81 | ) | (1.35 | ) | — | ||||||||||||
Return of capital | (2.99 | ) | (1.75 | ) | — | — | |||||||||||||
Total distributions | (3.08 | ) | (2.56 | ) | (1.35 | ) | — | ||||||||||||
Net asset value, end of period | $ | 16.39 | $ | 17.08 | $ | 23.39 | $ | 25.05 | |||||||||||
Total Return(c) | 15.80 | %** | (15.90 | )% | (1.33 | )% | 0.93 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 30,503 | $ | 26,878 | $ | 10,637 | $ | 40,563 | |||||||||||
Net expenses to average daily net assets | 0.20 | %(d)* | 0.20 | % | 0.20 | % | 0.21 | %* | |||||||||||
Net investment income to average daily net assets(b) | 1.34 | %* | 5.47 | % | 4.25 | % | (0.21 | )%* | |||||||||||
Portfolio turnover rate | 0 | %** | 18 | % | 127 | % | 125 | %**†† | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.14 | %* | 0.17 | % | 0.15 | % | 0.06 | %* | |||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (e) | $ | 0.01 | — | — |
(a) Period from December 28, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by GMO Short-Duration Collateral Fund.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) The net expense ratio does not include the effect of expense reductions.
(e) 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 period from March 1, 2006 (commencement of operations) through February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
6
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Short-Duration Collateral Share Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 comparable to that of its benchmark, the J.P. Morgan U.S. 3 Month Cash Index. The Fund invests substantially all of its assets in GMO Short-Duration Collateral Fund ("SDCF") (an arrangement often referred to as a "master-feeder" structure) and, to a limited extent, in cash and cash equivalents. Its investment objective and principal investment strategies, therefore, are identical to those of SDCF. SDCF invests primarily in U.S. and foreign adjustable rate asset-backed securities and primarily holds 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. In addition, SDCF may invest in government securities, corporate debt securities, money market instruments, and commercial paper, and ent er into credit default swaps, reverse repurchase agreements, and repurchase agreements. SDCF also may use exchange-traded and over-the-counter ("OTC") derivatives. Because of the deterioration in credit markets that became acute in 2008, the Fund, through its holdings of SDCF, currently holds and may continue to hold material positions of below investment grade securities.
Since October of 2008, SDCF has declared and paid dividends when it has acquired a meaningful cash position rather than reinvesting that cash in portfolio securities. SDCF continued this practice throughout the period from March 1, 2009 through August 31, 2009.
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). As of August 31, 2009, shares of SDCF were not publicly available for direct purchase.
From prior to March 1, 2009 through July 12, 2009, the Fund had a policy to effect redemptions of its shares in-kind above de minimis levels. The Fund had established de minimis amounts below which redemptions would be honored for cash. Beginning July 13, 2009, the Fund expected to pay redemption requests with cash (less a redemption fee).
7
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
As of August 31, 2009, a significant portion of the Fund's dividends received from other GMO funds is expected to be a return of capital for U.S. federal income tax purposes. Accordingly, "dividends from affiliated issuers" reported in the Statement of Operations has been reduced by the portion estimated to be a return of capital as of August 31, 2009. The estimated return of capital is $5,651,030. In addition, all applicable related income disclosures throughout this Semiannual Report have been adjusted by the estimated return of capital. Furthermore, the "distributions to shareholders from return of capital" disclosed in the Statement of Changes in Net Assets and Financial Highlights are also estimates as of August 31, 2009. Both the dividends from affiliated issuers and distributions to shareholders from return of capital are subject to change and will not be finalized until February 28, 2010, the Fund's upcoming fiscal year- end. Finally, in early 2010, applicable shareholders will receive Form 1099-DIV that will indicate the appropriate tax character of all distributions paid by the Fund in 2009.
Portfolio valuation
Shares of SDCF are generally valued at their net asset value.
Investments held by SDCF funds are valued as follows. Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally 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 fait h by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty.
8
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Typically SDCF values debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by SDCF, those alternative sources would not necessarily confirm the security price used by the SDCF. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund. As of August 31, 2009, the t otal value of securities held indirectly for which no alternative pricing source was available represented 19.35% of the net assets of the Fund.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
Asset Valuation Inputs | Investments in Securities | Other Financial Instruments | |||||||||
Level 1 - Quoted Prices | $ | — | $ | — | |||||||
Level 2 - Other Significant Observable Inputs | 30,541,368 | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | 30,541,368 | $ | — | |||||||
Liability Valuation Inputs | Investments in Securities | Other Financial Instruments | |||||||||
Level 1 - Quoted Prices | $ | — | $ | — | |||||||
Level 2 - Other Significant Observable Inputs | — | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | — | $ | — |
9
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The underlying fund is classified as Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying fund, please refer to the portfolio valuation notes in SDCF's financial statements. The aggregate net value of the Fund's indirect investments in securities and other financial instruments using Level 3 inputs were 80.43% and (0.24%) of total net assets, respectively.
The Fund held no investments or other financial instruments directly at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
The level classification by major category of investments is the same as the category presentation in the 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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, if any, at least annually. The Fund is permitted to, and will from time to time, declare and pay distributions from net investment income, if any, more frequently (e.g. monthly). 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
10
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/29/2016 | $ | (3,400,357 | ) | ||||
2/28/2017 | (862,157 | ) | |||||
Total | $ | (4,262,514 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 33,784,092 | $ | — | $ | (3,242,724 | ) | $ | (3,242,724 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Income dividends and capital gain distributions from the 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 asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Purchases and redemptions of Fund shares
From prior to March 1, 2009 through August 2, 2009, the fee on cash redemptions was 2.00% of the amount redeemed. From August 3, 2009 through August 31, 2009, the fee on cash redemptions was 1.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired
11
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
(e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are g enerally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in SDCF (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Because the Fund invests substantially all of its assets in SDCF, the most significant risks of an investment in the Fund are the risks to which the Fund is exposed through SDCF, which include those outlined in the following brief summary of principal risks. Many of these risks are more pronounced as a result of current global economic conditions that began to unfold in 2008.This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the SDCF's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and
12
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent SDCF from selling securities or closing derivative positions at desirable prices. SDCF invests in asset-backed securities that may be less liquid than the Fund's or SDCF's benchmark. Recent changes in credit markets have reduced the liquidity of all types of fixed income securities, including in particular the asset-backed securities held by SDCF.
• Focused Investment Risk — Focusing investments in countries, regions, or sectors with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for SDCF because of its exposure to asset-backed securities secured by different types of consumer debt (e.g., credit-card receivables, automobile loans, and home equity loans).
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to an OTC derivatives contract, a borrower of SDCF's securities or the obligor of an obligation underlying an asset-backed security, will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions.
Other principal risks of an investment in the Fund include Derivatives Risk (use of derivatives by SDCF involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by SDCF), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-ter m effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the underlying fund in which the Fund invests will not perform as expected). The Fund and SDCF are non-diversified investment companies under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund or SDCF may affect the Fund's performance more than if the Fund or SDCF were diversified.
The Fund invests (through SDCF) in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the
13
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of underlying assets or other support available to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities generally. These events reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not continue or that they will not deteriorate further. Also, government actions and proposals affecting the terms of underl ying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund adopted SFAS 161 on March 1, 2009. As of August 31, 2009, the Fund held no derivative contracts for the purposes of SFAS 161.
14
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 shareholders 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 and 0.055% for Class VI shares.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.05% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an inv estment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes).
The Fund incurs fees and expenses indirectly as a shareholder in SDCF. For the period ended August 31, 2009, 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 | ||||||||||||
0.006 | % | 0.000 | % | 0.003 | % | 0.009 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $235 and $184, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
15
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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, 2009 aggregated $5,050,000 and $0, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 83.18% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 85.91% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 25,505 | $ | 424,551 | 1,190,692 | $ | 27,314,596 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 267,944 | 4,295,697 | 144,906 | 2,586,630 | |||||||||||||||
Shares repurchased | (6,135 | ) | (101,622 | ) | (217,211 | ) | (4,975,873 | ) | |||||||||||
Purchase premiums | — | — | — | — | |||||||||||||||
Redemption fees | — | 1,119 | — | 12,814 | |||||||||||||||
Net increase (decrease) | 287,314 | $ | 4,619,745 | 1,118,387 | $ | (24,938,167 | ) |
16
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 | $ | 26,767,495 | $ | 5,050,000 | $ | — | $ | 219,560 | $ | — | $ | 30,166,126 | |||||||||||||||
Totals | $ | 26,767,495 | $ | 5,050,000 | $ | — | $ | 219,560 | $ | — | $ | 30,166,126 |
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. On September 14, 2009, the Fund's redemption fee was eliminated.
17
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees noted that the Fund invests substantially all of its assets in another series of the Trust, GMO Short-Duration Collateral Fund ("SDCF"), and, therefore, that the Fund's investment objective and principal investment strategies are identical to those of SDCF. The Trustees met over the course of the year with the Manager'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 SDCF and the level of skill required to manage SDCF. In evaluating that information, the Trustees considered the Manager's internal resources as well as other resources available to the Manager's personnel, paying part icular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's senior management to the Fund and SDCF. 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 SDCF's investment performance relative to their performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including a one-year period and for the life of the Fund and SDCF's performance over various periods, including one- and five-year periods and for the life of SDCF, information prepared by the third-party data services, various statistical measures of the Fund's and SDCF's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's and SDCF's performance. The Trustees considered information provided by the Manager addressing the Fund's and SDCF's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel r esponsible for managing the Fund and SDCF, the support those personnel received from the Manager, the investment techniques used to manage SDCF, and the overall competence of the Manager.
18
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement, and noted that SDCF does not pay an advisory fee to the Manager. The Trustees also noted that the Fund's expense ratio reflects total expenses payable by the Fund and SDCF. The Trustees considered information prepared by third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage SDCF. The Trustees also reviewed information provided by the Manager regarding the combined profits it realized on the services (excluding distribution services) it provided to th e Fund and SDCF, and profits it realized on the services (excluding distribution services) it provided to the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client relationships. The Trustees also considered possible economies of scale to the Manager, and co ncluded that the fees payable under the Fund's agreement appropriately reflected any economies of scale associated with managing the Fund and SDCF. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the Fund's investment management 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 and SDCF. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund, SDCF, 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 and SDCF with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, th e Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the
19
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
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 shareholder services. The Trustees considered the Manager's oversight 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 SDCF, 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.
Following their review, on June 15, 2009, 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, 2009.
20
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including 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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | $ | 1,158.00 | $ | 1.14 | |||||||||||
2) Hypothetical | 0.21 | % | $ | 1,000.00 | $ | 1,024.15 | $ | 1.07 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, 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 Short-Duration Collateral Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Debt Obligations | 100.0 | % | |||||
Short-Term Investments | 0.8 | ||||||
Reverse Repurchase Agreements | (0.6 | ) | |||||
Swaps | (0.2 | ) | |||||
Forward Currency Contracts | 0.0 | ||||||
Other | 0.0 | ||||||
100.0 | % | ||||||
Industry Summary | % of Debt Obligations | ||||||
Credit Cards | 22.7 | % | |||||
Auto Financing | 12.9 | ||||||
Residential Asset-Backed Securities (United States) | 11.9 | ||||||
Insured Auto Financing | 7.9 | ||||||
CMBS | 7.4 | ||||||
Residential Mortgage-Backed Securities (European) | 6.2 | ||||||
Business Loans | 6.1 | ||||||
Student Loans | 4.7 | ||||||
Residential Mortgage-Backed Securities (Australian) | 3.6 | ||||||
Investment Grade Corporate Collateralized Debt Obligations | 3.2 | ||||||
Insured Other | 2.8 | ||||||
Equipment Leases | 1.6 | ||||||
U.S. Government Agencies (AID) | 1.3 | ||||||
Rate Reduction Bonds | 1.2 | ||||||
Bank Loan Collateralized Debt Obligations | 1.1 | ||||||
CMBS Collateralized Debt Obligations | 1.0 | ||||||
Insurance Premiums | 0.9 | ||||||
Insured High Yield Collateralized Debt Obligations | 0.7 | ||||||
U.S. Government | 0.6 | ||||||
Insured Time Share | 0.5 | ||||||
Insured Residential Asset-Backed Securities (United States) | 0.5 | ||||||
Insured Residential Mortgage-Backed Securities (United States) | 0.4 | ||||||
Airlines | 0.4 | ||||||
Insured Transportation | 0.1 | ||||||
Time Share | 0.1 | ||||||
Residential Mortgage-Backed Securities (United States) | 0.1 | ||||||
Insured Business Loans | 0.1 | ||||||
Collateralized Loan Obligations | 0.0 | ||||||
ABS Collateralized Debt Obligations | 0.0 | ||||||
100.0 | % |
1
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 100.0% | |||||||||||||||
Asset-Backed Securities — 98.1% | |||||||||||||||
ABS Collateralized Debt Obligations — 0.0% | |||||||||||||||
11,200,000 | Paragon CDO Ltd., Series 04-1A, Class A, 144A, 3 mo. LIBOR + .65%, 1.16%, due 10/20/44 | 336,000 | |||||||||||||
Airlines — 0.4% | |||||||||||||||
19,400,000 | Aircraft Finance Trust, Series 99-1A, Class A1, 144A, 1 mo. LIBOR + .48%, 0.75%, due 05/15/24 | 5,626,000 | |||||||||||||
7,298,971 | Continental Airlines, Inc., Series 99-1A, 6.55%, due 08/02/20 | 7,007,013 | |||||||||||||
Total Airlines | 12,633,013 | ||||||||||||||
Auto Financing — 13.3% | |||||||||||||||
15,488,014 | BMW Vehicle Lease Trust, Series 07-1, Class A3B, 1 mo. LIBOR + .24%, 0.51%, due 08/15/13 | 15,479,325 | |||||||||||||
11,600,000 | Capital Auto Receivable Asset Trust, Series 07-SN1, Class A4, 1 mo. LIBOR + .10%, 0.37%, due 02/15/11 | 11,339,000 | |||||||||||||
26,700,000 | Capital Auto Receivable Asset Trust, Series 07-2, Class A4B, 1 mo. LIBOR + .40%, 0.67%, due 02/18/14 | 26,513,100 | |||||||||||||
5,100,000 | Capital Auto Receivable Asset Trust, Series 08-1, Class A4B, 1 mo. LIBOR + 1.35%, 1.62%, due 07/15/14 | 4,867,338 | |||||||||||||
24,500,000 | Carmax Auto Owner Trust, Series 08-2, Class A4B, 1 mo. LIBOR + 1.65%, 1.92%, due 08/15/13 | 24,694,530 | |||||||||||||
22,300,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4A, 5.32%, due 11/10/14 | 23,474,407 | |||||||||||||
17,400,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 1.85%, 2.13%, due 11/10/14 | 16,747,500 | |||||||||||||
3,514,369 | Daimler Chrysler Master Owner Trust, Series 06-A, Class A, 1 mo. LIBOR + .03%, 0.30%, due 11/15/11 | 3,497,887 | |||||||||||||
24,300,000 | Ford Credit Auto Owner Trust, Series 06-C, Class A4B, 1 mo. LIBOR + .04%, 0.31%, due 02/15/12 | 24,137,919 | |||||||||||||
13,700,000 | Ford Credit Auto Owner Trust, Series 07-B, Class A4B, 1 mo. LIBOR + .38%, 0.65%, due 07/15/12 | 13,528,750 | |||||||||||||
31,800,000 | Ford Credit Auto Owner Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 2.00%, 2.27%, due 03/15/13 | 32,353,638 | |||||||||||||
61,000,000 | Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.52%, due 06/15/13 | 56,730,000 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Auto Financing — continued | |||||||||||||||
8,400,000 | Franklin Auto Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.95%, 2.22%, due 05/20/16 | 8,505,000 | |||||||||||||
30,200,000 | Nissan Auto Lease Trust, Series 08-A, Class A3B, 1 mo. LIBOR + 2.20%, 2.47%, due 07/15/11 | 30,030,880 | |||||||||||||
31,100,000 | Nissan Auto Receivables Owner Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.27%, due 06/17/13 | 30,935,108 | |||||||||||||
30,400,000 | Nissan Master Owner Trust Receivables, Series 07-A, Class A, 1 mo. LIBOR, 0.27%, due 05/15/12 | 29,032,000 | |||||||||||||
32,200,000 | Swift Master Auto Receivables Trust, Series 07-1, Class A, 1 mo. LIBOR + .10%, 0.37%, due 06/15/12 | 29,946,000 | |||||||||||||
17,100,000 | Swift Master Auto Receivables Trust, Series 07-2, Class A, 1 mo. LIBOR + .65%, 0.92%, due 10/15/12 | 15,604,776 | |||||||||||||
33,350,000 | Truck Retail Installment Paper Corp., Series 05-1A, Class A, 144A, 1 mo. LIBOR + .27%, 0.54%, due 12/15/16 | 28,767,743 | |||||||||||||
12,000,000 | Wachovia Auto Owner Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.15%, 1.42%, due 03/20/14 | 11,984,520 | |||||||||||||
19,600,000 | World Omni Auto Receivables Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.27%, due 11/15/12 | 19,305,608 | |||||||||||||
Total Auto Financing | 457,475,029 | ||||||||||||||
Bank Loan Collateralized Debt Obligations — 1.1% | |||||||||||||||
15,305,407 | Arran Corp. Loans No. 1 B.V., Series 06-1A, Class A3, 144A, 3 mo. LIBOR + .17%, 0.78%, due 06/20/25 | 14,248,377 | |||||||||||||
27,200,000 | Omega Capital Europe Plc, Series GLOB-5A, Class A1, 144A, 3 mo. LIBOR + .25%, 0.83%, due 07/05/11 | 24,208,000 | |||||||||||||
Total Bank Loan Collateralized Debt Obligations | 38,456,377 | ||||||||||||||
Business Loans — 6.0% | |||||||||||||||
21,994,137 | ACAS Business Loan Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .14%, 0.58%, due 08/16/19 | 17,155,427 | |||||||||||||
3,359,505 | Bayview Commercial Asset Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .36%, 0.63%, due 04/25/34 | 2,519,629 | |||||||||||||
2,516,239 | Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, 1 mo. LIBOR + .37%, 0.64%, due 01/25/35 | 1,761,367 | |||||||||||||
10,922,107 | Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, 1 mo. LIBOR + .39%, 0.66%, due 01/25/36 | 7,099,369 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Business Loans — continued | |||||||||||||||
9,447,665 | Bayview Commercial Asset Trust, Series 07-3, Class A1, 144A, 1 mo. LIBOR + .24%, 0.51%, due 07/25/37 | 5,668,599 | |||||||||||||
31,200,000 | Bayview Commercial Asset Trust, Series 07-6A, Class A2, 144A, 1 mo. LIBOR + 1.30%, 1.57%, due 12/25/37 | 20,124,000 | |||||||||||||
3,324,490 | Capitalsource Commercial Loan Trust, Series 06-1A, Class A1, 144A, 1 mo. LIBOR + .12%, 0.39%, due 08/22/16 | 2,726,082 | |||||||||||||
7,986,489 | Capitalsource Commercial Loan Trust, Series 07-1A, Class A, 144A, 1 mo. LIBOR + .13%, 0.40%, due 03/20/17 | 6,548,921 | |||||||||||||
3,345,867 | GE Business Loan Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .29%, 0.56%, due 05/15/32 | 2,308,648 | |||||||||||||
5,864,004 | GE Business Loan Trust, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .24%, 0.51%, due 11/15/33 | 3,635,683 | |||||||||||||
28,300,000 | GE Dealer Floorplan Master Trust, Series 06-4, Class A, 1 mo. LIBOR + .01%, 0.28%, due 10/20/11 | 28,217,364 | |||||||||||||
41,500,000 | GE Dealer Floorplan Master Trust, Series 07-2, Class A, 1 mo. LIBOR + .01%, 0.28%, due 07/20/12 | 40,860,900 | |||||||||||||
8,426,249 | Lehman Brothers Small Balance Commercial, Series 05-1A, Class A, 144A, 1 mo. LIBOR + .25%, 0.52%, due 02/25/30 | 5,224,274 | |||||||||||||
5,282,682 | Lehman Brothers Small Balance Commercial, Series 05-2A, Class 1A, 144A, 1 mo. LIBOR + .25%, 0.52%, due 09/25/30 | 3,169,609 | |||||||||||||
3,834,460 | Lehman Brothers Small Balance Commercial, Series 07-3A, Class 1A1, 144A, 1 mo. LIBOR + .65%, 0.92%, due 10/25/37 | 3,335,980 | |||||||||||||
27,169,000 | Lehman Brothers Small Balance Commercial, Series 07-3A, Class 1A2, 144A, 1 mo. LIBOR + .85%, 1.12%, due 10/25/37 | 17,116,470 | |||||||||||||
27,200,000 | Navistar Financial Dealer Note Master Trust, Series 05-1, Class A, 1 mo. LIBOR + .11%, 0.39%, due 02/25/13 | 26,384,000 | |||||||||||||
20,700,000 | Textron Financial Floorplan Master Note, Series 07-AA, Class A, 144A, 1 mo. LIBOR + .06%, 0.33%, due 03/13/12 | 13,455,000 | |||||||||||||
332,977 | The Money Store Business Loan Backed Trust, Series 99-1, Class AN, 1 mo. LIBOR + .50%, 0.77%, due 09/15/17 | 283,031 | |||||||||||||
Total Business Loans | 207,594,353 | ||||||||||||||
CMBS — 7.4% | |||||||||||||||
11,500,000 | Banc of America Commercial Mortgage, Inc., Series 06-3, Class A2, 5.81%, due 07/10/44 | 11,528,750 | |||||||||||||
4,511,693 | Bear Stearns Commercial Mortgage Securities, Inc., Series 05-PW10, Class A1, 5.09%, due 12/11/40 | 4,562,224 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
CMBS — continued | |||||||||||||||
19,100,000 | Citigroup/Deutsche Bank Commercial Mortgage, Series 05-CD1, Class A2FL, 1 mo. LIBOR + .12%, 0.39%, due 07/15/44 | 13,370,000 | |||||||||||||
32,300,000 | Commercial Mortgage Pass-Through Certificates, Series 06-FL12, Class AJ, 144A, 1 mo. LIBOR + .13%, 0.40%, due 12/15/20 | 17,765,000 | |||||||||||||
25,800,000 | GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45 | 25,887,720 | |||||||||||||
16,950,000 | GE Capital Commercial Mortgage Corp., Series 06-C1, Class A2, 5.51%, due 03/10/44 | 17,026,275 | |||||||||||||
3,572,545 | Greenwich Capital Commercial Funding Corp., Series 06-FL4A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.37%, due 11/05/21 | 3,072,388 | |||||||||||||
27,200,000 | GS Mortgage Securities Corp., Series 06-GG6, Class A2, 5.51%, due 04/10/38 | 27,123,500 | |||||||||||||
5,938,604 | GS Mortgage Securities Corp., Series 07-EOP, Class A1, 144A, 1 mo. LIBOR + .09%, 0.37%, due 03/06/20 | 5,166,585 | |||||||||||||
6,300,000 | GS Mortgage Securities Corp., Series 07-EOP, Class A2, 144A, 1 mo. LIBOR + .13%, 0.41%, due 03/06/20 | 5,292,000 | |||||||||||||
42,900,000 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-LDP7, Class A2, 6.05%, due 04/15/45 (a) | 43,247,662 | |||||||||||||
7,637,472 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-FL1A, Class A1B, 144A, 1 mo. LIBOR + .12%, 0.39%, due 02/15/20 | 5,788,287 | |||||||||||||
3,525,454 | Lehman Brothers Floating Rate Commercial, Series 06-LLFA, Class A1, 144A, 1 mo. LIBOR + .08%, 0.35%, due 09/15/21 | 3,014,264 | |||||||||||||
27,000,000 | Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, 5.79%, due 05/12/39 | 27,170,100 | |||||||||||||
10,300,000 | Morgan Stanley Capital I, Series 06-IQ11, Class A2, 5.69%, due 10/15/42 | 10,383,636 | |||||||||||||
11,000,000 | Morgan Stanley Capital I, Series 06-IQ11, Class A3, 5.91%, due 10/15/42 | 10,723,900 | |||||||||||||
4,346,181 | Morgan Stanley Dean Witter Capital I, Series 03-TOP9, Class A1, 3.98%, due 11/13/36 | 4,359,220 | |||||||||||||
26,097,462 | Wachovia Bank Commercial Mortgage Trust, Series 06-WL7A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.36%, due 09/15/21 | 18,790,172 | |||||||||||||
Total CMBS | 254,271,683 | ||||||||||||||
CMBS Collateralized Debt Obligations — 1.0% | |||||||||||||||
4,400,000 | American Capital Strategies Ltd. Commercial Real Estate CDO Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .80%, 1.21%, due 11/23/52 | 308,000 | |||||||||||||
10,904,754 | Crest Exeter Street Solar, Series 04-1A, Class A1, 144A, 3 mo. LIBOR + .35%, 0.95%, due 06/28/19 | 6,542,852 | |||||||||||||
13,977,288 | G-Force LLC, Series 05-RR2, Class A2, 144A, 5.16%, due 12/25/39 | 6,988,644 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
CMBS Collateralized Debt Obligations — continued | |||||||||||||||
18,809,007 | Guggenheim Structured Real Estate Funding, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .32%, 0.59%, due 08/26/30 | 6,583,153 | |||||||||||||
27,100,000 | Marathon Real Estate CDO, Series 06-1A, Class A1, 144A, 1 mo. LIBOR + .33%, 0.60%, due 05/25/46 | 14,092,000 | |||||||||||||
Total CMBS Collateralized Debt Obligations | 34,514,649 | ||||||||||||||
Collateralized Loan Obligations — 0.0% | |||||||||||||||
719,907 | Archimedes Funding IV (Cayman) Ltd., Series 4A, Class A1, 144A, 3 mo. LIBOR + .48%, 0.87%, due 02/25/13 | 647,917 | |||||||||||||
Credit Cards — 22.7% | |||||||||||||||
9,094,969 | Advanta Business Card Master Trust, Series 05-A2, Class A2, 1 mo. LIBOR + .13%, 0.40%, due 05/20/13 | 8,640,221 | |||||||||||||
13,173,925 | Advanta Business Card Master Trust, Series 07-A4, Class A4, 1 mo. LIBOR + .03%, 0.30%, due 04/22/13 | 12,515,229 | |||||||||||||
50,600,000 | American Express Credit Account Master Trust, Series 05-5, Class A, 1 mo. LIBOR + .04%, 0.31%, due 02/15/13 | 50,353,072 | |||||||||||||
20,700,000 | American Express Credit Account Master Trust, Series 06-1, Class A, 1 mo. LIBOR + .03%, 0.30%, due 12/15/13 | 20,344,229 | |||||||||||||
10,300,000 | American Express Issuance Trust, Series 07-1, Class A, 1 mo. LIBOR + .20%, 0.47%, due 09/15/11 | 10,253,650 | |||||||||||||
4,200,000 | Bank of America Credit Card Trust, Series 06-A12, Class A12, 1 mo. LIBOR + .02%, 0.29%, due 03/15/14 | 4,098,780 | |||||||||||||
33,750,000 | Cabela's Master Credit Card Trust, Series 08-4A, Class A2, 144A, 1 mo. LIBOR + 3.00%, 3.27%, due 09/15/14 | 34,637,962 | |||||||||||||
17,875,000 | Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, 3 mo. LIBOR + .15%, 0.59%, due 06/16/14 | 17,523,041 | |||||||||||||
24,800,000 | Capital One Multi-Asset Execution Trust, Series 06-A14, Class A, 1 mo. LIBOR + .01%, 0.28%, due 08/15/13 | 24,428,000 | |||||||||||||
7,700,000 | Capital One Multi-Asset Execution Trust, Series 07-A4, Class A4, 1 mo. LIBOR + .03%, 0.30%, due 03/16/15 | 7,353,500 | |||||||||||||
16,800,000 | Capital One Multi-Asset Execution Trust, Series 07-A6, Class A6, 1 mo. LIBOR + .07%, 0.34%, due 05/15/13 | 16,691,808 | |||||||||||||
17,500,000 | Capital One Multi-Asset Execution Trust, Series 08-A6, Class A6, 1 mo. LIBOR + 1.10%, 1.37%, due 03/17/14 | 17,368,750 | |||||||||||||
39,000,000 | Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.52%, due 09/15/17 | 36,031,710 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Credit Cards — continued | |||||||||||||||
46,600,000 | Chase Issuance Trust, Series 05-A6, Class A6, 1 mo. LIBOR + .07%, 0.34%, due 07/15/14 | 45,435,000 | |||||||||||||
22,900,000 | Chase Issuance Trust, Series 06-A7, Class A, 1 mo. LIBOR + .01%, 0.28%, due 02/15/13 | 22,708,900 | |||||||||||||
4,000,000 | Chase Issuance Trust, Series 07-A1, Class A1, 1 mo. LIBOR + .02%, 0.29%, due 03/15/13 | 3,962,360 | |||||||||||||
13,000,000 | Chase Issuance Trust, Series 07-A11, Class A11, 1 mo. LIBOR, 0.27%, due 07/16/12 | 12,937,912 | |||||||||||||
EUR | 33,200,000 | Citibank Credit Card Issuance Trust, Series 04-A2, Class A, 3 mo. EUR LIBOR + .10%, 0.95%, due 05/24/13 | 45,117,674 | ||||||||||||
11,200,000 | Citibank Credit Card Issuance Trust, Series 01-A7, Class A7, 3 mo. LIBOR + .14%, 0.58%, due 08/15/13 | 10,987,200 | |||||||||||||
8,100,000 | Citibank Credit Card Issuance Trust, Series 05-A3, Class A3, 1 mo. LIBOR + .07%, 0.34%, due 04/24/14 | 7,922,853 | |||||||||||||
40,500,000 | Citibank OMNI Master Trust, Series 07-A9A, Class A9, 144A, 1 mo. LIBOR + 1.10%, 1.37%, due 12/23/13 | 40,338,000 | |||||||||||||
10,600,000 | Discover Card Master Trust I, Series 96-4, Class A, 1 mo. LIBOR + .38%, 0.65%, due 10/16/13 | 10,420,860 | |||||||||||||
11,000,000 | Discover Card Master Trust I, Series 05-4, Class A1, 1 mo. LIBOR + .06%, 0.33%, due 06/18/13 | 10,845,340 | |||||||||||||
16,400,000 | Discover Card Master Trust I, Series 05-4, Class A2, 1 mo. LIBOR + .09%, 0.36%, due 06/16/15 | 14,929,125 | |||||||||||||
52,700,000 | Discover Card Master Trust I, Series 06-2, Class A2, 1 mo. LIBOR + .03%, 0.30%, due 01/16/14 | 51,528,901 | |||||||||||||
3,900,000 | Discover Card Master Trust I, Series 07-1, Class A, 1 mo. LIBOR + .01%, 0.28%, due 08/15/12 | 3,882,918 | |||||||||||||
46,700,000 | First National Master Note Trust, Series 07-2, Class A, 1 mo. LIBOR + .75%, 1.02%, due 11/15/12 | 46,648,922 | |||||||||||||
19,800,000 | GE Capital Credit Card Master Note Trust, Series 05-1, Class A, 1 mo. LIBOR + .04%, 0.31%, due 03/15/13 | 19,707,138 | |||||||||||||
35,800,000 | GE Capital Credit Card Master Note Trust, Series 07-3, Class A1, 1 mo. LIBOR + .01%, 0.28%, due 06/15/13 | 35,370,400 | |||||||||||||
39,800,000 | Household Credit Card Master Note Trust I, Series 07-1, Class A, 1 mo. LIBOR + .05%, 0.32%, due 04/15/13 | 39,178,125 | |||||||||||||
17,500,000 | Household Credit Card Master Note Trust I, Series 07-2, Class A, 1 mo. LIBOR + .55%, 0.82%, due 07/15/13 | 17,150,000 | |||||||||||||
11,500,000 | MBNA Credit Card Master Note Trust, Series 04-A8, Class A8, 1 mo. LIBOR + .15%, 0.42%, due 01/15/14 | 11,287,250 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Credit Cards — continued | |||||||||||||||
40,300,000 | National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.07%, due 05/15/13 | 39,091,000 | |||||||||||||
21,100,000 | Pillar Funding Plc, Series 04-2, Class A, 144A, 3 mo. LIBOR + .14%, 0.77%, due 09/15/11 | 21,090,505 | |||||||||||||
10,600,000 | World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, 1 mo. LIBOR + .13%, 0.40%, due 02/15/17 | 9,549,964 | |||||||||||||
Total Credit Cards | 780,330,299 | ||||||||||||||
Equipment Leases — 1.6% | |||||||||||||||
9,791,996 | CNH Equipment Trust, Series 07-B, Class A3B, 1 mo. LIBOR + .60%, 0.87%, due 10/17/11 | 9,795,521 | |||||||||||||
14,600,000 | CNH Equipment Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.95%, 2.23%, due 08/15/14 | 14,791,260 | |||||||||||||
30,222,736 | GE Equipment Midticket LLC, Series 07-1, Class A3B, 1 mo. LIBOR + .25%, 0.52%, due 06/14/11 | 30,109,401 | |||||||||||||
Total Equipment Leases | 54,696,182 | ||||||||||||||
Insurance Premiums — 0.9% | |||||||||||||||
32,700,000 | AICCO Premium Finance Master Trust, Series 07-AA, Class A, 144A, 1 mo. LIBOR + .05%, 0.32%, due 12/15/11 | 31,411,620 | |||||||||||||
Insured Auto Financing — 7.8% | |||||||||||||||
8,500,000 | Aesop Funding II LLC, Series 05-1A, Class A3, 144A, MBIA, 1 mo. LIBOR + .12%, 0.39%, due 04/20/11 | 8,324,560 | |||||||||||||
7,090,949 | AmeriCredit Automobile Receivables Trust, Series 05-BM, Class A4, MBIA, 1 mo. LIBOR + .08%, 0.36%, due 05/06/12 | 7,006,850 | |||||||||||||
22,900,000 | AmeriCredit Automobile Receivables Trust, Series 07-AX, Class A4, XL, 1 mo. LIBOR + .04%, 0.32%, due 10/06/13 | 21,990,870 | |||||||||||||
17,000,000 | AmeriCredit Automobile Receivables Trust, Series 07-BF, Class A4, FSA, 1 mo. LIBOR + .05%, 0.33%, due 12/06/13 | 15,446,200 | |||||||||||||
6,556,239 | AmeriCredit Automobile Receivables Trust, Series 07-CM, Class A3B, MBIA, 1 mo. LIBOR + .03%, 0.31%, due 05/07/12 | 6,398,634 | |||||||||||||
13,300,000 | AmeriCredit Automobile Receivables Trust, Series 07-DF, Class A4B, FSA, 1 mo. LIBOR + .80%, 1.08%, due 06/06/14 | 11,546,249 | |||||||||||||
25,400,000 | AmeriCredit Prime Automobile Receivable Trust, Series 07-2M, Class A4B, MBIA, 1 mo. LIBOR + .50%, 0.78%, due 03/08/16 | 23,022,255 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Auto Financing — continued | |||||||||||||||
20,560,409 | Capital One Auto Finance Trust, Series 06-A, Class A4, AMBAC, 1 mo. LIBOR + .01%, 0.28%, due 12/15/12 | 19,822,290 | |||||||||||||
22,151,306 | Capital One Auto Finance Trust, Series 06-B, Class A4, MBIA, 1 mo. LIBOR + .02%, 0.29%, due 07/15/13 | 21,536,829 | |||||||||||||
6,800,000 | Capital One Auto Finance Trust, Series 07-A, Class A4, AMBAC, 1 mo. LIBOR + .02%, 0.29%, due 11/15/13 | 6,453,214 | |||||||||||||
15,505,215 | Capital One Auto Finance Trust, Series 07-C, Class A3B, FGIC, 1 mo. LIBOR + .51%, 0.78%, due 04/16/12 | 15,332,176 | |||||||||||||
1,600,000 | Hertz Vehicle Financing LLC, Series 05-2A, Class A3, 144A, AMBAC, 1 mo. LIBOR + .20%, 0.47%, due 02/25/11 | 1,579,152 | |||||||||||||
7,800,000 | Hertz Vehicle Financing LLC, Series 05-2A, Class A5, 144A, AMBAC, 1 mo. LIBOR + .25%, 0.52%, due 11/25/11 | 7,409,376 | |||||||||||||
31,821,927 | Santander Drive Auto Receivables Trust, Series 07-1, Class A4, FGIC, 1 mo. LIBOR + .05%, 0.32%, due 09/15/14 | 29,798,689 | |||||||||||||
23,000,000 | Santander Drive Auto Receivables Trust, Series 07-3, Class A4B, FGIC, 1 mo. LIBOR + .65%, 0.92%, due 10/15/14 | 21,406,100 | |||||||||||||
51,300,000 | Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.48%, due 07/14/14 | 46,683,000 | |||||||||||||
3,630,457 | UPFC Auto Receivables Trust, Series 06-B, Class A3, AMBAC, 5.01%, due 08/15/12 | 3,628,751 | |||||||||||||
Total Insured Auto Financing | 267,385,195 | ||||||||||||||
Insured Business Loans — 0.1% | |||||||||||||||
2,977,589 | CNL Commercial Mortgage Loan Trust, Series 03-2A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .44%, 0.71%, due 10/25/30 | 1,935,433 | |||||||||||||
Insured High Yield Collateralized Debt Obligations — 0.7% | |||||||||||||||
18,892,308 | Augusta Funding Ltd., Series 10A, Class F-1, 144A, CapMAC, 3mo. LIBOR +.25%, 0.85%, due 06/30/17 (b) | 15,805,305 | |||||||||||||
4,414,401 | GSC Partners CDO Fund Ltd., Series 2A, Class A, 144A, FSA, 6 mo. LIBOR + .52%, 1.76%, due 05/22/13 | 3,310,801 | |||||||||||||
6,908,818 | GSC Partners CDO Fund Ltd., Series 03-4A, Class A3, 144A, AMBAC, 3 mo. LIBOR + .46%, 0.97%, due 12/16/15 | 5,803,407 | |||||||||||||
Total Insured High Yield Collateralized Debt Obligations | 24,919,513 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Other — 2.9% | |||||||||||||||
24,700,000 | DB Master Finance LLC, Series 06-1, Class A2, 144A, AMBAC, 5.78%, due 06/20/31 | 22,830,235 | |||||||||||||
45,300,000 | Dominos Pizza Master Issuer LLC, Series 07-1, Class A2, 144A, MBIA, 5.26%, due 04/25/37 | 36,368,425 | |||||||||||||
12,718,124 | Henderson Receivables LLC, Series 06-3A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.47%, due 09/15/41 | 9,614,011 | |||||||||||||
12,202,463 | Henderson Receivables LLC, Series 06-4A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.47%, due 12/15/41 | 9,289,979 | |||||||||||||
18,565,617 | TIB Card Receivables Fund, 144A, FGIC, 3 mo. LIBOR + .25%, 0.83%, due 01/05/14 | 16,709,055 | |||||||||||||
2,988,000 | Toll Road Investment Part II, Series B, 144A, MBIA, Zero Coupon, due 02/15/30 | 515,281 | |||||||||||||
26,300,000 | Toll Road Investment Part II, Series C, 144A, MBIA, Zero Coupon, due 02/15/37 | 2,485,087 | |||||||||||||
Total Insured Other | 97,812,073 | ||||||||||||||
Insured Residential Asset-Backed Securities (United States) — 0.4% | |||||||||||||||
2,947,743 | Ameriquest Mortgage Securities, Inc., Series 04-R6, Class A1, XL, 1 mo. LIBOR + .21%, 0.48%, due 07/25/34 | 1,297,007 | |||||||||||||
3,505,394 | Citigroup Mortgage Loan Trust, Inc., Series 03-HE3, Class A, AMBAC, 1 mo. LIBOR + .38%, 0.65%, due 12/25/33 | 1,927,967 | |||||||||||||
919,396 | Quest Trust, Series 04-X1, Class A, 144A, AMBAC, 1 mo. LIBOR + .33%, 0.60%, due 03/25/34 | 505,667 | |||||||||||||
24,064,671 | Residential Asset Mortgage Products, Inc., Series 05-RS9, Class AI3, FGIC, 1 mo. LIBOR + .22%, 0.49%, due 11/25/35 | 10,829,102 | |||||||||||||
Total Insured Residential Asset-Backed Securities (United States) | 14,559,743 | ||||||||||||||
Insured Residential Mortgage-Backed Securities (United States) — 0.4% | |||||||||||||||
582,672 | Chevy Chase Mortgage Funding Corp., Series 03-4A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .34%, 0.61%, due 10/25/34 | 302,989 | |||||||||||||
1,120,209 | Chevy Chase Mortgage Funding Corp., Series 04-1A, Class A2, 144A, AMBAC, 1 mo. LIBOR + .33%, 0.60%, due 01/25/35 | 537,700 | |||||||||||||
15,444,952 | Countrywide Home Equity Loan Trust, Series 07-E, Class A, MBIA, 1 mo. LIBOR + .15%, 0.42%, due 06/15/37 | 3,079,723 | |||||||||||||
7,655,736 | GMAC Mortgage Corp. Loan Trust, Series 04-HE3, Class A3, FSA, 1 mo. LIBOR + .23%, 0.50%, due 10/25/34 | 3,524,724 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Residential Mortgage-Backed Securities (United States) — continued | |||||||||||||||
520,587 | GreenPoint Home Equity Loan Trust, Series 04-1, Class A, AMBAC, 1 mo. LIBOR + .23%, 0.73%, due 07/25/29 | 227,486 | |||||||||||||
528,540 | GreenPoint Home Equity Loan Trust, Series 04-4, Class A, AMBAC, 1 mo. LIBOR + .28%, 0.83%, due 08/15/30 | 296,025 | |||||||||||||
1,203,978 | Lehman ABS Corp., Series 04-2, Class A, AMBAC, 1 mo. LIBOR + .22%, 0.71%, due 06/25/34 | 397,313 | |||||||||||||
252,446 | Residential Funding Mortgage Securities II, Series 03-HS1, Class AII, FGIC, 1 mo. LIBOR + .29%, 0.56%, due 12/25/32 | 109,814 | |||||||||||||
5,113,131 | SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, 1 mo. LIBOR + .19%, 0.46%, due 11/25/35 | 2,446,914 | |||||||||||||
2,149,656 | Wachovia Asset Securitization, Inc., Series 02-HE1, Class A, AMBAC, 1 mo. LIBOR + .37%, 0.64%, due 09/27/32 | 1,100,388 | |||||||||||||
1,692,472 | Wachovia Asset Securitization, Inc., Series 04-HE1, Class A, MBIA, 1 mo. LIBOR + .22%, 0.49%, due 06/25/34 | 814,841 | |||||||||||||
Total Insured Residential Mortgage-Backed Securities (United States) | 12,837,917 | ||||||||||||||
Insured Time Share — 0.5% | |||||||||||||||
875,665 | Cendant Timeshare Receivables Funding LLC, Series 04-1A, Class A2, 144A, MBIA, 1 mo. LIBOR + .18%, 0.45%, due 05/20/16 | 713,821 | |||||||||||||
2,387,283 | Cendant Timeshare Receivables Funding LLC, Series 05-1A, Class A2, 144A, FGIC, 1 mo. LIBOR + .18%, 0.45%, due 05/20/17 | 2,172,427 | |||||||||||||
3,999,894 | Sierra Receivables Funding Co., Series 06-1A, Class A2, 144A, MBIA, 1 mo. LIBOR + .15%, 0.42%, due 05/20/18 | 3,280,865 | |||||||||||||
4,208,445 | Sierra Receivables Funding Co., Series 07-1A, Class A2, 144A, FGIC, 1 mo. LIBOR + .15%, 0.42%, due 03/20/19 | 3,661,347 | |||||||||||||
13,340,900 | Sierra Receivables Funding Co., Series 07-2A, Class A2, 144A, MBIA, 1 mo. LIBOR + 1.00%, 1.27%, due 09/20/19 | 8,274,293 | |||||||||||||
Total Insured Time Share | 18,102,753 | ||||||||||||||
Insured Transportation — 0.1% | |||||||||||||||
6,020,000 | GE Seaco Finance SRL, Series 04-1A, Class A, 144A, AMBAC, 1 mo. LIBOR + .30%, 0.57%, due 04/17/19 | 4,635,400 | |||||||||||||
Investment Grade Corporate Collateralized Debt Obligations — 3.1% | |||||||||||||||
15,500,000 | Counts Trust, Series 04-2, 144A, 3 mo. LIBOR + .95%, 1.56%, due 09/20/09 | 15,531,465 | |||||||||||||
22,300,000 | Morgan Stanley ACES SPC, Series 05-15, Class A, 144A, 3 mo. LIBOR + .40%, 1.01%, due 12/20/10 | 18,765,450 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Investment Grade Corporate Collateralized Debt Obligations — continued | |||||||||||||||
34,200,000 | Morgan Stanley ACES SPC, Series 06-13A, Class A, 144A, 3 mo. LIBOR + .29%, 0.90%, due 06/20/13 | 18,621,900 | |||||||||||||
4,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class I, 144A, 3 mo. LIBOR + .45%, 1.06%, due 12/20/09 | 3,802,000 | |||||||||||||
6,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class II, 144A, 3 mo. LIBOR + .65%, 1.26%, due 12/20/09 | 5,589,000 | |||||||||||||
2,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class III, 144A, 3 mo. LIBOR + .75%, 1.36%, due 12/20/09 | 1,815,000 | |||||||||||||
10,100,000 | Morgan Stanley ACES SPC, Series 05-2A, Class A, 144A, 3 mo. LIBOR + .45%, 1.06%, due 03/20/10 | 9,180,900 | |||||||||||||
12,000,000 | Morgan Stanley ACES SPC, Series 05-10, Class A1, 144A, 3 mo. LIBOR + .52%, 1.13%, due 03/20/10 | 10,518,000 | |||||||||||||
8,400,000 | Prism Orso Trust, Series 04-MAPL, Class CERT, 144A, 3 mo. LIBOR + .70%, 1.41%, due 08/01/11 | 7,141,680 | |||||||||||||
22,900,000 | Salisbury International Investments Ltd., 3 mo. LIBOR + .42%, 1.03%, due 06/22/10 | 16,442,200 | |||||||||||||
Total Investment Grade Corporate Collateralized Debt Obligations | 107,407,595 | ||||||||||||||
Rate Reduction Bonds — 1.2% | |||||||||||||||
14,157,276 | Massachusetts RRB Special Purpose Trust, Series 05-1, Class A3, 4.13%, due 09/15/13 | 14,494,785 | |||||||||||||
24,500,000 | PG&E Energy Recovery Funding LLC, Series 05-1, Class A4, 4.37%, due 06/25/14 | 25,541,250 | |||||||||||||
Total Rate Reduction Bonds | 40,036,035 | ||||||||||||||
Residential Asset-Backed Securities (United States) — 12.0% | |||||||||||||||
977,554 | Accredited Mortgage Loan Trust, Series 04-4, Class A1B, 1 mo. LIBOR + .39%, 0.66%, due 01/25/35 | 581,645 | |||||||||||||
1,752,333 | Accredited Mortgage Loan Trust, Series 07-1, Class A1, 1 mo. LIBOR + .05%, 0.32%, due 02/25/37 | 1,662,081 | |||||||||||||
2,081,693 | ACE Securities Corp., Series 05-ASP1, Class A2C, 1 mo. LIBOR + .27%, 0.54%, due 09/25/35 | 2,008,834 | |||||||||||||
3,205,526 | ACE Securities Corp., Series 06-ASL1, Class A, 1 mo. LIBOR + .14%, 0.41%, due 02/25/36 | 511,281 | |||||||||||||
6,442,848 | ACE Securities Corp., Series 06-ASP2, Class A2B, 1 mo. LIBOR + .14%, 0.41%, due 03/25/36 | 5,927,420 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
8,500,000 | ACE Securities Corp., Series 06-ASP2, Class A2C, 1 mo. LIBOR + .18%, 0.45%, due 03/25/36 | 3,570,000 | |||||||||||||
10,387,413 | ACE Securities Corp., Series 06-ASP4, Class A2B, 1 mo. LIBOR + .10%, 0.37%, due 08/25/36 | 7,790,560 | |||||||||||||
20,300,000 | ACE Securities Corp., Series 06-ASP5, Class A2C, 1 mo. LIBOR + .18%, 0.45%, due 10/25/36 | 5,278,000 | |||||||||||||
18,148,368 | ACE Securities Corp., Series 06-CW1, Class A2B, 1 mo. LIBOR + .10%, 0.37%, due 07/25/36 | 13,611,276 | |||||||||||||
5,900,000 | ACE Securities Corp., Series 06-HE2, Class A2C, 1 mo. LIBOR + .16%, 0.43%, due 05/25/36 | 1,947,000 | |||||||||||||
7,484,403 | ACE Securities Corp., Series 06-HE3, Class A2B, 1 mo. LIBOR + .09%, 0.36%, due 06/25/36 | 5,613,302 | |||||||||||||
11,100,000 | ACE Securities Corp., Series 06-OP1, Class A2C, 1 mo. LIBOR + .15%, 0.42%, due 04/25/36 | 4,329,000 | |||||||||||||
4,321,333 | ACE Securities Corp., Series 06-SL1, Class A, 1 mo. LIBOR + .16%, 0.43%, due 09/25/35 | 534,765 | |||||||||||||
8,619,824 | ACE Securities Corp., Series 06-SL3, Class A1, 1 mo. LIBOR + .10%, 0.37%, due 06/25/36 | 280,144 | |||||||||||||
10,019,677 | ACE Securities Corp., Series 06-SL3, Class A2, 1 mo. LIBOR + .17%, 0.44%, due 06/25/36 | 175,344 | |||||||||||||
10,894,416 | ACE Securities Corp., Series 07-HE1, Class A2A, 1 mo. LIBOR + .09%, 0.36%, due 01/25/37 | 5,174,848 | |||||||||||||
6,496,787 | ACE Securities Corp., Series 07-WM1, Class A2A, 1 mo. LIBOR + .07%, 0.34%, due 11/25/36 | 3,085,974 | |||||||||||||
12,442,814 | Alliance Bancorp Trust, Series 07-S1, Class A1, 144A, 1 mo. LIBOR + .20%, 0.47%, due 05/25/37 | 1,505,581 | |||||||||||||
3,448,275 | Argent Securities, Inc., Series 04-W8, Class A5, 1 mo. LIBOR + .52%, 0.79%, due 05/25/34 | 2,580,818 | |||||||||||||
58,867,000 | Argent Securities, Inc., Series 06-M1, Class A2C, 1 mo. LIBOR + .15%, 0.42%, due 07/25/36 | 13,907,329 | |||||||||||||
11,564,217 | Argent Securities, Inc., Series 06-M2, Class A2B, 1 mo. LIBOR + .11%, 0.38%, due 09/25/36 | 6,938,530 | |||||||||||||
13,350,164 | Argent Securities, Inc., Series 06-W2, Class A2B, 1 mo. LIBOR + .19%, 0.46%, due 03/25/36 | 8,277,102 | |||||||||||||
642,505 | Argent Securities, Inc., Series 06-W4, Class A2B, 1 mo. LIBOR + .11%, 0.38%, due 05/25/36 | 546,129 | |||||||||||||
9,600,000 | Argent Securities, Inc., Series 06-W5, Class A2C, 1 mo. LIBOR + .15%, 0.42%, due 06/25/36 | 3,187,500 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
14,300,000 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3B, 1 mo. LIBOR + .11%, 0.38%, due 10/25/36 | 13,350,480 | |||||||||||||
10,100,000 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3C, 1 mo. LIBOR + .15%, 0.42%, due 10/25/36 | 4,012,730 | |||||||||||||
718,523 | Asset Backed Funding Certificates, Series 06-OPT3, Class A3A, 1 mo. LIBOR + .06%, 0.33%, due 11/25/36 | 696,967 | |||||||||||||
28,475,556 | Asset Backed Funding Certificates, Series 07-NC1, Class A1, 144A, 1 mo. LIBOR + .22%, 0.49%, due 05/25/37 | 20,448,297 | |||||||||||||
5,734,455 | Bayview Financial Acquisition Trust, Series 04-B, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 05/28/39 | 4,037,056 | |||||||||||||
5,978,474 | Bayview Financial Acquisition Trust, Series 04-B, Class A2, 144A, 1 mo. LIBOR + .65%, 1.56%, due 05/28/39 | 3,587,084 | |||||||||||||
11,501,781 | Bayview Financial Acquisition Trust, Series 05-A, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 02/28/40 | 5,582,964 | |||||||||||||
4,479,622 | Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A1, 1 mo. LIBOR + .11%, 0.38%, due 11/25/36 | 3,129,191 | |||||||||||||
8,500,000 | Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A2, 1 mo. LIBOR + .20%, 0.47%, due 11/25/36 | 1,692,256 | |||||||||||||
6,015,109 | Bear Stearns Mortgage Funding Trust, Series 07-SL2, Class 1A, 1 mo. LIBOR + .16%, 0.43%, due 02/25/37 | 549,691 | |||||||||||||
9,793,011 | Carrington Mortgage Loan Trust, Series 06-NC1, Class A2, 1 mo. LIBOR + .16%, 0.43%, due 01/25/36 | 7,834,409 | |||||||||||||
4,145,536 | Carrington Mortgage Loan Trust, Series 07-FRE1, Class A1, 1 mo. LIBOR + .12%, 0.39%, due 02/25/37 | 3,794,190 | |||||||||||||
38,100,000 | Carrington Mortgage Loan Trust, Series 07-FRE1, Class A2, 1 mo. LIBOR + .20%, 0.47%, due 02/25/37 | 23,348,213 | |||||||||||||
12,800,000 | Centex Home Equity, Series 06-A, Class AV3, 1 mo. LIBOR + .16%, 0.43%, due 06/25/36 | 8,960,000 | |||||||||||||
269,942 | Chase Funding Mortgage Loan Trust, Series 03-3, Class 2A2, 1 mo. LIBOR + .27%, 0.81%, due 04/25/33 | 165,152 | |||||||||||||
178,309 | Citigroup Mortgage Loan Trust, Inc., Series 04-OPT1, Class A1B, 1 mo. LIBOR + .41%, 0.68%, due 10/25/34 | 80,239 | |||||||||||||
12,100,000 | Citigroup Mortgage Loan Trust, Inc., Series 06-HE3, Class A2C, 1 mo. LIBOR + .16%, 0.43%, due 12/25/36 | 3,751,000 | |||||||||||||
36,200,000 | Countrywide Asset-Backed Certificates, Series 06-BC3, Class 2A2, 1 mo. LIBOR + .14%, 0.41%, due 02/25/37 | 19,768,820 | |||||||||||||
8,105,398 | Countrywide Asset-Backed Certificates, Series 06-BC5, Class 2A1, 1 mo. LIBOR + .08%, 0.35%, due 03/25/37 | 7,569,631 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
3,199,381 | Credit-Based Asset Servicing & Securitization, Series 06-RP1, Class A1, 144A, 1 mo. LIBOR + .11%, 0.38%, due 04/25/36 | 2,950,429 | |||||||||||||
429,511 | Equity One ABS, Inc., Series 04-1, Class AV2, 1 mo. LIBOR + .30%, 0.57%, due 04/25/34 | 179,992 | |||||||||||||
2,013,114 | First Franklin Mortgage Loan Asset Backed Certificates, Series 06-FF18, Class A2A, 1 mo. LIBOR + .07%, 0.34%, due 12/25/37 | 1,965,927 | |||||||||||||
14,400,000 | First Franklin Mortgage Loan Asset Backed Certificates, Series 06-FF5, Class 2A3, 1 mo. LIBOR + .16%, 0.43%, due 04/25/36 | 5,832,000 | |||||||||||||
4,556,710 | Fremont Home Loan Trust, Series 06-A, Class 1A2, 1 mo. LIBOR + .20%, 0.46%, due 05/25/36 | 2,318,226 | |||||||||||||
3,343,902 | Fremont Home Loan Trust, Series 06-B, Class 2A2, 1 mo. LIBOR + .10%, 0.37%, due 08/25/36 | 2,172,492 | |||||||||||||
19,925,000 | Fremont Home Loan Trust, Series 06-B, Class 2A3, 1 mo. LIBOR + .16%, 0.43%, due 08/25/36 | 5,698,550 | |||||||||||||
15,000,000 | GE-WMC Mortgage Securities, Series 06-1, Class A2B, 1 mo. LIBOR + .15%, 0.42%, due 08/25/36 | 4,350,000 | |||||||||||||
3,736,045 | Household Home Equity Loan Trust, Series 05-2, Class A2, 1 mo. LIBOR + .31%, 0.58%, due 01/20/35 | 2,900,105 | |||||||||||||
3,218,653 | Household Home Equity Loan Trust, Series 05-3, Class A2, 1 mo. LIBOR + .29%, 0.56%, due 01/20/35 | 2,450,200 | |||||||||||||
11,933,332 | Household Home Equity Loan Trust, Series 06-1, Class A1, 1 mo. LIBOR + .16%, 0.43%, due 01/20/36 | 9,636,165 | |||||||||||||
29,400,000 | J.P. Morgan Mortgage Acquisition Corp., Series 06-WMC4, Class A3, 1 mo. LIBOR + .12%, 0.39%, due 12/25/36 | 8,422,630 | |||||||||||||
4,136,315 | Master Asset-Backed Securities Trust, Series 05-FRE1, Class A4, 1 mo. LIBOR + .25%, 0.52%, due 10/25/35 | 3,603,765 | |||||||||||||
7,176,618 | Master Asset-Backed Securities Trust, Series 06-AM3, Class A2, 1 mo. LIBOR + .13%, 0.40%, due 10/25/36 | 6,687,746 | |||||||||||||
20,910,000 | Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.42%, due 03/25/36 | 7,406,531 | |||||||||||||
11,300,000 | Master Asset-Backed Securities Trust, Series 06-HE2, Class A3, 1 mo. LIBOR + .15%, 0.42%, due 06/25/36 | 3,288,074 | |||||||||||||
23,290,000 | Master Asset-Backed Securities Trust, Series 06-HE3, Class A3, 1 mo. LIBOR + .15%, 0.42%, due 08/25/36 | 7,066,885 | |||||||||||||
14,400,000 | Master Asset-Backed Securities Trust, Series 06-NC3, Class A4, 1 mo. LIBOR + .16%, 0.43%, due 10/25/36 | 4,151,952 | |||||||||||||
2,504,312 | Master Asset-Backed Securities Trust, Series 06-WMC1, Class A2, 1 mo. LIBOR + .11%, 0.38%, due 02/25/36 | 2,487,108 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
6,598,971 | Master Second Lien Trust, Series 06-1, Class A, 1 mo. LIBOR + .16%, 0.43%, due 03/25/36 | 214,467 | |||||||||||||
10,550,301 | Merrill Lynch Mortgage Investors, Series 07-HE2, Class A2A, 1 mo. LIBOR + .12%, 0.39%, due 02/25/37 | 5,473,496 | |||||||||||||
3,496,461 | Morgan Stanley Capital, Inc., Series 04-SD1, Class A, 1 mo. LIBOR + .40%, 0.67%, due 08/25/34 | 2,272,700 | |||||||||||||
32,500,000 | Morgan Stanley Capital, Inc., Series 07-HE4, Class A2C, 1 mo. LIBOR + .23%, 0.50%, due 02/25/37 | 9,750,000 | |||||||||||||
21,345,837 | Morgan Stanley Home Equity Loans, Series 06-3, Class A3, 1 mo. LIBOR + .16%, 0.43%, due 04/25/36 | 8,751,793 | |||||||||||||
9,020,519 | Morgan Stanley Home Equity Loans, Series 07-2, Class A1, 1 mo. LIBOR + .10%, 0.37%, due 04/25/37 | 7,045,026 | |||||||||||||
9,500,000 | Morgan Stanley IXIS Real Estate Capital Trust, Series 06-2, Class A3, 1 mo. LIBOR + .15%, 0.42%, due 11/25/36 | 2,565,000 | |||||||||||||
2,467,187 | Nomura Home Equity Loan, Inc., Series 06-FM1, Class 2A2, 1 mo. LIBOR + .16%, 0.43%, due 11/25/35 | 2,427,095 | |||||||||||||
8,214,714 | People's Choice Home Loan Securities Trust, Series 05-4, Class 1A2, 1 mo. LIBOR + .26%, 0.53%, due 12/25/35 | 5,367,634 | |||||||||||||
11,025,250 | RAAC Series Trust, Series 06-SP1, Class A2, 1 mo. LIBOR + .19%, 0.46%, due 09/25/45 | 8,428,803 | |||||||||||||
1,246,352 | Residential Asset Mortgage Products, Inc., Series 05-RS4, Class A3, 1 mo. LIBOR + .23%, 0.50%, due 04/25/35 | 1,184,034 | |||||||||||||
3,275,629 | Residential Asset Mortgage Products, Inc., Series 05-RS8, Class A2, 1 mo. LIBOR + .29%, 0.56%, due 10/25/33 | 2,808,573 | |||||||||||||
720,377 | Residential Asset Mortgage Products, Inc., Series 06-RZ4, Class A1, 1 mo. LIBOR + .09%, 0.36%, due 10/25/36 | 715,875 | |||||||||||||
7,362,151 | Residential Asset Securities Corp., Series 05-KS12, Class A2, 1 mo. LIBOR + .25%, 0.52%, due 01/25/36 | 6,257,828 | |||||||||||||
6,585,926 | Residential Asset Securities Corp., Series 07-KS3, Class AI1, 1 mo. LIBOR + .11%, 0.38%, due 04/25/37 | 6,029,679 | |||||||||||||
236,691 | Saxon Asset Securities Trust, Series 04-1, Class A, 1 mo. LIBOR + .27%, 0.81%, due 03/25/35 | 110,135 | |||||||||||||
4,825,178 | Securitized Asset Backed Receivables LLC, Series 06-NC1, Class A2, 1 mo. LIBOR + .16%, 0.43%, due 03/25/36 | 3,618,884 | |||||||||||||
2,878,007 | Security National Mortgage Loan Trust, Series 06-2A, Class A1, 144A, 1 mo. LIBOR + .29%, 0.56%, due 10/25/36 | 2,411,770 | |||||||||||||
2,189,799 | SG Mortgage Securities Trust, Series 05-OPT1, Class A2, 1 mo. LIBOR + .26%, 0.53%, due 10/25/35 | 1,983,559 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
2,950,643 | Soundview Home Equity Loan Trust, Series 07-NS1, Class A1, 1 mo. LIBOR + .12%, 0.39%, due 01/25/37 | 2,420,450 | |||||||||||||
17,100,000 | Specialty Underwriting & Residential Finance, Series 06-BC3, Class A2C, 1 mo. LIBOR + .15%, 0.42%, due 06/25/37 | 4,883,760 | |||||||||||||
9,454,097 | Structured Asset Investment Loan Trust, Series 06-1, Class A3, 1 mo. LIBOR + .20%, 0.47%, due 01/25/36 | 5,483,376 | |||||||||||||
6,214,249 | Structured Asset Securities Corp., Series 05-S6, Class A2, 1 mo. LIBOR + .29%, 0.56%, due 11/25/35 | 1,304,992 | |||||||||||||
17,234,438 | Yale Mortgage Loan Trust, Series 07-1, Class A, 144A, 1 mo. LIBOR + .40%, 0.67%, due 06/25/37 | 4,429,250 | |||||||||||||
Total Residential Asset-Backed Securities (United States) | 410,889,789 | ||||||||||||||
Residential Mortgage-Backed Securities (Australian) — 3.6% | |||||||||||||||
3,301,224 | Australian Mortgage Securities II, Series G3, Class A1A, 3 mo. LIBOR + .21%, 0.74%, due 01/10/35 | 2,888,571 | |||||||||||||
4,154,224 | Crusade Global Trust, Series 04-2, Class A1, 3 mo. LIBOR + .13%, 0.56%, due 11/19/37 | 3,801,423 | |||||||||||||
8,841,953 | Crusade Global Trust, Series 06-1, Class A1, 144A, 3 mo. LIBOR + .06%, 0.57%, due 07/20/38 | 8,247,261 | |||||||||||||
14,531,662 | Crusade Global Trust, Series 07-1, Class A1, 3 mo. LIBOR + .06%, 0.57%, due 04/19/38 | 13,196,769 | |||||||||||||
2,438,000 | Interstar Millennium Trust, Series 03-3G, Class A2, 3 mo. LIBOR + .25%, 1.10%, due 09/27/35 | 1,935,820 | |||||||||||||
25,123,669 | Interstar Millennium Trust, Series 04-2G, Class A, 3 mo. LIBOR + .20%, 1.03%, due 03/14/36 | 20,270,279 | |||||||||||||
1,622,079 | Interstar Millennium Trust, Series 05-1G, Class A, 3 mo. LIBOR + .12%, 0.75%, due 12/08/36 | 1,332,781 | |||||||||||||
2,487,983 | Interstar Millennium Trust, Series 06-2GA, Class A2, 144A, 3 mo. LIBOR + .08%, 0.46%, due 05/27/38 | 1,870,142 | |||||||||||||
1,889,383 | Medallion Trust, Series 05-1G, Class A1, 3 mo. LIBOR + .08%, 0.54%, due 05/10/36 | 1,776,387 | |||||||||||||
9,575,799 | Medallion Trust, Series 06-1G, Class A1, 3 mo. LIBOR + .05%, 0.68%, due 06/14/37 | 8,857,700 | |||||||||||||
6,042,271 | Medallion Trust, Series 07-1G, Class A1, 3 mo. LIBOR + .04%, 0.42%, due 02/27/39 | 5,599,487 | |||||||||||||
13,154,241 | National RMBS Trust, Series 06-3, Class A1, 144A, 3 mo. LIBOR + .07%, 0.58%, due 10/20/37 | 11,430,115 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Mortgage-Backed Securities (Australian) — continued | |||||||||||||||
14,934,160 | Puma Finance Ltd., Series G5, Class A1, 144A, 3 mo. LIBOR + .07%, 0.49%, due 02/21/38 | 11,947,328 | |||||||||||||
1,469,426 | Superannuation Members Home Loans Global Fund, Series 4A, Class A, 3 mo. LIBOR + .22%, 0.98%, due 10/09/29 | 1,370,732 | |||||||||||||
891,273 | Superannuation Members Home Loans Global Fund, Series 6, Class A, 3 mo. LIBOR + .16%, 0.62%, due 11/09/35 | 785,363 | |||||||||||||
1,761,426 | Superannuation Members Home Loans Global Fund, Series 7, Class A1, 3 mo. LIBOR + .14%, 0.77%, due 03/09/36 | 1,663,402 | |||||||||||||
1,469,965 | Superannuation Members Home Loans Global Fund, Series 8, Class A1, 3 mo. LIBOR + .07%, 0.58%, due 01/12/37 | 1,266,948 | |||||||||||||
17,729,584 | Superannuation Members Home Loans Global Fund, Series 07-1, Class A1, 3 mo. LIBOR + .06%, 0.70%, due 06/12/40 | 16,092,151 | |||||||||||||
12,124,102 | Westpac Securitization Trust, Series 07-1G, Class A2A, 3 mo. LIBOR + .05%, 0.47%, due 05/21/38 | 10,342,587 | |||||||||||||
Total Residential Mortgage-Backed Securities (Australian) | 124,675,246 | ||||||||||||||
Residential Mortgage-Backed Securities (European) — 6.0% | |||||||||||||||
11,452,791 | Aire Valley Mortgages, Series 06-1A, Class 1A, 144A, 3 mo. LIBOR + .11%, 0.72%, due 09/20/66 | 5,726,395 | |||||||||||||
15,900,000 | Aire Valley Mortgages, Series 07-1A, Class 1A2, 144A, 3 mo. LIBOR + .09%, 0.70%, due 03/20/30 | 7,950,000 | |||||||||||||
12,300,000 | Arkle Master Issuer Plc, Series 06-1A, Class 4A1, 144A, 3 mo. LIBOR + .09%, 0.53%, due 02/17/52 | 11,623,500 | |||||||||||||
30,800,000 | Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.61%, due 01/13/39 | 27,036,625 | |||||||||||||
2,879,521 | Gracechurch Mortgage Funding Plc, Series 1A, Class A2B, 144A, 3 mo. LIBOR + .07%, 0.58%, due 10/11/41 | 2,717,145 | |||||||||||||
6,014,943 | Granite Master Issuer Plc, Series 06-2, Class A4, 1 mo. LIBOR + .04%, 0.31%, due 12/20/54 | 4,691,656 | |||||||||||||
3,467,031 | Granite Mortgages Plc, Series 04-3, Class 2A1, 3 mo. LIBOR + .14%, 0.75%, due 09/20/44 | 2,565,603 | |||||||||||||
38,600,000 | Holmes Financing Plc, Series 10A, Class 4A1, 144A, 3 mo. LIBOR + .08%, 0.59%, due 07/15/40 | 37,564,362 | |||||||||||||
10,000,000 | Holmes Master Issuer Plc, Series 07-2A, Class 3A1, 3 mo. LIBOR + .08%, 0.59%, due 07/15/21 | 9,122,600 | |||||||||||||
18,457,682 | Kildare Securities Ltd., Series 07-1A, Class A2, 144A, 3 mo. LIBOR + .06%, 0.71%, due 12/10/43 | 16,171,698 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Mortgage-Backed Securities (European) — continued | |||||||||||||||
767,210 | Leek Finance Plc, Series 14A, Class A2B, 144A, 3 mo. LIBOR + .18%, 0.79%, due 09/21/36 | 719,499 | |||||||||||||
3,142,900 | Leek Finance Plc, Series 15A, Class AB, 144A, 3 mo. LIBOR + .14%, 0.75%, due 03/21/37 | 2,767,225 | |||||||||||||
3,891,888 | Leek Finance Plc, Series 17A, Class A2B, 144A, 3 mo. LIBOR + .14%, 0.75%, due 12/21/37 | 3,035,065 | |||||||||||||
11,300,379 | Paragon Mortgages Plc, Series 12A, Class A2C, 144A, 3 mo. LIBOR + .11%, 0.55%, due 11/15/38 | 6,342,903 | |||||||||||||
6,563,673 | Paragon Mortgages Plc, Series 14A, Class A2C, 144A, 3 mo. LIBOR + .10%, 0.73%, due 09/15/39 | 3,398,145 | |||||||||||||
6,543,175 | Paragon Mortgages Plc, Series 7A, Class A1A, 144A, 3 mo. LIBOR + .21%, 0.65%, due 05/15/34 | 4,303,053 | |||||||||||||
36,000,000 | Pendeford Master Issuer Plc, Series 07-1A, Class 3A, 144A, 3 mo. LIBOR + .10%, 0.56%, due 02/12/16 | 33,840,000 | |||||||||||||
26,600,000 | Permanent Master Issuer Plc, Series 06-1, Class 5A, 3 mo. LIBOR + .11%, 0.62%, due 07/15/33 | 21,147,000 | |||||||||||||
6,400,000 | Permanent Master Issuer Plc, Series 07-1, Class 4A, 3 mo. LIBOR + .08%, 0.59%, due 10/15/33 | 5,603,584 | |||||||||||||
Total Residential Mortgage-Backed Securities (European) | 206,326,058 | ||||||||||||||
Residential Mortgage-Backed Securities (United States) — 0.1% | |||||||||||||||
670,174 | Chevy Chase Mortgage Funding Corp., Series 04-3A, Class A2, 144A, 1 mo. LIBOR + .30%, 0.57%, due 08/25/35 | 321,684 | |||||||||||||
1,360,966 | GreenPoint Mortgage Funding Trust, Series 05-HE4, Class 2A3C, 1 mo. LIBOR + .25%, 0.52%, due 07/25/30 | 1,176,597 | |||||||||||||
3,486,595 | Mellon Residential Funding Corp., Series 04-TBC1, Class A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 02/26/34 | 2,363,802 | |||||||||||||
Total Residential Mortgage-Backed Securities (United States) | 3,862,083 | ||||||||||||||
Student Loans — 4.7% | |||||||||||||||
10,800,000 | College Loan Corp. Trust, Series 06-1, Class A2, 3 mo. LIBOR + .02%, 0.52%, due 04/25/22 | 10,759,500 | |||||||||||||
5,032,000 | College Loan Corp. Trust, Series 07-1, Class A1, 3 mo. LIBOR + .01%, 0.51%, due 01/25/23 | 5,000,550 | |||||||||||||
20,300,000 | College Loan Corp. Trust, Series 07-2, Class A1, 3 mo. LIBOR + .25%, 0.75%, due 01/25/24 | 20,230,219 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Student Loans — continued | |||||||||||||||
4,122,141 | Goal Capital Funding Trust, Series 06-1, Class A1, 3 mo. LIBOR, 0.39%, due 08/25/20 | 4,089,659 | |||||||||||||
4,150,489 | Goal Capital Funding Trust, Series 07-1, Class A1, 3 mo. LIBOR + .02%, 0.63%, due 06/25/21 | 4,082,421 | |||||||||||||
446,126 | Keycorp Student Loan Trust, Series 05-A, Class 2A1, 3 mo. LIBOR + .05%, 0.65%, due 09/27/21 | 444,605 | |||||||||||||
2,761,700 | Montana Higher Education Student Assistance Corp., Series 05-1, Class A, 3 mo. LIBOR + .04%, 0.65%, due 06/20/15 | 2,744,577 | |||||||||||||
8,913,016 | National Collegiate Student Loan Trust, Series 06-1, Class A2, 1 mo. LIBOR + .14%, 0.41%, due 08/25/23 | 8,244,629 | |||||||||||||
5,801,086 | National Collegiate Student Loan Trust, Series 06-A, Class A1, 144A, 1 mo. LIBOR + .08%, 0.35%, due 08/26/19 | 5,641,556 | |||||||||||||
9,600,000 | Nelnet Student Loan Trust, Series 05-2, Class A4, 3 mo. LIBOR + .08%, 0.69%, due 12/23/19 | 9,368,064 | |||||||||||||
15,574,593 | SLM Student Loan Trust, Series 05-1, Class A2, 3 mo. LIBOR + .08%, 0.58%, due 04/27/20 | 15,133,505 | |||||||||||||
24,600,000 | SLM Student Loan Trust, Series 05-3, Class A4, 3 mo. LIBOR + .07%, 0.57%, due 04/27/20 | 24,046,500 | |||||||||||||
25,300,000 | SLM Student Loan Trust, Series 07-2, Class A2, 3 mo. LIBOR, 0.50%, due 07/25/17 | 24,762,375 | |||||||||||||
5,500,000 | SLM Student Loan Trust, Series 07-6, Class A2, 3 mo. LIBOR + .25%, 0.75%, due 01/25/19 | 5,390,000 | |||||||||||||
12,128,418 | SLM Student Loan Trust, Series 07-A, Class A1, 3 mo. LIBOR + .03%, 0.66%, due 09/15/22 | 11,036,861 | |||||||||||||
10,800,000 | SLM Student Loan Trust, Series 08-6, Class A3, 1 mo. LIBOR + .75%, 1.25%, due 01/25/19 | 10,540,125 | |||||||||||||
Total Student Loans | 161,515,146 | ||||||||||||||
Time Share — 0.1% | |||||||||||||||
4,377,655 | Sierra Receivables Funding Co., Series 08-1A, Class A2, 144A, 1 mo. LIBOR + 4.00%, 4.27%, due 02/20/20 | 4,279,157 | |||||||||||||
Total Asset-Backed Securities | 3,373,546,258 | ||||||||||||||
U.S. Government — 0.6% | |||||||||||||||
22,554,226 | U.S. Treasury Inflation Indexed Bond, 0.88%, due 04/15/10 (c) (d) | 22,518,996 |
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, 2009 (Unaudited)
Par Value ($) / Shares | Description | Value ($) | |||||||||||||
U.S. Government Agency — 1.3% | |||||||||||||||
10,578,750 | Agency for International Development Floater (Support of India), 3 mo. LIBOR + .10%, 0.58%, due 02/01/27 (b) | 8,965,920 | |||||||||||||
13,125,000 | Agency for International Development Floater (Support of Morocco), 6 mo. LIBOR + .15%, 0.95%, due 10/29/26 (b) | 11,645,059 | |||||||||||||
15,306,250 | Agency for International Development Floater (Support of Morocco), 6 mo. LIBOR - .02%, 0.78%, due 02/01/25 (b) | 13,533,390 | |||||||||||||
633,416 | Agency for International Development Floater (Support of Peru), Series A, 6 mo. U.S. Treasury Bill + .35%, 0.61%, due 05/01/14 (b) | 607,039 | |||||||||||||
9,870,000 | Agency for International Development Floater (Support of Tunisia), 6 mo. LIBOR, 0.80%, due 07/01/23 (b) | 8,847,038 | |||||||||||||
Total U.S. Government Agency | 43,598,446 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $4,253,966,066) | 3,439,663,700 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.8% | |||||||||||||||
Money Market Funds — 0.8% | |||||||||||||||
27,428,743 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 27,428,743 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $27,428,743) | 27,428,743 | ||||||||||||||
TOTAL INVESTMENTS — 100.8% (Cost $4,281,394,809) | 3,467,092,443 | ||||||||||||||
Other Assets and Liabilities (net) — (0.8%) | (27,944,855 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 3,439,147,588 |
See accompanying notes to the financial statements.
21
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales # | |||||||||||||||||||
10/06/09 | EUR | 20,000,000 | $ | 28,672,908 | $ | 117,892 |
# Fund sells foreign currency; buys USD.
Reverse Repurchase Agreements
Face Value | Description | Market Value | |||||||||||||
USD | 20,734,000 | JP Morgan Chase Bank, 1.75%, dated 07/09/09, to be repurchased on demand at face value plus accrued interest. | $ | (20,788,427 | ) | ||||||||||
$ | (20,788,427 | ) |
Average balance outstanding | $ | (20,734,000 | ) | ||||
Average interest rate | 1.77 | % | |||||
Maximum balance outstanding | $ | (20,734,000 | ) | ||||
Average shares outstanding | 214,212,753 | ||||||
Average balance per share outstanding | $ | (0.10 | ) | ||||
Days outstanding | 54 |
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund has entered into reverse repurchase agreements.
See accompanying notes to the financial statements.
22
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
60,000,000 | USD | 9/20/2010 | Morgan Stanley | Receive | 0.40 | % | 4.08 | % | Eagle | 60,000,000 | USD | $ | (2,331,599 | ) | |||||||||||||||||||||||||||||
Creek | |||||||||||||||||||||||||||||||||||||||||||
CDO | |||||||||||||||||||||||||||||||||||||||||||
31,000,000 | USD | 3/20/2013 | Morgan Stanley | Receive | 0.25 | % | 6.22 | % | MS Synthetic 2006-1 | 31,000,000 | USD | (5,939,228 | ) | ||||||||||||||||||||||||||||||
$ | (8,270,827 | ) | |||||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
^ Receive - Fund receives premium and sells credit protection.
(Pay) - Fund pays premium and buys credit protection.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2009, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider (i.e. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to make as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
As of August 31, 2009, for the swap contracts held, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
23
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (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.
CapMAC - Insured as to the payment of principal and interest by Capital Markets Assurance Corporation.
CDO - Collateralized Debt Obligation
CMBS - Commercial Mortgage Backed Security
EUR LIBOR - London Interbank Offered Rate denominated in Euros.
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.
RMBS - Residential Mortgage Backed Security
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at August 31, 2009, which are subject to change based on the terms of the security.
(a) All or a portion of this security has been pledged to cover collateral requirements on reverse repurchase agreements (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.
(c) All or a portion of this security has been pledged to cover collateral requirements 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.
Currency Abbreviations:
EUR - Euro
USD - United States Dollar
See accompanying notes to the financial statements.
24
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $4,281,394,809) (Note 2) | $ | 3,467,092,443 | |||||
Receivable for investments sold | 159,871 | ||||||
Interest receivable | 3,665,088 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 117,892 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 55,739 | ||||||
Total assets | 3,471,091,033 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 1,386 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 7,864 | ||||||
Payable for open swap contracts (Note 2) | 8,270,827 | ||||||
Payable for reverse repurchase agreements (Note 2) | 20,788,427 | ||||||
Miscellaneous payable | 2,537,983 | ||||||
Accrued expenses | 336,958 | ||||||
Total liabilities | 31,943,445 | ||||||
Net assets | $ | 3,439,147,588 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 4,377,171,548 | |||||
Accumulated undistributed net investment income | 3,486,813 | ||||||
Accumulated net realized loss | (119,055,492 | ) | |||||
Net unrealized depreciation | (822,455,281 | ) | |||||
$ | 3,439,147,588 | ||||||
Net assets | $ | 3,439,147,588 | |||||
Shares outstanding | 214,272,088 | ||||||
Net asset value per share | $ | 16.05 |
See accompanying notes to the financial statements.
25
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Interest | $ | 32,134,668 | |||||
Dividends | 177,904 | ||||||
Total investment income | 32,312,572 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 213,532 | ||||||
Legal fees | 144,072 | ||||||
Interest expense (Note 2) | 54,427 | ||||||
Audit and tax fees | 40,664 | ||||||
Trustees fees and related expenses (Note 3) | 37,372 | ||||||
Miscellaneous | 17,295 | ||||||
Total expenses | 507,362 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (354,568 | ) | |||||
Expense reductions (Note 2) | (116 | ) | |||||
Net expenses | 152,678 | ||||||
Net investment income (loss) | 32,159,894 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (8,413,160 | ) | |||||
Closed swap contracts | 160,513 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (1,321,381 | ) | |||||
Net realized gain (loss) | (9,574,028 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 479,385,690 | ||||||
Open swap contracts | 21,462,277 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (1,996,218 | ) | |||||
Net unrealized gain (loss) | 498,851,749 | ||||||
Net realized and unrealized gain (loss) | 489,277,721 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 521,437,615 |
See accompanying notes to the financial statements.
26
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 32,159,894 | $ | 208,565,178 | |||||||
Net realized gain (loss) | (9,574,028 | ) | (331,967,782 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 498,851,749 | (823,404,562 | ) | ||||||||
Net increase (decrease) in net assets from operations | 521,437,615 | (946,807,166 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | (27,899,086 | ) | (266,488,025 | ) | |||||||
Return of capital | (718,100,918 | ) | (538,644,733 | ) | |||||||
(746,000,004 | ) | (805,132,758 | ) | ||||||||
Net share transactions (Note 7): | (13,037,815 | ) | (2,247,496,453 | ) | |||||||
Redemption fees (Notes 2 and 7): | — | 4,769,406 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (13,037,815 | ) | (2,242,727,047 | ) | |||||||
Total increase (decrease) in net assets | (237,600,204 | ) | (3,994,666,971 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 3,676,747,792 | 7,671,414,763 | |||||||||
End of period (including accumulated undistributed net investment income of $3,486,813 and distributions in excess of net investment income of $773,995, respectively) | $ | 3,439,147,588 | $ | 3,676,747,792 |
See accompanying notes to the financial statements.
27
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Financial Highlights
(For a share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 17.10 | $ | 24.03 | $ | 25.66 | $ | 25.60 | $ | 25.33 | $ | 25.18 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.15 | 0.76 | 1.38 | 1.43 | 1.01 | 0.59 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.28 | (4.41 | ) | (1.64 | ) | 0.00 | (a) | (0.03 | ) | (0.09 | ) | ||||||||||||||||
Total from investment operations | 2.43 | (3.65 | ) | (0.26 | ) | 1.43 | 0.98 | 0.50 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.13 | ) | (1.06 | ) | (1.37 | ) | (1.37 | ) | (0.71 | ) | (0.34 | ) | |||||||||||||||
From net realized gains | — | — | — | — | — | (0.01 | ) | ||||||||||||||||||||
From return of capital | (3.35 | ) | (2.22 | ) | — | — | — | — | |||||||||||||||||||
Total distributions | (3.48 | ) | (3.28 | ) | (1.37 | ) | (1.37 | ) | (0.71 | ) | (0.35 | ) | |||||||||||||||
Net asset value, end of period | $ | 16.05 | $ | 17.10 | $ | 24.03 | $ | 25.66 | $ | 25.60 | $ | 25.33 | |||||||||||||||
Total Return(b) | 16.10 | %** | (15.97 | )% | (1.14 | )% | 5.68 | % | 3.89 | % | 2.01 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 3,439,148 | $ | 3,676,748 | $ | 7,671,415 | $ | 6,603,600 | $ | 4,480,312 | $ | 3,483,889 | |||||||||||||||
Net operating expenses to average daily net assets | 0.01 | %(d)* | 0.00 | %(c)(d) | 0.00 | %(c)(d) | 0.00 | %(c) | 0.00 | %(c) | 0.00 | %(c) | |||||||||||||||
Interest expense to average daily net assets(e) | 0.00 | %(f)* | — | — | 0.01 | % | 0.02 | % | — | ||||||||||||||||||
Total net expenses to average daily net assets | 0.01 | %(d)* | 0.00 | %(d)(g) | 0.00 | %(d)(g) | 0.01 | % | 0.02 | % | 0.00 | %(g) | |||||||||||||||
Net investment income to average daily net assets | 1.82 | %* | 3.46 | % | 5.41 | % | 5.50 | % | 3.96 | % | 2.31 | % | |||||||||||||||
Portfolio turnover rate | 0.00 | %** | 16 | % | 27 | % | 68 | % | 45 | % | 34 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.01 | % | 0.02 | % | 0.02 | % | 0.02 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (h) | $ | 0.02 | — | — | — | — |
(a) Net realized and unrealized gain (loss) 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 and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) Net operating expenses were less than 0.01% to average daily net assets.
(d) The net expense ratio does not include the effect of expense reductions.
(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 was less than 0.01% to average daily net assets.
(g) Total net expenses were less than 0.01% to average daily net assets.
(h) There were no redemption fees during the period.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
28
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Short-Duration Collateral Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 comparable to that of its benchmark, the J.P. Morgan U.S. 3 Month Cash Index. The Fund primarily invests in 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. In addition, the Fund may invest in government securities, corporate debt securities, money market instruments and commercial paper, and enter into credit default swaps, reverse repurchase agreements, and repurchase agreements. The Fund also may use exchange-traded and over-the-counter ("OTC") derivatives. The Fund also may invest in unaffiliated money market funds. Because of the deterioration in credit markets that became acute in 2008, the Fund currently holds and may continue to hold material positions of below investment g rade securities.
Since October of 2008, the Fund has declared and paid dividends when it has acquired a meaningful cash position rather than reinvesting that cash in portfolio securities. The Fund intends to continue this practice.
From prior to March 1, 2009 through July 12, 2009, the Fund had a policy to effect redemptions of its shares in-kind above de minimis levels. The Fund had established de minimis amounts below which redemptions would be honored for cash. Beginning July 13, 2009, the Fund expected to pay redemption requests with cash (less a redemption fee).
As of August 31, 2009, shares of the Fund were not publicly offered and were principally available only to other series of the Trust and certain accredited investors. On July 17, 2009, the Fund filed an initial registration statement to seek to register its shares under the Securities Act of 1933. As of August 31, 2009, the Fund was closed to subscriptions.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing
29
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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. The accounting records of the Fund are maintained in U.S. dollars.
The "distributions to shareholders from return of capital" disclosed in the Statement of Changes in Net Assets and Financial Highlights are estimates as of August 31, 2009. Distributions to shareholders from return of capital are subject to change and will not be finalized until February 28, 2010, the Fund's upcoming fiscal year-end. In early 2010, applicable shareholders will receive Form 1099-DIV that will indicate the appropriate tax character of all distributions paid by the Fund in 2009.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty.
Typically the Fund values debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by the Fund, those alternative sources would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund. As of August 31, 200 9, the total value of securities held that were fair valued or for which no alternative pricing source was available represented 19.56% of the net assets of the Fund.
30
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund also utilizes third party valuation services (which use industry standard models and inputs from pricing vendors) to value credit default swaps.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Asset-Backed Securities | $ | — | $ | 620,191,125 | $ | 2,753,355,133 | $ | 3,373,546,258 | |||||||||||
U.S. Government | — | 22,518,996 | — | 22,518,996 | |||||||||||||||
U.S. Government Agency | — | — | 43,598,446 | 43,598,446 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 642,710,121 | 2,796,953,579 | 3,439,663,700 | |||||||||||||||
Short-Term Investments | — | 27,428,743 | — | 27,428,743 | |||||||||||||||
TOTAL SHORT-TERM INVESTMENTS | — | 27,428,743 | — | 27,428,743 | |||||||||||||||
Total Investments | — | 670,138,864 | 2,796,953,579 | 3,467,092,443 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | — | 117,892 | — | 117,892 | |||||||||||||||
Total | $ | — | $ | 670,256,756 | $ | 2,796,953,579 | $ | 3,467,210,335 |
31
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements | $ | — | $ | — | $ | (8,270,827 | ) | $ | (8,270,827 | ) | |||||||||
Total | $ | — | $ | — | $ | (8,270,827 | ) | $ | (8,270,827 | ) |
The aggregate net values of the Fund's direct investments in securities and other financial instruments using Level 3 inputs were 81.33% and (0.24%) of total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||
Asset-Backed Securities | $ | 3,528,379,547 | $ | (630,674,625 | ) | $ | 2,166,119 | $ | (7,329,703 | ) | $ | 481,004,920 | $ | (620,191,125 | ) | $ | 2,753,355,133 | ||||||||||||||
U.S. Government Agency | 47,442,969 | (1,841,714 | ) | 16,820 | (2,308 | ) | (2,017,321 | ) | — | 43,598,446 | |||||||||||||||||||||
Swaps | (29,733,104 | ) | (160,514 | ) | — | 160,514 | 21,462,277 | — | (8,270,827 | ) | |||||||||||||||||||||
Total | $ | 3,546,089,412 | $ | (632,676,853 | ) | $ | 2,182,939 | $ | (7,171,497 | ) | $ | 500,449,876 | $ | (620,191,125 | ) | $ | 2,788,682,752 |
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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
32
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. 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. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price
33
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
34
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price
35
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at a later date at a fixed price. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which can cause the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. As of August 31, 2009, the Fund had entered into reverse repurchase agreements, plus accrued interest, amounting to $20,788,427, selling securities with a market value, plus accrued interest, of $25,328,566. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated
36
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, if any, at least annually. The Fund is permitted to, and will from time to time, declare and pay distributions from net investment income, if any, more frequently (e.g. monthly). 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital and currency losses of $39,640,884 and $28,599, respectively.
37
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2011 | $ | (29,576,884 | ) | ||||
2/29/2012 | (142,552 | ) | |||||
2/28/2014 | (614,650 | ) | |||||
2/28/2015 | (5,952,458 | ) | |||||
2/29/2016 | (1,158,601 | ) | |||||
2/28/2017 | (32,360,541 | ) | |||||
Total | $ | (69,805,686 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 4,280,000,874 | $ | 9,662,894 | $ | (822,571,325 | ) | $ | (812,908,431 | ) |
For the period ended August 31, 2009, the Fund had net realized losses attributed to redemption in-kind transactions of $6,379,072.
The Fund is subject to the provisions of Financial Accounting Standards Board Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon
38
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds.
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
From prior to March 1, 2009 through August 2, 2009, the fee on cash redemptions was 2.00% of the amount redeemed. From August 3, 2009 through August 31, 2009 the fee on cash redemptions was 1.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relati ng to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. Many of these risks are more pronounced as a result of
39
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
current global economic conditions that began to unfold in 2008.This summary is not intended to include every potential risk of investing in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. The Fund invests in asset-backed securities that may be less liquid than the Fund's benchmark. The Fund may be required to sell certain less liquid securities at distressed prices or meet redemption requests in-kind. Recent changes in credit markets have reduced the liquidity of all types of fixed income securities, including in particular the asset-backed securities held by the Fund.
• Focused Investment Risk — Focusing investments in countries, regions, or sectors with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for the Fund because of its exposure to asset-backed securities secured by different types of consumer debt (e.g., credit-card receivables, automobile loans, and home equity loans).
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to an OTC derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security, will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. The risk of counterparty default is particularly acute in economic environments where financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions.
Other principal risks of an investment in the Fund include Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Market Disruption and Geopolitical Risk (the risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that sh areholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified.
40
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund invests in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of underlying assets or other support available to prod uce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities generally. These events reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not continue or that they will not deteriorate further. Also, government actions and proposals affecting the terms of underl ying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
41
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Among other trading agreements, the Fund is party to International Swaps and Derivatives Association, Inc. Master Agreements ("ISDA Agreements") with select counterparties that generally govern over-the-counter derivative transactions entered into by the Fund. The ISDA Master Agreements typically include representations and warranties as well as contractual terms related to collateral, events of default, termination events, and other provisions. Termination events include the decline in the net assets of the Fund below a certain level over a specified period of time and entitle a counterparty to elect to terminate early with respect to some or all the transactions under the ISDA Agreement with that counterparty. Such an election by one or more of the counterparties could have a material adverse impact on the Fund's operations. Due to declines in the net assets of the Fund prior to August 31, 2009, one or more counterparties are entitled to terminate early but none has taken such action.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps (including credit default swaps) or other derivatives on an index, a single security or a basket of securities to gain investment exposures. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. For example, the Fund may use credit default swaps to take an active short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may attempt to alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument but adjust the Fund's interest rate exposure through
42
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed vs. variable and shorter duration vs. longer duration. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of
43
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 117,892 | — | — | — | 117,892 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | 117,892 | $ | — | $ | — | $ | — | $ | 117,892 |
44
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | (8,270,827 | ) | — | — | (8,270,827 | ) | |||||||||||||||||||
Total | $ | — | $ | — | $ | (8,270,827 | ) | $ | — | $ | — | $ | (8,270,827 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | — | — | 160,513 | — | — | 160,513 | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | (1,334,384 | ) | — | — | — | (1,334,384 | ) | |||||||||||||||||||
Total | $ | — | $ | (1,334,384 | ) | $ | 160,513 | $ | — | $ | — | $ | (1,173,871 | ) |
45
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | — | — | 21,462,277 | — | — | 21,462,277 | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | (1,996,281 | ) | — | — | — | (1,996,281 | ) | |||||||||||||||||||
Total | $ | — | $ | (1,996,281 | ) | $ | 21,462,277 | $ | — | $ | — | $ | 19,465,996 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Forwards | Swaps | ||||||||||
Average notional amount outstanding | $ | 27,393,959 | $ | 91,000,000 | |||||||
Highest notional amount outstanding | 28,672,908 | 91,000,000 | |||||||||
Lowest notional amount outstanding | 25,353,827 | 91,000,000 |
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 expenses incurred by the Fund through at least June 30, 2010 (excluding fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraor dinary, non-recurring and certain other unusual expenses (including taxes)).
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $29,828 and $17,295, respectively. The compensation and expenses of
46
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $1,386 and $614,460,755 respectively. Proceeds from sales of securities for in-kind transactions for the period ended August 31, 2009 were $18,056,963.
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 67.24% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. Each of the shareholders are other funds of the Trust.
As of August 31, 2009, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 99.93% of the Fund's shares were held by accounts for which the Manager had investment discretion.
47
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||
Shares sold | 314,159 | $ | 5,050,000 | 89,796,548 | $ | 2,127,502,850 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,229 | 19,699 | 1,977,373 | 46,978,867 | |||||||||||||||
Shares repurchased | (1,119,821 | ) | (18,107,514 | ) | (195,999,454 | ) | (4,421,978,170 | ) | |||||||||||
Redemption fees | — | — | — | 4,769,406 | |||||||||||||||
Net increase (decrease) | (804,433 | ) | $ | (13,037,815 | ) | (104,225,533 | ) | $ | (2,242,727,047 | ) |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. On September 14, 2009, the Fund's redemption fee was eliminated.
48
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one- and five-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 so-called "fallout benefits" to the Manager, such as the possible reputational value derived from serving as
49
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
50
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including redemption fees; 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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.01 | % | $ | 1,000.00 | $ | 1,161.00 | $ | 0.05 | |||||||||||
2) Hypothetical | 0.01 | % | $ | 1,000.00 | $ | 1,025.16 | $ | 0.05 |
* Expenses are calculated using the annualized expense ratio (including interest expense) for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
51
GMO Special Situations Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
GMO Special Situations Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Short-Term Investments | 76.5 | % | |||||
Debt Obligations | 51.3 | ||||||
Swaps | 4.3 | ||||||
Common Stocks | 0.6 | ||||||
Reverse Repurchase Agreements | (31.8 | ) | |||||
Other | (0.9 | ) | |||||
100.0 | % |
1
GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
COMMON STOCKS — 0.6% | |||||||||||||||
China — 0.6% | |||||||||||||||
42,000 | China Mobile Ltd Sponsored ADR | 2,067,240 | |||||||||||||
TOTAL COMMON STOCKS (COST $2,239,407) | 2,067,240 | ||||||||||||||
DEBT OBLIGATIONS — 51.3% | |||||||||||||||
Foreign Government Obligations — 11.5% | |||||||||||||||
JPY | 778,875,000 | Japanese Government CPI Linked Bond, 0.80%, due 12/10/15 (a) | 7,688,304 | ||||||||||||
JPY | 785,910,000 | Japanese Government CPI Linked Bond, 0.80%, due 03/10/16 (a) | 7,685,955 | ||||||||||||
JPY | 782,439,000 | Japanese Government CPI Linked Bond, 1.00%, due 06/10/16 (a) | 7,706,667 | ||||||||||||
JPY | 1,523,040,000 | Japanese Government CPI Linked Bond, 1.10%, due 09/10/16 (a) | 15,132,192 | ||||||||||||
Total Foreign Government Obligations | 38,213,118 | ||||||||||||||
U.S. Government — 39.8% | |||||||||||||||
22,195,680 | U.S. Treasury Inflation Indexed Bond, 0.88%, due 04/15/10 (a) | 22,161,010 | |||||||||||||
100,000,000 | U.S. Treasury Principal Strip Bond, due 11/15/22 (b) | 56,943,300 | |||||||||||||
100,000,000 | U.S. Treasury Strip Coupon Bond, due 11/15/23 (b) | 53,738,100 | |||||||||||||
Total U.S. Government | 132,842,410 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $165,589,416) | 171,055,528 | ||||||||||||||
SHORT-TERM INVESTMENTS — 76.5% | |||||||||||||||
Money Market Funds — 6.4% | |||||||||||||||
21,484,221 | State Street Institutional Treasury Money Market Fund-Institutional Class | 21,484,221 | |||||||||||||
Other Short-Term Investments — 70.1% | |||||||||||||||
234,000,000 | U.S. Treasury Bill, 1.01%, due 09/24/09 (c) | 233,845,453 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $255,329,674) | 255,329,674 | ||||||||||||||
TOTAL INVESTMENTS — 128.4% (Cost $423,158,497) | 428,452,442 | ||||||||||||||
Other Assets and Liabilities (net) — (28.4%) | (94,718,881 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 333,733,561 |
See accompanying notes to the financial statements.
2
GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Reverse Repurchase Agreements
Face Value | Description | Market Value | |||||||||
USD | 50,715,000 | Goldman Sachs, 0.23%, dated 08/13/09, to be repurchased on demand at face value plus accrued interest. | $ | (50,721,156 | ) | ||||||
USD | 55,375,000 | Goldman Sachs, 0.26%, dated 08/20/09, to be repurchased on demand at face value plus accrued interest. | (55,379,799 | ) | |||||||
$ | (106,100,955 | ) |
Average balance outstanding | $ | (85,688,684 | ) | ||||
Average interest rate | 0.25 | % | |||||
Maximum balance outstanding | $ | (106,090,000 | ) | ||||
Average shares outstanding | 12,512,185 | ||||||
Average balance per share outstanding | $ | (6.85 | ) | ||||
Days outstanding | 19 |
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund has entered into reverse repurchase agreements.
Swap Agreements
Forward Starting Dividend Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
3,910,000 | EUR | 12/19/2014 | BNP Paribas | 50,000 EUR for | 50,000 EUR for | ||||||||||||||||||||||
every 1 dividend | every 1 dividend | ||||||||||||||||||||||||||
index point decrease | index point increase | ||||||||||||||||||||||||||
in the actual | in the actual | ||||||||||||||||||||||||||
dividends from the | dividends from the | ||||||||||||||||||||||||||
Fixed Strike | Fixed Strike | $ | 1,012,515 | ||||||||||||||||||||||||
1,862,500 | EUR | 12/19/2014 | Barclays | 25,000 EUR for every 1 dividend index point decrease in the actual dividends from the Fixed Strike | 25,000 EUR for every 1 dividend index point increase in the actual dividends from the Fixed Strike | 620,474 |
See accompanying notes to the financial statements.
3
GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Forward Starting Dividend Swaps — continued
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
3,787,500 | EUR | 12/19/2014 | Barclays | 50,000 EUR for | 50,000 EUR for | ||||||||||||||||||||||
every 1 dividend | every 1 dividend | ||||||||||||||||||||||||||
index point decrease | index point increase | ||||||||||||||||||||||||||
in the actual | in the actual | ||||||||||||||||||||||||||
dividends from the | dividends from the | ||||||||||||||||||||||||||
Fixed Strike | Fixed Strike | $ | 1,163,775 | ||||||||||||||||||||||||
1,987,500 | EUR | 12/18/2015 | Barclays | 25,000 EUR for every 1 dividend index point decrease in the actual dividends from the Fixed Strike | 25,000 EUR for every 1 dividend index point increase in the actual dividends from the Fixed Strike | 510,173 | |||||||||||||||||||||
2,020,000 | EUR | 12/16/2016 | Barclays | 25,000 EUR for every 1 dividend index point decrease in the actual dividends from the Fixed Strike | 25,000 EUR for every 1 dividend index point increase in the actual dividends from the Fixed Strike | 455,148 | |||||||||||||||||||||
2,072,500 | EUR | 12/21/2018 | Barclays | 25,000 EUR for every 1 dividend index point decrease in the actual dividends from the Fixed Strike | 25,000 EUR for every 1 dividend index point increase in the actual dividends from the Fixed Strike | 456,543 | |||||||||||||||||||||
2,065,000 | EUR | 12/21/2018 | Barclays | 25,000 EUR for every 1 dividend index point decrease in the actual dividends from the Fixed Strike | 25,000 EUR for every 1 dividend index point increase in the actual dividends from the Fixed Strike | 464,369 | |||||||||||||||||||||
2,062,500 | EUR | 12/21/2018 | BNP Paribas | 25,000 EUR for every 1 dividend index point decrease in the actual dividends from the Fixed Strike | 25,000 EUR for every 1 dividend index point increase in the actual dividends from the Fixed Strike | 466,978 | |||||||||||||||||||||
$ | 5,149,975 | ||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
See accompanying notes to the financial statements.
4
GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
100,000,000 | USD | 11/15/2022 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | $ | 3,554,025 | ||||||||||||||||||||||
100,000,000 | USD | 11/15/2023 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | 4,655,749 | |||||||||||||||||||||||
$ | 8,209,774 | ||||||||||||||||||||||||||||||
Accretion since inception for zero coupon interest rate swaps | $ | 2,240,238 |
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
32,211,304 | USD | 8/20/2010 | BNP Paribas | MSCI Index (a) | 3 month | ||||||||||||||||||||||
LIBOR - 0.35% | $ | 972,965 | |||||||||||||||||||||||||
$ | 972,965 | ||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
As of August 31, 2009, for the swap contracts held, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
ADR - American Depositary Receipt
CPI - Consumer Price Index
LIBOR - London Interbank Offered Rate
(a) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic.
(b) All or a portion of this security has been segregated to cover collateral requirements on reverse repurchase agreements (Note 2).
(c) Rate shown represents yield-to-maturity.
See accompanying notes to the financial statements.
5
GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Currency Abbreviations:
EUR - Euro
JPY - Japanese Yen
USD - United States Dollar
See accompanying notes to the financial statements.
6
GMO Special Situations Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $423,158,497) (Note 2) | $ | 428,452,442 | |||||
Foreign currency, at value (cost $195,911) (Note 2) | 200,424 | ||||||
Receivable for Fund shares sold | 72,943 | ||||||
Interest receivable | 227,591 | ||||||
Interest receivable for open swap contracts | 640,220 | ||||||
Receivable for open swap contracts (Note 2) | 14,332,714 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 9,548 | ||||||
Total assets | 443,935,882 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 3,900,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 104,316 | ||||||
Shareholder service fee | 17,356 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 749 | ||||||
Payable for reverse repurchase agreements (Note 2) | 106,100,955 | ||||||
Accrued expenses | 78,945 | ||||||
Total liabilities | 110,202,321 | ||||||
Net assets | $ | 333,733,561 | |||||
Net assets attributable to: | |||||||
Class III shares | $ | 19,663,841 | |||||
Class VI shares | $ | 314,069,720 | |||||
Shares outstanding: | |||||||
Class III | 730,317 | ||||||
Class VI | 11,639,697 | ||||||
Net asset value per share: | |||||||
Class III | $ | 26.93 | |||||
Class VI | $ | 26.98 |
See accompanying notes to the financial statements.
7
GMO Special Situations Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Interest | $ | 2,505,967 | |||||
Dividends | 2,796 | ||||||
Total investment income | 2,508,763 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 591,438 | ||||||
Shareholder service fee – Class III (Note 3) | 15,090 | ||||||
Shareholder service fee – Class VI (Note 3) | 82,383 | ||||||
Audit and tax fees | 36,984 | ||||||
Custodian, fund accounting agent and transfer agent fees | 20,700 | ||||||
Interest expense (Note 2) | 10,955 | ||||||
Legal fees | 8,740 | ||||||
Trustees fees and related expenses (Note 3) | 3,459 | ||||||
Miscellaneous | 2,760 | ||||||
Total expenses | 772,509 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (65,228 | ) | |||||
Net expenses | 707,281 | ||||||
Net investment income (loss) | 1,801,482 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Closed swap contracts | (6,701,794 | ) | |||||
Written options | 338,390 | ||||||
Net realized gain (loss) | (6,363,404 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 6,353,449 | ||||||
Open swap contracts | 15,215,870 | ||||||
Written options | 564,085 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 16,477 | ||||||
Net unrealized gain (loss) | 22,149,881 | ||||||
Net realized and unrealized gain (loss) | 15,786,477 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 17,587,959 |
See accompanying notes to the financial statements.
8
GMO Special Situations Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,801,482 | $ | 5,920,536 | |||||||
Net realized gain (loss) | (6,363,404 | ) | 95,010,697 | ||||||||
Change in net unrealized appreciation (depreciation) | 22,149,881 | (8,057,488 | ) | ||||||||
Net increase (decrease) in net assets from operations | 17,587,959 | 92,873,745 | |||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (1,828,967 | ) | (77,529,015 | ) | |||||||
Class VI | (28,539,408 | ) | (350,165,495 | ) | |||||||
Increase (decrease) in net assets resulting from net share transactions | (30,368,375 | ) | (427,694,510 | ) | |||||||
Total increase (decrease) in net assets | (12,780,416 | ) | (334,820,765 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 346,513,977 | 681,334,742 | |||||||||
End of period | $ | 333,733,561 | $ | 346,513,977 |
See accompanying notes to the financial statements.
9
GMO Special Situations Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||
(Unaudited) | 2009 | 2008(a) | |||||||||||||
Net asset value, beginning of period | $ | 25.47 | $ | 21.32 | $ | 20.09 | |||||||||
Income (loss) from investment operations: | |||||||||||||||
Net investment income (loss)† | 0.15 | 0.26 | 0.31 | ||||||||||||
Net realized and unrealized gain (loss) | 1.31 | 3.89 | 0.92 | ||||||||||||
Total from investment operations | 1.46 | 4.15 | 1.23 | ||||||||||||
Net asset value, end of period | $ | 26.93 | $ | 25.47 | $ | 21.32 | |||||||||
Total Return(b) | 5.73 | %** | 19.47 | % | 6.12 | %** | |||||||||
Ratios/Supplemental Data: | |||||||||||||||
Net assets, end of period (000's) | $ | 19,664 | $ | 20,366 | $ | 88,204 | |||||||||
Net operating expenses to average daily net assets | 0.52 | %* | 0.52 | % | 0.53 | %* | |||||||||
Interest expense to average daily net assets | 0.01 | %* | — | — | |||||||||||
Total net expenses to average daily net assets | 0.53 | %* | 0.52 | % | 0.53 | %* | |||||||||
Net investment income to average daily net assets | 1.14 | %* | 1.20 | % | 2.71 | %* | |||||||||
Portfolio turnover rate | 0 | %** | 62 | % | 0 | %††** | |||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* | 0.03 | % | 0.05 | %* |
(a) Period from August 13, 2007 (commencement of operations) through February 29, 2008.
(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 rate of the Fund for the period from July 31, 2007 (commencement of operations) through February 29, 2008.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
10
GMO Special Situations Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||
(Unaudited) | 2009 | 2008(a) | |||||||||||||
Net asset value, beginning of period | $ | 25.51 | $ | 21.33 | $ | 20.00 | |||||||||
Income (loss) from investment operations: | |||||||||||||||
Net investment income (loss)† | 0.15 | 0.23 | 0.34 | ||||||||||||
Net realized and unrealized gain (loss) | 1.32 | 3.95 | 0.99 | ||||||||||||
Total from investment operations | 1.47 | 4.18 | 1.33 | ||||||||||||
Net asset value, end of period | $ | 26.98 | $ | 25.51 | $ | 21.33 | |||||||||
Total Return(b) | 5.76 | %** | 19.60 | % | 6.65 | %** | |||||||||
Ratios/Supplemental Data: | |||||||||||||||
Net assets, end of period (000's) | $ | 314,070 | $ | 326,148 | $ | 593,131 | |||||||||
Net operating expenses to average daily net assets | 0.43 | %* | 0.43 | % | 0.43 | %* | |||||||||
Interest expense to average daily net assets | 0.01 | %* | — | — | |||||||||||
Total net expenses to average daily net assets | 0.44 | %* | 0.43 | % | 0.43 | %* | |||||||||
Net investment income to average daily net assets | 1.13 | %* | 1.03 | % | 2.84 | %* | |||||||||
Portfolio turnover rate | 0 | %** | 62 | % | 0 | %††** | |||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* | 0.03 | % | 0.05 | %* |
(a) Period from July 31, 2007 (commencement of operations) through February 29, 2008.
(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 rate of the Fund for the period from July 31, 2007 (commencement of operations) through February 29, 2008.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
11
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Special Situations Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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's investment objectives are capital appreciation and capital preservation. The Manager plans to pursue the Fund's investment objectives by implementing investment strategies that complement long-only investments in global equities and fixed income instruments. The Fund may have long or short exposure to foreign and U.S. equity securities (including both growth and value style equities and equities of any market capitalization), foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), currencies, and, from time to time, other alternative asset classes (e.g., instruments that seek exposure to or hedge risks of market volatility). The Fund is not restricted in its exposure to any particular asset class, and at times may be substantially exposed (long or short) to a single asset class (e.g., equity securities or fixed income securities). In addit ion, the Fund is not restricted in its exposure (long or short) to any particular market. The Fund may have substantial exposure (long or short) to a particular country or type of country (e.g., emerging countries). The Fund could be subject to material losses from a single investment. In pursuing its investment objectives, the Fund is permitted to use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including reverse repurchase agreements, options, futures, swap contracts, swaptions and foreign currency derivative transactions. The Fund may elect to make some or all of its investments through one or more wholly-owned, non-U.S. subsidiaries. GMO may serve as the investment manager to these companies but will not receive any additional management or other fees for such services. 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 (i.e., the Fund does not seek "relative" return). The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. If the Fund takes temporary defensive positions, it may not achieve its investment objective.
As of August 31, 2009, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
As of August 31, 2009, shares of the Fund were not publicly offered and were principally available only to other series of the Trust and certain accredited investors.
The Fund currently limits subscriptions due to capacity considerations.
12
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant.
13
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
China | $ | 2,067,240 | $ | — | $ | — | $ | 2,067,240 | |||||||||||
TOTAL COMMON STOCKS | 2,067,240 | — | — | 2,067,240 | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Foreign Government Obligations | — | 38,213,118 | — | 38,213,118 | |||||||||||||||
U.S. Government | — | 132,842,410 | — | 132,842,410 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 171,055,528 | — | 171,055,528 | |||||||||||||||
Short-Term Investments | — | 255,329,674 | — | 255,329,674 | |||||||||||||||
Total Investments | 2,067,240 | 426,385,202 | — | 428,452,442 | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements | — | 14,332,714 | — | 14,332,714 | |||||||||||||||
Total | $ | 2,067,240 | $ | 440,717,916 | $ | — | $ | 442,785,156 |
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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.
14
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
15
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
For the period ended August 31, 2009, investment activity in options contracts written by the Fund was as follows:
Puts | Calls | ||||||||||||||||||||||||||
Principal Amount of Contracts | Number of Contracts | Premiums | Principal Amount of Contracts | Number of Contracts | Premiums | ||||||||||||||||||||||
Outstanding, beginning of period | $ | — | (390 | ) | $ | (4,152,460 | ) | $ | — | — | $ | — | |||||||||||||||
Options written | — | — | — | — | — | — | |||||||||||||||||||||
Options exercised | — | — | — | — | — | — | |||||||||||||||||||||
Options expired | — | — | — | — | — | — | |||||||||||||||||||||
Options sold | — | 390 | 4,152,460 | — | — | — | |||||||||||||||||||||
Outstanding, end of period | $ | — | — | $ | — | $ | — | — | $ | — |
16
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, forward starting dividend swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level
17
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
Forward starting dividend swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive the changes in a dividend index point. The Fund gains exposure by either paying or receiving an amount in respect of an increase or decrease in the change of the relevant dividend index point based on a notional amount. For example, if the Fund took a long position on a dividend index swap, the Fund would receive payments if the relevant index point increased in value and would be obligated to pay if that index point decreased in value.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at a later date at a fixed price. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which can cause the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between
18
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. As of August 31, 2009, the Fund had entered into reverse repurchase agreements, plus accrued interest, amounting to $106,100,955, selling securities with a market value, plus accrued interest, of $110,681,400. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
Taxes
The Fund has elected to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Fund is not itself subject to federal income tax. Instead, each shareholder is required to take into account in determining its tax liability its distributive share of items of Fund income, gain, loss, deduction, credit, and tax preference for each taxable year substantially as though such items have been realized directly by the shareholder and without regard to whether any distribution by the Fund has been or will be received. Accordingly, no provision (benefit) for federal and state income taxes is reflected in the accompanying financial statements.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 423,158,497 | $ | 5,466,112 | $ | (172,167 | ) | $ | 5,293,945 |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not
19
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Distributions
Because the Fund has elected to be treated as a partnership for tax purposes, it is not required to make distributions to its shareholders. It is the policy of the Fund to declare and pay distributions as determined by the Trustees (or their delegates).
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 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.
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
20
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
To the extent that the Fund invests in wholly-owned subsidiaries, the Fund is exposed to all the risks to which its wholly-owned subsidiaries are exposed, as well as the risk that investments made through its wholly-owned subsidiaries will not perform as expected.
• Customized Investment Program Risk — Because the Fund is intended to compliment the Manager's asset allocation strategies, the risks associated with the Fund's investments often will be far greater (and investment returns may be far more volatile) than if the Fund served as a stand-alone investment vehicle.
• Management Risk — This is the risk that the Manager's strategies and techniques will fail to produce the desired results.
• Derivatives Risk — The use of derivatives by the Fund or underlying funds involves risks different from, and potentially greater than, risks associated with direct investments in securities and other assets. Derivatives may increase other Fund risks, including market risk, liquidity risk, and credit and counterparty risk, and their value may or may not correlate with the value of the relevant underlying asset. The risk to the Fund of using derivatives is particularly pronounced because the Fund makes substantial use of derivatives to implement its investment program.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Leveraging Risk — The Fund's use of reverse repurchase agreements and other derivatives and securities lending may cause its portfolio to be leveraged. The Fund is not limited in the extent to which it may use derivatives or in the absolute face value of its derivative positions. Leverage increases the Fund's portfolio losses and reduces opportunities for gain when interest rates or currency rates are changing.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. The Fund may be required to sell certain less liquid securities at distressed prices. Recent changes in credit markets have reduced the liquidity of all types of fixed income securities, including in particular any asset-backed securities held by the Fund.
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to an OTC derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security, will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses OTC derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments where financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehma n Brothers and subsequent market disruptions.
21
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
• Focused Investment Risk — Focusing investments in countries, regions, or sectors with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for the Fund because it makes significant use of swap contracts and other OTC derivative instruments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
Other principal risks of an investment in the Fund include Market Disruption and Geopolitical Risk (the risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Fund and other underlying funds in which the Fund invests will not perform as expected). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. For more information about reverse repurchase agreements and other derivatives, please refer to the descriptions of financial instruments (e.g. reverse repurchase agreements, swaps, futures and other types of derivative contracts) in Note 2 above as well as the discussion of the Fund's use of derivatives below.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
22
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund uses derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund uses derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund may also use swaps (including credit default swaps) or other derivatives on an index, a single security or a basket of securities to gain investment exposures. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. For example, the Fund may use credit default swaps to take an active short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may attempt to alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed vs. variable and shorter duration vs. longer duration. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue
23
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
24
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | 8,209,774 | — | — | 972,965 | 5,149,975 | 14,332,714 | |||||||||||||||||||||
Total | $ | 8,209,774 | $ | — | $ | — | $ | 972,965 | $ | 5,149,975 | $ | 14,332,714 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
25
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | (6,701,794 | ) | — | — | — | — | (6,701,794 | ) | |||||||||||||||||||
Written options | — | — | — | 338,390 | — | 338,390 | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | (6,701,794 | ) | $ | — | $ | — | $ | 338,390 | $ | — | $ | (6,363,404 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | 10,065,895 | — | — | — | 5,149,975 | 15,215,870 | |||||||||||||||||||||
Written options | — | — | — | 564,085 | — | 564,085 | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | 10,065,895 | $ | — | $ | — | $ | 564,085 | $ | 5,149,975 | $ | 15,779,955 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Swaps | Options | ||||||||||
Average notional amount outstanding | $ | 374,860,605 | $ | 11,143 | |||||||
Highest notional amount outstanding | 427,790,665 | 39,000 | |||||||||
Lowest notional amount outstanding | 260,474,816 | — |
3. Fees and other transactions with affiliates
GMO receives management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.37% 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 and 0.055% for Class VI shares.
26
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.37% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fun d) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes)). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 to the extent that the sum of (i) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses) and (ii) the amount of fees and expenses incurred indirectly by the Fund through its investment in GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.37% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.37% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $2,723 and $1,564, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
4. Purchases and sales of securities
For the period ended August 31, 2009, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 108,223,000 | $ | — | |||||||
Investments (non-U.S. Government securities) | 2,239,406 | — |
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss
27
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 83.75% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. Two of the shareholders are other funds of the Trust.
As of August 31, 2009, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and all of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 363,567 | $ | 9,667,436 | 112,442 | $ | 2,461,097 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | — | — | |||||||||||||||
Shares repurchased | (432,979 | ) | (11,496,403 | ) | (3,450,617 | ) | (79,990,112 | ) | |||||||||||
Net increase (decrease) | (69,412 | ) | $ | (1,828,967 | ) | (3,338,175 | ) | $ | (77,529,015 | ) | |||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 821,813 | $ | 21,677,266 | 283,402 | $ | 6,515,930 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | — | — | |||||||||||||||
Shares repurchased | (1,968,099 | ) | (50,216,674 | ) | (15,304,605 | ) | (356,681,425 | ) | |||||||||||
Net increase (decrease) | (1,146,286 | ) | $ | (28,539,408 | ) | (15,021,203 | ) | $ | (350,165,495 | ) |
28
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
29
GMO Special Situations Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including a one-year period and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered that the Fund is intended to complement other strategies offered by the Manager and is not intended to stand on its own, and concluded that the usefulness of the Fund's performance relative to its benchmark was limited because the Fund is not managed to a benchmark. 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.
30
GMO Special Situations Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trust ees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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, the Trustees concluded, within the context of their overall conclusions regarding the agreement, th at 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered
31
GMO Special Situations Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
32
GMO Special Situations Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
Actual Expenses
The first line of the table below for each class 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 $10,000,000 account value divided by $1,000 = 10,000), 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 for each class 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, 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 | 0.53 | % | $ | 1,000.00 | $ | 1,057.30 | $ | 2.75 | |||||||||||
2) Hypothetical | 0.53 | % | $ | 1,000.00 | $ | 1,022.53 | $ | 2.70 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.44 | % | $ | 1,000.00 | $ | 1,057.60 | $ | 2.28 | |||||||||||
2) Hypothetical | 0.44 | % | $ | 1,000.00 | $ | 1,022.99 | $ | 2.24 |
* Expenses are calculated using each Class's annualized expense ratio (including interest expense) for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
33
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 99.4 | % | |||||
Short-Term Investments | 0.9 | ||||||
Futures Contracts | (0.1 | ) | |||||
Other | (0.2 | ) | |||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments | ||||||
Retailing | 15.1 | % | |||||
Insurance | 13.7 | ||||||
Health Care Equipment & Services | 8.1 | ||||||
Software & Services | 7.3 | ||||||
Consumer Services | 6.4 | ||||||
Technology Hardware & Equipment | 5.7 | ||||||
Consumer Durables & Apparel | 5.7 | ||||||
Food, Beverage & Tobacco | 5.3 | ||||||
Commercial & Professional Services | 4.7 | ||||||
Materials | 4.7 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 3.6 | ||||||
Capital Goods | 3.4 | ||||||
Real Estate | 2.8 | ||||||
Food & Staples Retailing | 2.6 | ||||||
Diversified Financials | 1.9 | ||||||
Energy | 1.8 | ||||||
Household & Personal Products | 1.6 | ||||||
Telecommunication Services | 1.6 | ||||||
Media | 1.0 | ||||||
Utilities | 0.9 | ||||||
Banks | 0.9 | ||||||
Transportation | 0.7 | ||||||
Automobiles & Components | 0.4 | ||||||
Semiconductors & Semiconductor Equipment | 0.1 | ||||||
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 99.4% | |||||||||||||||
Automobiles & Components — 0.4% | |||||||||||||||
800 | Dorman Products, Inc. * | 11,248 | |||||||||||||
600 | Spartan Motors, Inc. | 3,258 | |||||||||||||
600 | Standard Motor Products, Inc. | 7,428 | |||||||||||||
2,200 | TRW Automotive Holdings Corp. * | 38,830 | |||||||||||||
Total Automobiles & Components | 60,764 | ||||||||||||||
Banks — 0.9% | |||||||||||||||
200 | Bank of Kentucky Financial Corp. | 5,382 | |||||||||||||
200 | Camden National Corp. | 6,470 | |||||||||||||
400 | First Defiance Financial Corp. | 6,656 | |||||||||||||
300 | First of Long Island Corp. (The) | 8,562 | |||||||||||||
500 | Great Southern Bancorp, Inc. | 10,525 | |||||||||||||
400 | National Bankshares, Inc. | 10,164 | |||||||||||||
2,300 | Ocwen Financial Corp. * | 23,805 | |||||||||||||
2,700 | PMI Group (The), Inc. | 9,018 | |||||||||||||
3,300 | Radian Group, Inc. | 30,261 | |||||||||||||
1,300 | Trustmark Corp. | 24,739 | |||||||||||||
Total Banks | 135,582 | ||||||||||||||
Capital Goods — 3.3% | |||||||||||||||
500 | AAON, Inc. | 10,440 | |||||||||||||
900 | Alliant Techsystems, Inc. * | 69,552 | |||||||||||||
1,100 | Applied Industrial Technologies, Inc. | 22,693 | |||||||||||||
900 | Beacon Roofing Supply, Inc. * | 15,138 | |||||||||||||
1,300 | Briggs & Stratton Corp. | 22,932 | |||||||||||||
1,300 | Carlisle Cos., Inc. | 42,887 | |||||||||||||
1,200 | Crane Co. | 28,164 | |||||||||||||
131 | DigitalGlobe, Inc. * | 2,628 | |||||||||||||
1,500 | Force Protection, Inc. * | 7,950 | |||||||||||||
800 | H&E Equipment Services, Inc. * | 8,016 | |||||||||||||
1,600 | Hubbell, Inc.-Class B | 61,552 | |||||||||||||
800 | Interline Brands, Inc. * | 13,368 |
See accompanying notes to the financial statements.
2
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Capital Goods — continued | |||||||||||||||
1,000 | John Bean Technologies Corp. | 16,690 | |||||||||||||
200 | Michael Baker Corp. * | 6,696 | |||||||||||||
2,500 | Oshkosh Corp. | 84,000 | |||||||||||||
1,000 | Thomas & Betts Corp. * | 27,690 | |||||||||||||
800 | Toro Co. (The) | 30,344 | |||||||||||||
600 | Universal Forest Products, Inc. | 24,780 | |||||||||||||
1,400 | WESCO International, Inc. * | 33,642 | |||||||||||||
Total Capital Goods | 529,162 | ||||||||||||||
Commercial & Professional Services — 4.7% | |||||||||||||||
1,000 | Administaff, Inc. | 24,140 | |||||||||||||
5,400 | Cintas Corp. | 148,176 | |||||||||||||
400 | Courier Corp. | 6,440 | |||||||||||||
2,400 | Deluxe Corp. | 40,104 | |||||||||||||
900 | Ennis, Inc. | 12,267 | |||||||||||||
3,400 | Equifax, Inc. | 93,976 | |||||||||||||
1,500 | HNI Corp. | 32,220 | |||||||||||||
400 | ICF International, Inc. * | 10,940 | |||||||||||||
1,000 | Kelly Services, Inc.-Class A | 11,480 | |||||||||||||
2,000 | Kforce, Inc. * | 22,400 | |||||||||||||
2,800 | Manpower, Inc. | 144,760 | |||||||||||||
3,900 | Robert Half International, Inc. | 102,531 | |||||||||||||
600 | School Specialty, Inc. * | 13,674 | |||||||||||||
1,600 | Spherion Corp. * | 8,672 | |||||||||||||
1,200 | TrueBlue, Inc. * | 16,320 | |||||||||||||
1,000 | United Stationers, Inc. * | 45,690 | |||||||||||||
400 | Volt Information Sciences, Inc. * | 4,040 | |||||||||||||
Total Commercial & Professional Services | 737,830 | ||||||||||||||
Consumer Durables & Apparel — 5.7% | |||||||||||||||
1,300 | American Greetings Corp.-Class A | 18,057 | |||||||||||||
200 | Blyth, Inc. | 9,100 | |||||||||||||
2,400 | Brunswick Corp. | 22,296 | |||||||||||||
2,500 | Carter's, Inc. * | 62,900 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Consumer Durables & Apparel — continued | |||||||||||||||
1,100 | Columbia Sportswear Co. | 43,241 | |||||||||||||
2,100 | CROCS, Inc. * | 13,335 | |||||||||||||
300 | CSS Industries, Inc. | 6,264 | |||||||||||||
2,000 | Fossil, Inc. * | 50,760 | |||||||||||||
700 | Helen of Troy Ltd. * | 15,134 | |||||||||||||
3,500 | Jarden Corp. * | 85,225 | |||||||||||||
2,800 | Jones Apparel Group, Inc. | 43,652 | |||||||||||||
500 | Maidenform Brands, Inc. * | 8,070 | |||||||||||||
5,100 | Newell Rubbermaid, Inc. | 70,992 | |||||||||||||
400 | Oxford Industries, Inc. | 5,600 | |||||||||||||
1,500 | Phillips-Van Heusen Corp. | 56,670 | |||||||||||||
1,000 | Polaris Industries, Inc. | 37,710 | |||||||||||||
1,100 | Pool Corp. | 26,202 | |||||||||||||
400 | RC2 Corp. * | 6,280 | |||||||||||||
3,100 | Standard Pacific Corp. * | 11,253 | |||||||||||||
2,500 | Stanley Works (The) | 102,325 | |||||||||||||
800 | Steven Madden Ltd. * | 25,784 | |||||||||||||
3,300 | Tempur-Pedic International, Inc. * | 48,840 | |||||||||||||
2,700 | Timberland Co.-Class A * | 34,992 | |||||||||||||
1,700 | Tupperware Corp. | 62,883 | |||||||||||||
1,300 | Wolverine World Wide, Inc. | 32,383 | |||||||||||||
Total Consumer Durables & Apparel | 899,948 | ||||||||||||||
Consumer Services — 6.4% | |||||||||||||||
500 | Ambassadors Group, Inc. | 7,890 | |||||||||||||
1,300 | Ameristar Casinos, Inc. | 21,593 | |||||||||||||
900 | Bob Evans Farms, Inc. | 24,183 | |||||||||||||
2,200 | Boyd Gaming Corp. * | 22,616 | |||||||||||||
4,300 | Brinker International, Inc. | 62,608 | |||||||||||||
400 | California Pizza Kitchen, Inc. * | 5,624 | |||||||||||||
4,500 | Career Education Corp. * | 106,875 | |||||||||||||
1,000 | Carrols Restaurant Group, Inc. * | 7,610 | |||||||||||||
800 | CEC Entertainment, Inc. * | 21,400 | |||||||||||||
1,300 | Cheesecake Factory (The), Inc. * | 23,881 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Consumer Services — continued | |||||||||||||||
300 | CPI Corp. | 5,424 | |||||||||||||
1,100 | Cracker Barrel Old Country Store, Inc. | 31,251 | |||||||||||||
4,400 | Darden Restaurants, Inc. | 144,892 | |||||||||||||
500 | DineEquity, Inc. | 10,540 | |||||||||||||
2,200 | Domino's Pizza, Inc. * | 17,798 | |||||||||||||
200 | Frisch's Restaurants, Inc. | 5,644 | |||||||||||||
1,400 | Isle of Capri Casinos, Inc. * | 14,322 | |||||||||||||
1,170 | ITT Educational Services, Inc. * | 122,838 | |||||||||||||
1,000 | Jack in the Box, Inc. * | 20,390 | |||||||||||||
500 | Lincoln Educational Services Corp. * | 11,090 | |||||||||||||
400 | Mac-Gray Corp. * | 4,796 | |||||||||||||
900 | O'Charleys, Inc. | 6,885 | |||||||||||||
1,000 | Papa John's International, Inc. * | 23,330 | |||||||||||||
500 | PF Chang's China Bistro, Inc. * | 15,955 | |||||||||||||
500 | Pre-Paid Legal Services, Inc. * | 22,920 | |||||||||||||
2,400 | Regis Corp. | 38,832 | |||||||||||||
3,200 | Ruby Tuesday, Inc. * | 23,360 | |||||||||||||
1,100 | Shuffle Master, Inc. * | 8,338 | |||||||||||||
1,000 | Speedway Motorsports, Inc. | 15,550 | |||||||||||||
1,000 | Steak n Shake Co. (The) * | 10,480 | |||||||||||||
700 | Steiner Leisure Ltd. * | 23,254 | |||||||||||||
1,400 | Weight Watchers International, Inc. | 38,402 | |||||||||||||
6,200 | Wyndham Worldwide Corp. | 93,930 | |||||||||||||
Total Consumer Services | 1,014,501 | ||||||||||||||
Diversified Financials — 1.9% | |||||||||||||||
2,700 | Advance America Cash Advance Centers, Inc. | 15,498 | |||||||||||||
5,700 | AmeriCredit Corp. * | 98,382 | |||||||||||||
500 | Calamos Asset Management, Inc. | 5,640 | |||||||||||||
500 | Encore Capital Group, Inc. * | 7,450 | |||||||||||||
2,000 | Federated Investors Inc.-Class B | 52,500 | |||||||||||||
700 | Hercules Technology Growth Capital, Inc. | 6,489 | |||||||||||||
2,700 | MCG Capital Corp. * | 8,181 | |||||||||||||
2,200 | MF Global Ltd. * | 15,730 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Diversified Financials — continued | |||||||||||||||
2,400 | Nelnet, Inc.-Class A * | 35,424 | |||||||||||||
800 | PennantPark Investment Corp. | 6,680 | |||||||||||||
1,900 | Primus Guaranty Ltd. * | 7,885 | |||||||||||||
650 | Student Loan Corp. | 31,954 | |||||||||||||
600 | World Acceptance Corp. * | 15,618 | |||||||||||||
Total Diversified Financials | 307,431 | ||||||||||||||
Energy — 1.8% | |||||||||||||||
1,100 | Delek US Holdings, Inc. | 8,899 | |||||||||||||
4,200 | Sunoco, Inc. | 112,980 | |||||||||||||
5,300 | Tesoro Corp. | 74,624 | |||||||||||||
4,300 | Western Refining, Inc. * | 26,101 | |||||||||||||
1,500 | World Fuel Services Corp. | 67,410 | |||||||||||||
Total Energy | 290,014 | ||||||||||||||
Food & Staples Retailing — 2.5% | |||||||||||||||
1,500 | BJ's Wholesale Club, Inc. * | 48,900 | |||||||||||||
1,500 | Casey's General Stores, Inc. | 41,625 | |||||||||||||
400 | Nash Finch Co. | 10,856 | |||||||||||||
1,200 | Pantry, Inc. * | 18,180 | |||||||||||||
7,000 | Supervalu, Inc. | 100,450 | |||||||||||||
500 | Susser Holdings Corp. * | 5,365 | |||||||||||||
900 | United Natural Foods, Inc. * | 24,318 | |||||||||||||
700 | Village Super Market, Inc. | 20,055 | |||||||||||||
1,200 | Weis Markets, Inc. | 37,452 | |||||||||||||
3,300 | Whole Foods Market, Inc. * | 95,964 | |||||||||||||
Total Food & Staples Retailing | 403,165 | ||||||||||||||
Food, Beverage & Tobacco — 5.2% | |||||||||||||||
3,200 | Alliance One International, Inc. * | 12,256 | |||||||||||||
500 | Coca-Cola Bottling Co. | 27,030 | |||||||||||||
6,500 | Dean Foods Co. * | 117,910 | |||||||||||||
8,700 | Del Monte Foods Co. | 91,263 | |||||||||||||
3,900 | Hormel Foods Corp. | 144,105 |
See accompanying notes to the financial statements.
6
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Food, Beverage & Tobacco — continued | |||||||||||||||
500 | J&J Snack Foods Corp. | 21,850 | |||||||||||||
2,800 | JM Smucker Co. (The) | 146,356 | |||||||||||||
900 | Lancaster Colony Corp. | 45,234 | |||||||||||||
2,200 | National Beverage Corp. * | 22,308 | |||||||||||||
4,200 | PepsiAmericas, Inc. | 117,516 | |||||||||||||
1,500 | Pilgrim's Pride Corp. | 7,200 | |||||||||||||
1,100 | Ralcorp Holdings, Inc. * | 69,003 | |||||||||||||
300 | Seneca Foods Corp.-Class A * | 8,004 | |||||||||||||
Total Food, Beverage & Tobacco | 830,035 | ||||||||||||||
Health Care Equipment & Services — 8.0% | |||||||||||||||
500 | America Service Group, Inc. | 9,120 | |||||||||||||
2,300 | AMERIGROUP Corp. * | 54,395 | |||||||||||||
1,300 | BioScrip, Inc. * | 7,644 | |||||||||||||
500 | Cantel Medical Corp. * | 6,720 | |||||||||||||
1,900 | Centene Corp. * | 32,889 | |||||||||||||
1,500 | Cerner Corp. * | 92,565 | |||||||||||||
900 | Chemed Corp. | 39,186 | |||||||||||||
500 | Computer Programs & Systems, Inc. | 19,350 | |||||||||||||
1,900 | Continucare Corp. * | 5,396 | |||||||||||||
1,800 | Cooper Cos (The), Inc. | 49,176 | |||||||||||||
6,100 | Coventry Health Care, Inc. * | 133,163 | |||||||||||||
1,600 | Edwards Lifesciences Corp. * | 99,008 | |||||||||||||
8,400 | Health Management Associates, Inc. * | 58,044 | |||||||||||||
4,700 | Health Net, Inc. * | 72,004 | |||||||||||||
400 | ICU Medical, Inc. * | 14,876 | |||||||||||||
1,000 | Invacare Corp. | 21,660 | |||||||||||||
2,200 | Kinetic Concepts, Inc. * | 70,290 | |||||||||||||
1,800 | LifePoint Hospitals, Inc. * | 45,234 | |||||||||||||
2,500 | Lincare Holdings, Inc. * | 65,975 | |||||||||||||
1,000 | MedQuist, Inc. | 8,010 | |||||||||||||
900 | Molina Healthcare, Inc. * | 18,225 | |||||||||||||
1,600 | Odyssey HealthCare, Inc. * | 20,608 | |||||||||||||
4,700 | Omnicare, Inc. | 107,583 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Health Care Equipment & Services — continued | |||||||||||||||
800 | Orthofix International NV * | 21,896 | |||||||||||||
1,300 | Owens & Minor, Inc. | 57,525 | |||||||||||||
600 | Providence Service Corp. (The) * | 6,816 | |||||||||||||
2,000 | PSS World Medical, Inc. * | 40,880 | |||||||||||||
500 | RehabCare Group, Inc. * | 10,495 | |||||||||||||
1,200 | STERIS Corp. | 34,824 | |||||||||||||
600 | Triple-S Management Corp.-Class B * | 11,124 | |||||||||||||
2,800 | Universal American Financial Corp. * | 25,704 | |||||||||||||
400 | Young Innovations, Inc. | 9,392 | |||||||||||||
Total Health Care Equipment & Services | 1,269,777 | ||||||||||||||
Household & Personal Products — 1.6% | |||||||||||||||
3,600 | Central Garden & Pet Co.-Class A * | 39,600 | |||||||||||||
2,000 | Herbalife Ltd. | 60,560 | |||||||||||||
2,100 | NBTY, Inc. * | 77,826 | |||||||||||||
2,700 | Nu Skin Enterprises, Inc.-Class A | 46,575 | |||||||||||||
3,100 | Tiens Biotech Group USA, Inc. * | 8,959 | |||||||||||||
600 | USANA Health Sciences, Inc. * | 18,912 | |||||||||||||
Total Household & Personal Products | 252,432 | ||||||||||||||
Insurance — 13.7% | |||||||||||||||
2,400 | Allied World Assurance Co. Holdings Ltd. | 111,192 | |||||||||||||
2,100 | American Equity Investment Life Holding Co. | 16,947 | |||||||||||||
4,300 | American Financial Group, Inc. | 110,295 | |||||||||||||
266 | American Physicians Capital, Inc. | 7,937 | |||||||||||||
300 | American Physicians Service Group, Inc. | 6,903 | |||||||||||||
1,800 | Arch Capital Group Ltd. * | 116,946 | |||||||||||||
3,500 | Aspen Insurance Holdings Ltd. | 88,900 | |||||||||||||
5,200 | Axis Capital Holdings Ltd. | 158,496 | |||||||||||||
400 | Baldwin & Lyons, Inc.-Class B | 8,848 | |||||||||||||
1,800 | CNA Surety Corp. * | 28,584 | |||||||||||||
1,400 | Delphi Financial Group, Inc.-Class A | 32,718 | |||||||||||||
2,800 | Endurance Specialty Holdings Ltd. | 96,516 | |||||||||||||
1,600 | Everest Re Group Ltd. | 134,896 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Insurance — continued | |||||||||||||||
4,100 | First American Corp. | 129,232 | |||||||||||||
9,300 | Genworth Financial, Inc.-Class A | 98,208 | |||||||||||||
3,600 | HCC Insurance Holdings, Inc. | 95,184 | |||||||||||||
1,300 | Horace Mann Educators Corp. | 15,925 | |||||||||||||
300 | Infinity Property & Casualty Corp. | 13,191 | |||||||||||||
2,200 | IPC Holdings Ltd. | 71,324 | |||||||||||||
2,200 | Maiden Holdings Ltd. | 16,808 | |||||||||||||
1,300 | Meadowbrook Insurance Group, Inc. | 10,361 | |||||||||||||
1,000 | National Financial Partners Corp. | 7,850 | |||||||||||||
1,500 | Odyssey Re Holdings Corp. | 75,975 | |||||||||||||
2,400 | PartnerRe Ltd. | 177,384 | |||||||||||||
1,900 | Platinum Underwriters Holdings Ltd. | 68,875 | |||||||||||||
2,400 | RenaissanceRe Holdings Ltd. | 130,680 | |||||||||||||
500 | Safety Insurance Group, Inc. | 16,065 | |||||||||||||
1,100 | StanCorp Financial Group, Inc. | 41,635 | |||||||||||||
500 | Stewart Information Services Corp. | 7,085 | |||||||||||||
1,800 | Torchmark Corp. | 76,698 | |||||||||||||
1,500 | Universal Insurance Holdings, Inc. | 7,530 | |||||||||||||
2,600 | Validus Holdings Ltd. | 66,716 | |||||||||||||
4,700 | W.R. Berkley Corp. | 120,085 | |||||||||||||
Total Insurance | 2,165,989 | ||||||||||||||
Materials — 4.6% | |||||||||||||||
200 | AEP Industries, Inc. * | 7,662 | |||||||||||||
2,300 | Ball Corp. | 111,458 | |||||||||||||
2,200 | Bemis Co., Inc. | 58,498 | |||||||||||||
700 | Bway Holding Co. * | 10,850 | |||||||||||||
500 | Hawkins, Inc. | 10,625 | |||||||||||||
1,400 | International Flavors & Fragrances, Inc. | 49,868 | |||||||||||||
2,100 | Lubrizol Corp. | 133,812 | |||||||||||||
900 | Omnova Solutions, Inc. * | 4,248 | |||||||||||||
1,400 | Reliance Steel & Aluminum Co. | 51,716 | |||||||||||||
3,100 | RPM International, Inc. | 50,468 | |||||||||||||
300 | Schweitzer-Mauduit International, Inc. | 14,754 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Materials — continued | |||||||||||||||
2,900 | Scotts Miracle-Gro Co. (The)-Class A | 118,001 | |||||||||||||
600 | Spartech Corp. | 6,924 | |||||||||||||
3,900 | Valspar Corp. | 104,442 | |||||||||||||
Total Materials | 733,326 | ||||||||||||||
Media — 1.0% | |||||||||||||||
600 | Carmike Cinemas, Inc. * | 6,084 | |||||||||||||
2,100 | Harte-Hanks, Inc. | 27,384 | |||||||||||||
1,900 | Meredith Corp. | 52,592 | |||||||||||||
1,300 | Scholastic Corp. | 31,668 | |||||||||||||
2,100 | Valassis Communications, Inc. * | 32,970 | |||||||||||||
Total Media | 150,698 | ||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 3.6% | |||||||||||||||
3,700 | Endo Pharmaceuticals Holdings, Inc. * | 83,509 | |||||||||||||
10,400 | King Pharmaceuticals, Inc. * | 107,952 | |||||||||||||
500 | Matrixx Initiatives, Inc. * | 2,695 | |||||||||||||
1,900 | Medicis Pharmaceutical Corp.-Class A | 35,093 | |||||||||||||
10,700 | Mylan, Inc. * | 156,969 | |||||||||||||
900 | Par Pharmaceutical Cos., Inc. * | 18,405 | |||||||||||||
4,800 | Watson Pharmaceuticals, Inc. * | 169,392 | |||||||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 574,015 | ||||||||||||||
Real Estate — 2.8% | |||||||||||||||
766 | Altisource Portfolio Solutions SA * | 10,977 | |||||||||||||
700 | American Capital Agency Corp. | 17,423 | |||||||||||||
8,400 | Annaly Capital Management, Inc. REIT | 145,656 | |||||||||||||
3,900 | Anworth Mortgage Asset Corp. REIT | 29,211 | |||||||||||||
2,700 | Ashford Hospitality Trust, Inc. REIT | 8,316 | |||||||||||||
2,500 | Capstead Mortgage Corp. REIT | 34,125 | |||||||||||||
500 | Getty Realty Corp. REIT | 11,795 | |||||||||||||
1,600 | Hatteras Financial Corp. REIT | 47,824 | |||||||||||||
9,900 | HRPT Properties Trust REIT | 64,152 | |||||||||||||
2,100 | iStar Financial, Inc. REIT * | 4,431 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Real Estate — continued | |||||||||||||||
7,600 | MFA Financial, Inc. REIT | 60,192 | |||||||||||||
1,100 | Mission West Properties, Inc. REIT | 7,590 | |||||||||||||
Total Real Estate | 441,692 | ||||||||||||||
Retailing — 15.0% | |||||||||||||||
2,000 | Aaron's, Inc. | 52,200 | |||||||||||||
3,100 | Advance Auto Parts, Inc. | 131,130 | |||||||||||||
2,100 | Aeropostale, Inc. * | 82,215 | |||||||||||||
400 | America's Car-Mart, Inc. * | 8,240 | |||||||||||||
7,000 | American Eagle Outfitters, Inc. | 94,500 | |||||||||||||
1,300 | Asbury Automotive Group, Inc. * | 16,250 | |||||||||||||
7,700 | AutoNation, Inc. * | 146,146 | |||||||||||||
2,200 | Barnes & Noble, Inc. | 45,518 | |||||||||||||
900 | Big 5 Sporting Goods Corp. | 13,743 | |||||||||||||
1,700 | Big Lots, Inc. * | 43,214 | |||||||||||||
700 | Books-A-Million, Inc. | 9,506 | |||||||||||||
1,600 | Borders Group, Inc. * | 5,072 | |||||||||||||
1,500 | Buckle (The), Inc. | 39,675 | |||||||||||||
2,200 | Cabela's, Inc. * | 35,310 | |||||||||||||
1,200 | Cato Corp. (The)-Class A | 20,496 | |||||||||||||
4,200 | Charming Shoppes, Inc. * | 22,008 | |||||||||||||
5,800 | Chico's FAS, Inc. * | 73,834 | |||||||||||||
2,500 | Collective Brands, Inc. * | 39,600 | |||||||||||||
800 | Conn's, Inc. * | 9,048 | |||||||||||||
500 | Core-Mark Holding Co., Inc. * | 14,355 | |||||||||||||
2,500 | Dillard's Inc-Class A | 28,525 | |||||||||||||
3,100 | Dollar Tree, Inc. * | 154,814 | |||||||||||||
1,600 | Dress Barn, Inc. * | 25,968 | |||||||||||||
4,500 | Family Dollar Stores, Inc. | 136,260 | |||||||||||||
1,200 | Finish Line (The), Inc.-Class A | 9,900 | |||||||||||||
4,800 | Foot Locker, Inc. | 51,168 | |||||||||||||
1,200 | Fred's, Inc.-Class A | 15,696 | |||||||||||||
900 | Gander Mountain Co. * | 5,058 | |||||||||||||
300 | Genesco, Inc. * | 6,570 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Retailing — continued | |||||||||||||||
1,000 | Group 1 Automotive, Inc. | 28,170 | |||||||||||||
500 | Gymboree Corp. (The) * | 22,395 | |||||||||||||
500 | Haverty Furniture Cos, Inc. * | 5,835 | |||||||||||||
800 | hhgregg, Inc. * | 13,824 | |||||||||||||
1,900 | Hot Topic, Inc. * | 13,224 | |||||||||||||
800 | Jos. A. Bank Clothiers, Inc. * | 35,208 | |||||||||||||
900 | Kirkland's, Inc. * | 12,744 | |||||||||||||
900 | Lithia Motors, Inc.-Class A | 11,529 | |||||||||||||
2,000 | Men's Wearhouse (The), Inc. | 52,000 | |||||||||||||
600 | Monro Muffler, Inc. | 15,468 | |||||||||||||
5,300 | Nordstrom, Inc. | 148,612 | |||||||||||||
1,000 | NutriSystem, Inc. | 14,230 | |||||||||||||
7,300 | Office Depot, Inc. * | 38,106 | |||||||||||||
1,600 | OfficeMax, Inc. | 18,096 | |||||||||||||
3,200 | Penske Auto Group, Inc. | 56,608 | |||||||||||||
1,000 | Pep Boys-Manny Moe & Jack Co. (The) | 8,930 | |||||||||||||
3,900 | PetSmart, Inc. | 81,549 | |||||||||||||
4,900 | RadioShack Corp. | 74,137 | |||||||||||||
2,700 | Rent-A-Center, Inc. * | 53,271 | |||||||||||||
3,200 | Ross Stores, Inc. | 149,248 | |||||||||||||
900 | Sonic Automotive, Inc. | 11,538 | |||||||||||||
900 | Stage Stores, Inc. | 12,015 | |||||||||||||
1,600 | Stein Mart, Inc. * | 19,776 | |||||||||||||
1,300 | Systemax, Inc. * | 17,290 | |||||||||||||
1,300 | Tractor Supply Co. * | 61,178 | |||||||||||||
1,500 | Tuesday Morning Corp. * | 6,750 | |||||||||||||
1,100 | West Marine, Inc. * | 9,097 | |||||||||||||
3,000 | Williams-Sonoma, Inc. | 57,390 | |||||||||||||
Total Retailing | 2,384,237 | ||||||||||||||
Semiconductors & Semiconductor Equipment — 0.1% | |||||||||||||||
1,000 | DSP Group, Inc. * | 7,900 |
See accompanying notes to the financial statements.
12
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Software & Services — 7.3% | |||||||||||||||
1,500 | Actuate Corp. * | 8,430 | |||||||||||||
2,000 | Acxiom Corp. * | 18,240 | |||||||||||||
3,000 | Affiliated Computer Services, Inc.-Class A * | 134,400 | |||||||||||||
1,200 | CACI International, Inc.-Class A * | 55,152 | |||||||||||||
5,700 | Compuware Corp. * | 41,097 | |||||||||||||
4,500 | Convergys Corp. * | 48,780 | |||||||||||||
1,700 | CSG Systems International, Inc. * | 25,619 | |||||||||||||
700 | Digital River, Inc. * | 24,724 | |||||||||||||
500 | Dynamics Research Corp. * | 6,890 | |||||||||||||
4,500 | EarthLink, Inc. * | 37,440 | |||||||||||||
500 | ePlus, Inc. * | 7,900 | |||||||||||||
1,900 | Fair Isaac Corp. | 42,370 | |||||||||||||
3,100 | Global Cash Access Holdings, Inc. * | 22,475 | |||||||||||||
3,200 | IAC/InterActiveCorp * | 59,264 | |||||||||||||
2,100 | infoGROUP, Inc. * | 12,957 | |||||||||||||
1,700 | j2 Global Communications, Inc. * | 36,329 | |||||||||||||
1,900 | Jack Henry & Associates, Inc. | 44,289 | |||||||||||||
600 | JDA Software Group, Inc. * | 11,604 | |||||||||||||
500 | Manhattan Associates, Inc. * | 8,915 | |||||||||||||
600 | MAXIMUS, Inc. | 24,990 | |||||||||||||
300 | MicroStrategy, Inc.-Class A * | 18,525 | |||||||||||||
2,900 | Quest Software, Inc. * | 47,821 | |||||||||||||
8,400 | SAIC, Inc. * | 155,316 | |||||||||||||
900 | Smith Micro Software, Inc. * | 10,395 | |||||||||||||
400 | SPSS, Inc. * | 19,920 | |||||||||||||
3,900 | Sybase, Inc. * | 135,915 | |||||||||||||
1,100 | TeleTech Holdings, Inc. * | 18,766 | |||||||||||||
6,900 | TIBCO Software, Inc. * | 61,203 | |||||||||||||
2,500 | United Online, Inc. | 17,500 | |||||||||||||
Total Software & Services | 1,157,226 | ||||||||||||||
Technology Hardware & Equipment — 5.7% | |||||||||||||||
9,700 | 3Com Corp. * | 42,195 | |||||||||||||
1,300 | ADTRAN, Inc. | 29,562 | |||||||||||||
1,500 | Airvana, Inc. * | 9,735 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Technology Hardware & Equipment — continued | |||||||||||||||
300 | Anaren, Inc. * | 4,824 | |||||||||||||
900 | Avocent Corp. * | 14,688 | |||||||||||||
700 | Black Box Corp. | 17,528 | |||||||||||||
1,600 | Brightpoint, Inc. * | 11,744 | |||||||||||||
7,100 | Brocade Communications Systems, Inc. * | 51,333 | |||||||||||||
7,600 | Ingram Micro, Inc.-Class A * | 127,376 | |||||||||||||
1,200 | Insight Enterprises, Inc. * | 13,764 | |||||||||||||
1,600 | Lexmark International, Inc. * | 30,144 | |||||||||||||
700 | Netgear, Inc. * | 11,956 | |||||||||||||
1,500 | Polycom, Inc. * | 35,385 | |||||||||||||
300 | Rimage Corp. * | 4,830 | |||||||||||||
10,200 | Seagate Technology | 141,270 | |||||||||||||
1,500 | SYNNEX Corp. * | 44,475 | |||||||||||||
2,400 | Tech Data Corp. * | 91,440 | |||||||||||||
9,900 | Tellabs, Inc. * | 62,766 | |||||||||||||
4,700 | Western Digital Corp. * | 161,116 | |||||||||||||
Total Technology Hardware & Equipment | 906,131 | ||||||||||||||
Telecommunication Services — 1.6% | |||||||||||||||
4,900 | CenturyTel, Inc. | 157,927 | |||||||||||||
1,200 | USA Mobility, Inc. | 15,276 | |||||||||||||
2,400 | Virgin Mobile USA, Inc. * | 11,304 | |||||||||||||
7,800 | Windstream Corp. | 66,846 | |||||||||||||
Total Telecommunication Services | 251,353 | ||||||||||||||
Transportation — 0.7% | |||||||||||||||
2,300 | Air Transport Services Group, Inc. * | 6,808 | |||||||||||||
4,100 | Avis Budget Group, Inc. * | 39,893 | |||||||||||||
1,100 | Dollar Thrifty Automotive Group, Inc. * | 21,824 | |||||||||||||
1,400 | Republic Airways Holdings, Inc. * | 12,894 | |||||||||||||
1,800 | Skywest, Inc. | 27,810 | |||||||||||||
Total Transportation | 109,229 |
See accompanying notes to the financial statements.
14
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Utilities — 0.9% | |||||||||||||||
1,100 | New Jersey Resources Corp. | 40,425 | |||||||||||||
3,900 | UGI Corp. | 99,489 | |||||||||||||
Total Utilities | 139,914 | ||||||||||||||
TOTAL COMMON STOCKS (COST $13,817,195) | 15,752,351 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.9% | |||||||||||||||
Money Market Funds — 0.9% | |||||||||||||||
148,830 | State Street Institutional Treasury Money Market Fund-Institutional Class | 148,830 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $148,830) | 148,830 | ||||||||||||||
TOTAL INVESTMENTS — 100.3% (Cost $13,966,025) | 15,901,181 | ||||||||||||||
Other Assets and Liabilities (net) — (0.3%) | (49,488 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 15,851,693 |
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)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
1 | S&P Midcap 400 E-Mini | September 2009 | $ | 65,400 | $ | 9,308 |
As of August 31, 2009, for the futures contracts held, 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 U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $13,966,025) (Note 2) | $ | 15,901,181 | |||||
Receivable for investments sold | 300 | ||||||
Dividends and interest receivable | 16,754 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 6,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 8,525 | ||||||
Total assets | 15,932,760 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 4,169 | ||||||
Shareholder service fee | 2,017 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 9 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 800 | ||||||
Accrued expenses | 74,072 | ||||||
Total liabilities | 81,067 | ||||||
Net assets | $ | 15,851,693 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 29,017,353 | |||||
Accumulated undistributed net investment income | 22,314 | ||||||
Accumulated net realized loss | (15,132,438 | ) | |||||
Net unrealized appreciation | 1,944,464 | ||||||
$ | 15,851,693 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 15,851,693 | |||||
Shares outstanding: | |||||||
Class III | 2,779,794 | ||||||
Net asset value per share: | |||||||
Class III | $ | 5.70 |
See accompanying notes to the financial statements.
17
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $5) | $ | 151,459 | |||||
Interest | 88 | ||||||
Total investment income | 151,547 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 23,197 | ||||||
Shareholder service fee – Class III (Note 3) | 11,224 | ||||||
Audit and tax fees | 28,152 | ||||||
Custodian, fund accounting agent and transfer agent fees | 20,240 | ||||||
Legal fees | 276 | ||||||
Trustees fees and related expenses (Note 3) | 119 | ||||||
Total expenses | 83,208 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (48,668 | ) | |||||
Net expenses | 34,540 | ||||||
Net investment income (loss) | 117,007 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (6,203,588 | ) | |||||
Closed futures contracts | 58,700 | ||||||
Net realized gain (loss) | (6,144,888 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 9,733,980 | ||||||
Open futures contracts | 63,635 | ||||||
Net unrealized gain (loss) | 9,797,615 | ||||||
Net realized and unrealized gain (loss) | 3,652,727 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 3,769,734 |
See accompanying notes to the financial statements.
18
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 117,007 | $ | 335,298 | |||||||
Net realized gain (loss) | (6,144,888 | ) | (5,839,204 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 9,797,615 | (2,897,819 | ) | ||||||||
Net increase (decrease) in net assets from operations | 3,769,734 | (8,401,725 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (120,917 | ) | (339,148 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | (923,397 | ) | (13,439,111 | ) | |||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 7,253 | 68,983 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | (916,144 | ) | (13,370,128 | ) | |||||||
Total increase (decrease) in net assets | 2,732,673 | (22,111,001 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 13,119,020 | 35,230,021 | |||||||||
End of period (including accumulated undistributed net investment income of $22,314 and $26,224, respectively) | $ | 15,851,693 | $ | 13,119,020 |
See accompanying notes to the financial statements.
19
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 4.44 | $ | 7.36 | $ | 10.01 | $ | 10.52 | $ | 12.38 | $ | 15.51 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.04 | 0.10 | 0.13 | 0.15 | 0.20 | 0.19 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 1.26 | (2.92 | ) | (1.87 | ) | 0.68 | 1.11 | 1.32 | |||||||||||||||||||
Total from investment operations | 1.30 | (2.82 | ) | (1.74 | ) | 0.83 | 1.31 | 1.51 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.04 | ) | (0.10 | ) | (0.13 | ) | (0.20 | ) | (0.21 | ) | (0.16 | ) | |||||||||||||||
From net realized gains | — | — | (0.78 | ) | (1.14 | ) | (2.96 | ) | (4.48 | ) | |||||||||||||||||
Total distributions | (0.04 | ) | (0.10 | ) | (0.91 | ) | (1.34 | ) | (3.17 | ) | (4.64 | ) | |||||||||||||||
Net asset value, end of period | $ | 5.70 | $ | 4.44 | $ | 7.36 | $ | 10.01 | $ | 10.52 | $ | 12.38 | |||||||||||||||
Total Return(a) | 29.46 | %** | (38.76 | )% | (18.73 | )% | 8.71 | % | 11.67 | % | 14.98 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 15,852 | $ | 13,119 | $ | 35,230 | $ | 58,452 | $ | 53,389 | $ | 80,084 | |||||||||||||||
Net expenses to average daily net assets | 0.46 | %* | 0.46 | % | 0.46 | % | 0.46 | % | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 1.56 | %* | 1.46 | % | 1.44 | % | 1.46 | % | 1.71 | % | 1.48 | % | |||||||||||||||
Portfolio turnover rate | 100 | %** | 73 | % | 63 | % | 79 | % | 48 | % | 66 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.65 | %* | 0.43 | % | 0.19 | % | 0.22 | % | 0.19 | % | 0.12 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (b) | $ | 0.02 | $ | 0.01 | $ | 0.02 | $ | 0.04 | $ | 0.09 |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
20
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO U.S. Small/Mid Cap Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 long-term capital growth. The Fund seeks to achieve its objective by outperforming its benchmark, the Russell 2500 Value Index. The Fund typically makes equity investments in U.S. companies that issue stocks included in the Russell 2500 Index, a U.S. stock index, and in companies with similar market capitalizations ("small- and mid-cap companies"). Under normal circumstances, the Fund invests at least 80% of its assets in investments in small- and mid-cap companies tied economically to the U.S. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the counter derivatives, including options, fu tures, and swap contracts. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost.
21
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
Asset Valuation Inputs | Investments in Securities | Other Financial Instruments* | |||||||||
Level 1 - Quoted Prices | $ | 15,752,351 | $ | 9,308 | |||||||
Level 2 - Other Significant Observable Inputs | 148,830 | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | 15,901,181 | $ | 9,308 |
* Other financial instruments include futures contracts.
Liability Valuation Inputs | Investments in Securities | Other Financial Instruments | |||||||||
Level 1 - Quoted Prices | $ | — | $ | — | |||||||
Level 2 - Other Significant Observable Inputs | — | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | — | $ | — |
22
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
All of the Fund's common stocks are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks. All short-term investments are classified as Level 2.
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. 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 various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
23
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the
24
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $2,570,608.
25
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (5,940,234 | ) | ||||
Total | $ | (5,940,234 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 14,393,936 | $ | 1,934,056 | $ | (426,811 | ) | $ | 1,507,245 |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds.
26
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Smaller Company Risk — The securities of small- and mid-cap companies typically are less widely held, trade less frequently and in lesser quantities, and have market prices that may fluctuate more than those of securities of larger capitalization companies.
• Market Risk — Value Securities — The Fund purchases some equity securities at prices below what the Manager believes to be their fundamental value. The Fund bears the risk that the price of these securities may not increase to what the Manager believes to be their fundamental value or that the Manager may have overestimated their fundamental value.
Other principal risks of an investment in the Fund include Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Credit and Counterparty Risk (risk of default of a derivatives counterparty or borrower of the Fund's securities), Liquidity Risk (difficulty in selling Fund investments), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected).
27
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index).
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
28
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
29
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | 9,308 | — | 9,308 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 9,308 | $ | — | $ | 9,308 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
30
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | 58,700 | — | 58,700 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 58,700 | $ | — | $ | 58,700 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | 63,635 | — | 63,635 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 63,635 | $ | — | $ | 63,635 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Futures | |||||||
Average notional amount outstanding | $ | 249,414 | |||||
Highest notional amount outstanding | 454,600 | ||||||
Lowest notional amount outstanding | 65,400 |
Purchases and redemptions of Fund shares
For the six-month period ended August 31, 2009, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.50% of the amount invested or redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares
31
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholde r's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.31% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fun d) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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
32
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
in GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.31% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.31% of the Fund's average daily net assets.
The Fund's portion of the fee paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $119 and $0, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $14,492,800 and $14,873,764, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 61.53% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 0.17% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 95.51% of the Fund's shares were held by accounts for which the Manager had investment discretion.
33
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 44,247 | $ | 207,962 | 4,941 | $ | 32,066 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 22,391 | 110,289 | 47,015 | 308,041 | |||||||||||||||
Shares repurchased | (238,514 | ) | (1,241,648 | ) | (1,889,957 | ) | (13,779,218 | ) | |||||||||||
Purchase premiums | — | 1,045 | — | 123 | |||||||||||||||
Redemption fees | — | 6,208 | — | 68,860 | |||||||||||||||
Net increase (decrease) | (171,876 | ) | $ | (916,144 | ) | (1,838,001 | ) | $ | (13,370,128 | ) |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
34
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature.
35
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, 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 to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to separate account clients and the impact on the Manager of, and expenses and risks associated with, the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and c hanges in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 fa ctors, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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
36
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
37
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.46 | % | $ | 1,000.00 | $ | 1,294.60 | $ | 2.66 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 |
* Expenses are calculated using the Class's annualized expense ratio for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
38
GMO Domestic Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Domestic Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 94.7 | % | |||||
Short-Term Investments | 5.8 | ||||||
Preferred Stocks | 0.1 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Swaps | (0.1 | ) | |||||
Reverse Repurchase Agreements | (0.5 | ) | |||||
Other | 0.0 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) / Shares | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 6.6% | |||||||||||
Corporate Debt — 1.0% | |||||||||||
9,312,000 | Health Care Property Investors, Inc., Series G, MTN, 5.63%, due 02/28/13 | 8,784,010 | |||||||||
U.S. Government — 4.0% | |||||||||||
34,431,760 | U.S. Treasury Inflation Indexed Bond, 0.88%, due 04/15/10 (a) | 34,377,977 | |||||||||
U.S. Government Agency — 1.6% | |||||||||||
8,465,625 | Agency for International Development Floater (Support of India), 3 mo. LIBOR + .10%, 0.58%, due 02/01/27 (b) | 7,174,961 | |||||||||
2,750,000 | Agency for International Development Floater (Support of Jamaica), 6 mo. LIBOR + 0.30%, 1.10%, due 12/01/14 (b) | 2,655,611 | |||||||||
628,867 | Agency for International Development Floater (Support of Jamaica), 6 mo. U.S. Treasury Bill + 0.75%, 1.01%, due 03/30/19 (b) | 589,393 | |||||||||
2,085,000 | Agency for International Development Floater (Support of Sri Lanka), 6 mo. LIBOR + .20%, 1.00%, due 06/15/12 (b) | 2,041,166 | |||||||||
1,166,669 | Agency for International Development Floater (Support of Zimbabwe), 3 mo. U.S. Treasury Bill x 115%, 0.20%, due 01/01/12 (b) | 1,132,730 | |||||||||
Total U.S. Government Agency | 13,593,861 | ||||||||||
TOTAL DEBT OBLIGATIONS (COST $59,594,075) | 56,755,848 | ||||||||||
PREFERRED STOCKS — 0.1% | |||||||||||
Banking — 0.1% | |||||||||||
8,000 | Home Ownership Funding 2 Preferred 144A, 1.00% (b) | 720,000 | |||||||||
TOTAL PREFERRED STOCKS (COST $2,060,969) | 720,000 |
See accompanying notes to the financial statements.
2
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
MUTUAL FUNDS — 90.8% | |||||||||||
Affiliated Issuers — 90.8% | |||||||||||
47,223,590 | GMO Short-Duration Collateral Fund | 757,938,615 | |||||||||
1,483 | GMO Special Purpose Holding Fund (c) | 934 | |||||||||
936,909 | GMO U.S. Treasury Fund | 23,432,106 | |||||||||
TOTAL MUTUAL FUNDS (COST $889,946,372) | 781,371,655 | ||||||||||
SHORT-TERM INVESTMENTS — 2.4% | |||||||||||
Money Market Funds — 2.4% | |||||||||||
9,618,396 | State Street Institutional Liquid Reserves Fund-Institutional Class | 9,618,396 | |||||||||
10,846,910 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 10,846,910 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $20,465,306) | 20,465,306 | ||||||||||
TOTAL INVESTMENTS — 99.9% (Cost $972,066,722) | 859,312,809 | ||||||||||
Other Assets and Liabilities (net) — 0.1% | 755,660 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 860,068,469 |
See accompanying notes to the financial statements.
3
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
11,500,000 | USD | 3/20/2013 | Barclays | (Pay) | 0.61 | % | 2.78 | % | Health Care | NA | $ | 795,815 | |||||||||||||||||||||||||||||||
Bank PLC | Properties | ||||||||||||||||||||||||||||||||||||||||||
$ | 795,815 | ||||||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
^ Receive - Fund receives premium and sells credit protection.
(Pay) - Fund pays premium and buys credit protection.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2009, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider (i.e. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to make as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
As of August 31, 2009, for the swap contracts held, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
4
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (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.
LIBOR - London Interbank Offered Rate
MTN - Medium Term Note
The rates shown on variable rate notes are the current interest rates at August 31, 2009, 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.
(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) Underlying investment represents interests in defaulted securities.
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, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $82,120,350) (Note 2) | $ | 77,941,154 | |||||
Investments in affiliated issuers, at value (cost $889,946,372) (Notes 2 and 8) | 781,371,655 | ||||||
Dividends and interest receivable | 144,551 | ||||||
Receivable for open swap contracts (Note 2) | 795,815 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 56,418 | ||||||
Total assets | 860,309,593 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 5,377 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 72,165 | ||||||
Shareholder service fee | 57,671 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 2,071 | ||||||
Accrued expenses | 103,840 | ||||||
Total liabilities | 241,124 | ||||||
Net assets | $ | 860,068,469 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 988,365,581 | |||||
Distributions in excess of net investment income | (2,936,124 | ) | |||||
Distributions in excess of net realized gains | (13,402,890 | ) | |||||
Net unrealized depreciation | (111,958,098 | ) | |||||
$ | 860,068,469 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 191,494,561 | |||||
Class VI shares | $ | 668,573,908 | |||||
Shares outstanding: | |||||||
Class III | 29,430,675 | ||||||
Class VI | 102,657,260 | ||||||
Net asset value per share: | |||||||
Class III | $ | 6.51 | |||||
Class VI | $ | 6.51 |
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, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 6,219,498 | |||||
Interest | 1,764,850 | ||||||
Dividends | 12,018 | ||||||
Total investment income | 7,996,366 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 459,840 | ||||||
Shareholder service fee – Class III (Note 3) | 213,461 | ||||||
Shareholder service fee – Class VI (Note 3) | 174,643 | ||||||
Custodian, fund accounting agent and transfer agent fees | 71,116 | ||||||
Audit and tax fees | 32,200 | ||||||
Legal fees | 27,876 | ||||||
Trustees fees and related expenses (Note 3) | 14,302 | ||||||
Registration fees | 2,668 | ||||||
Miscellaneous | 8,554 | ||||||
Total expenses | 1,004,660 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (128,616 | ) | |||||
Fees and expenses waived by Manager (Note 3) | (181,584 | ) | |||||
Net expenses | 694,460 | ||||||
Net investment income (loss) | 7,301,906 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 369,965 | ||||||
Investments in affiliated issuers | 48,761 | ||||||
Closed futures contracts | (3,687,667 | ) | |||||
Closed swap contracts | 5,892,515 | ||||||
Written options | (996,375 | ) | |||||
Net realized gain (loss) | 1,627,199 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 11,437,389 | ||||||
Investments in affiliated issuers | 108,596,400 | ||||||
Open futures contracts | 1,547,694 | ||||||
Open swap contracts | (2,541,876 | ) | |||||
Net unrealized gain (loss) | 119,039,607 | ||||||
Net realized and unrealized gain (loss) | 120,666,806 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 127,968,712 |
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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 7,301,906 | $ | 58,828,164 | |||||||
Net realized gain (loss) | 1,627,199 | 8,021,440 | |||||||||
Change in net unrealized appreciation (depreciation) | 119,039,607 | (198,980,256 | ) | ||||||||
Net increase (decrease) in net assets from operations | 127,968,712 | (132,130,652 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (4,540,304 | ) | (6,956,865 | ) | |||||||
Class VI | (9,701,414 | ) | (53,135,218 | ) | |||||||
Total distributions from net investment income | (14,241,718 | ) | (60,092,083 | ) | |||||||
Net realized gains | |||||||||||
Class III | (19,446,942 | ) | (313,474 | ) | |||||||
Class VI | (41,539,732 | ) | (2,316,108 | ) | |||||||
Total distributions from net realized gains | (60,986,674 | ) | (2,629,582 | ) | |||||||
Return of capital | |||||||||||
Class III | (79,174,703 | ) | — | ||||||||
Class VI | (169,596,909 | ) | — | ||||||||
Total distributions from return of capital | (248,771,612 | ) | — | ||||||||
(324,000,004 | ) | (62,721,665 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (82,320,035 | ) | 215,412,245 | ||||||||
Class VI | 80,129,862 | 311,273,145 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | (2,190,173 | ) | 526,685,390 | ||||||||
Redemption fees (Notes 2 and 7): | |||||||||||
Class III | 10,529 | 65,120 | |||||||||
Class VI | 24,504 | 544,931 | |||||||||
Increase in net assets resulting from redemption fees | 35,033 | 610,051 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (2,155,140 | ) | 527,295,441 | ||||||||
Total increase (decrease) in net assets | (198,186,432 | ) | 332,443,124 | ||||||||
Net assets: | |||||||||||
Beginning of period | 1,058,254,901 | 725,811,777 | |||||||||
End of period (including distributions in excess of net investment income of $2,936,124 and accumulated undistributed net investment income $4,003,688, respectively) | $ | 860,068,469 | $ | 1,058,254,901 |
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.99 | $ | 9.47 | $ | 9.81 | $ | 9.81 | $ | 9.84 | $ | 10.07 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.05 | 0.39 | 0.42 | 0.43 | 0.13 | 0.16 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.91 | (1.36 | ) | (0.01 | ) | 0.06 | 0.16 | 0.04 | |||||||||||||||||||
Total from investment operations | 0.96 | (0.97 | ) | 0.41 | 0.49 | 0.29 | 0.20 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.10 | ) | (0.50 | ) | (0.75 | ) | (0.49 | ) | (0.16 | ) | (0.16 | ) | |||||||||||||||
From net realized gains | (0.46 | ) | (0.01 | ) | — | — | (0.16 | ) | (0.27 | ) | |||||||||||||||||
Return of capital | (1.88 | ) | — | — | — | — | (0.00 | )(b) | |||||||||||||||||||
Total distributions | (2.44 | ) | (0.51 | ) | (0.75 | ) | (0.49 | ) | (0.32 | ) | (0.43 | ) | |||||||||||||||
Net asset value, end of period | $ | 6.51 | $ | 7.99 | $ | 9.47 | $ | 9.81 | $ | 9.81 | $ | 9.84 | |||||||||||||||
Total Return(c) | 15.38 | %** | (10.39 | )% | 4.35 | % | 5.09 | % | 3.02 | % | 2.02 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 191,495 | $ | 337,524 | $ | 144,286 | $ | 94,159 | $ | 125,188 | $ | 736,300 | |||||||||||||||
Net expenses to average daily net assets(d) | 0.22 | %* | 0.26 | %(e) | 0.25 | %(e) | 0.25 | % | 0.25 | % | 0.25 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 1.57 | %* | 4.43 | % | 4.28 | % | 4.42 | % | 1.30 | % | 1.57 | % | |||||||||||||||
Portfolio turnover rate | 14 | %** | 68 | % | 22 | % | 17 | % | 24 | % | 11 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.07 | %* | 0.02 | % | 0.03 | % | 0.03 | % | 0.02 | % | 0.03 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.00 | (f) | — | — | — | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds 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 and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(e) The net expense ratio does not include the effect of expense reductions.
(f) 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.
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 7.99 | $ | 9.48 | $ | 9.82 | $ | 9.82 | $ | 9.93 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(b)† | 0.06 | 0.44 | 0.57 | 0.48 | 0.24 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.90 | (1.41 | ) | (0.15 | ) | 0.02 | (0.14 | )(c) | |||||||||||||||
Total from investment operations | 0.96 | (0.97 | ) | 0.42 | 0.50 | 0.10 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.10 | ) | (0.51 | ) | (0.76 | ) | (0.50 | ) | (0.21 | ) | |||||||||||||
From net realized gains | (0.46 | ) | (0.01 | ) | — | — | — | ||||||||||||||||
Return of capital | (1.88 | ) | — | — | — | — | |||||||||||||||||
Total distributions | (2.44 | ) | (0.52 | ) | (0.76 | ) | (0.50 | ) | (0.21 | ) | |||||||||||||
Net asset value, end of period | $ | 6.51 | $ | 7.99 | $ | 9.48 | $ | 9.82 | $ | 9.82 | |||||||||||||
Total Return(d) | 15.37 | %** | (10.40 | )% | 4.42 | % | 5.19 | % | 0.97 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 668,574 | $ | 720,731 | $ | 581,526 | $ | 327,796 | $ | 359,958 | |||||||||||||
Net expenses to average daily net assets(e) | 0.12 | %* | 0.16 | %(f) | 0.16 | %(f) | 0.16 | % | 0.16 | %* | |||||||||||||
Net investment income to average daily net assets(b) | 1.60 | %* | 5.02 | % | 5.87 | % | 4.85 | % | 2.38 | %(g) | |||||||||||||
Portfolio turnover rate | 14 | %** | 68 | % | 22 | % | 17 | % | 24 | %†† | |||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.07 | %* | 0.02 | % | 0.03 | % | 0.03 | % | 0.02 | %* | |||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (h) | $ | 0.00 | (h) | — | — | — |
(a) Period from July 26, 2005 (commencement of operations) through February 28, 2006.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) 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.
(d) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(f) The net expense ratio does not include the effect of expense reductions.
(g) 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.
(h) 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 year ended February 28, 2006.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
10
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Domestic Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the Barclays Capital U.S. Government Index (formerly Lehman Brothers U.S. Government Index). The Fund typically invests in bonds included in the Fund's benchmark and in securities and instruments with similar characteristics. The Fund may implement its strategies: (i) synthetically by using exchange-traded and over-the-counter ("OTC") derivatives and investing in other series of the Trust and/or (ii) directly by purchasing bonds. The Fund has historically gained its investment exposure primarily through the use of derivatives and investments in other series of the Trust. As a result, the Fund has substantial holdings of GMO Short-Duration Collateral Fund ("SDCF") (a Fund that invests primarily in asset backed securities). Under normal circumstances, the Fund invests directly or indirectly at least 80% of its assets in bonds tied economically to the U.S. For these pu rposes, the term "bond" includes (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by using a futures contract, swap contract, currency forward or option. To implement its investment strategies, the Fund may invest in or hold: U.S. investment-grade bonds, including asset-backed securities and U.S. government securities (including securities neither guaranteed nor insured by the U.S. government); derivatives, including without limitation, futures contracts, credit default swaps and other swap contracts; shares of SDCF (to gain exposure to asset-backed securities); and shares of U.S. Treasury Fund (for liquidity management purposes). Because of the Fund's investment in SDCF, the Fund currently holds and may continue to hold material positions of below investment grade securities. The Fund also may invest a portion of its assets in foreign bonds and lower-rated securities, and in unaffiliated money market funds.
As of August 31, 2009, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
Since April 2009, the Fund has declared and paid dividends when it has acquired a meaningful cash position rather than reinvesting that cash in portfolio securities. The Fund intends to continue this practice for the time being.
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). As of August 31, 2009, shares of SDCF and GMO Special Purpose Holding Fund ("SPHF") were not publicly available for direct purchase.
11
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
From prior to March 1, 2009 through July 12, 2009, the Fund had a policy to effect redemptions of its shares in-kind above de minimis levels. The Fund had established de minimis amounts below which redemptions would be honored for cash. Beginning July 13, 2009, the Fund had a policy to pay redemption requests with cash (less a redemption fee).
On March 19, 2009, the Trustees approved GMO's plan to maximize the amount of cash distributed to shareholders that represents receipts on its portfolio holdings (including shares of the underlying funds) and from dispositions of those holdings. The plan was adopted in light of the requirements of Section 562 (b) of the Code and calls for the Fund to cease operations within 2 years. For purposes of meeting that timetable, the Fund may distribute securities (including shares of the underlying funds) in-kind (See Note 9 — Subsequent events).
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
As of August 31, 2009, a significant portion of the Fund's dividends received from other GMO funds is expected to be a return of capital for U.S. federal income tax purposes. Accordingly, "dividends from affiliated issuers" reported in the Statement of Operations has been reduced by the portion estimated to be a return of capital as of August 31, 2009. The estimated return of capital is $158,172,001. In addition, all applicable related income disclosures throughout this Semiannual Report have been adjusted by the estimated return of capital. Furthermore, the "distributions to shareholders from return of capital" disclosed in the Statement of Changes in Net Assets and Financial Highlights are also estimates as of August 31, 2009. Both the dividends from affiliated issuers and distributions to shareholders from return of capital are subject to change and will not be finalized until February 28, 2010, the Fund's upcoming fiscal yea r-end. Finally, in early 2010, applicable shareholders will receive Form 1099-DIV that will indicate the appropriate tax character of all distributions paid by the Fund in 2009.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of
12
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by the Fund, those alternative sources would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fu nd. As of August 31, 2009, the total value of securities held directly and indirectly that were fair valued or for which no alternative pricing source was available represented 18.90% of the net assets of the Fund.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund valued certain debt securities and preferred stocks using a specified spread above the LIBOR Rate. The Fund also utilizes third party valuation services (which use industry standard models and inputs from pricing vendors) to value credit default swaps.
13
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Corporate Debt | $ | — | $ | 8,784,010 | $ | — | $ | 8,784,010 | |||||||||||
U.S. Government | — | 34,377,977 | — | 34,377,977 | |||||||||||||||
U.S. Government Agency | — | — | 13,593,861 | 13,593,861 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 43,161,987 | 13,593,861 | 56,755,848 | |||||||||||||||
Preferred Stocks | — | — | 720,000 | 720,000 | |||||||||||||||
Mutual Funds | 23,432,106 | 757,939,549 | — | 781,371,655 | |||||||||||||||
Short-Term Investments | — | 20,465,306 | — | 20,465,306 | |||||||||||||||
Total Investments | 23,432,106 | 821,566,842 | 14,313,861 | 859,312,809 | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements | — | — | 795,815 | 795,815 | |||||||||||||||
Total | $ | 23,432,106 | $ | 821,566,842 | $ | 15,109,676 | $ | 860,108,624 |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 73.33% and (0.12)% of total net assets, respectively.
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||
U.S. Government Agency | $ | 15,008,442 | $ | (1,101,632 | ) | $ | (27,332 | ) | $ | (182 | ) | $ | (285,435 | ) | $ | — | $ | 13,593,861 | |||||||||||||
Preferred Stocks | 720,000 | — | — | — | — | — | 720,000 | ||||||||||||||||||||||||
Mutual Funds | 1,082 | — | — | — | (148 | ) | (934 | ) | — | ||||||||||||||||||||||
Swaps | 3,621,898 | 605,196 | — | (605,196 | ) | (2,826,083 | ) | — | 795,815 | ||||||||||||||||||||||
Total | $ | 19,351,422 | $ | (496,436 | ) | $ | (27,332 | ) | $ | (605,378 | ) | $ | (3,111,666 | ) | $ | (934 | ) | $ | 15,109,676 |
14
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
15
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts outstanding at the end of the period.
For the period ended August 31, 2009, investment activity in options contracts written by the Fund was as follows:
Puts | Calls | ||||||||||||||||||||||||||
Principal Amount of Contracts | Number of Contracts | Premiums | Principal Amount of Contracts | Number of Contracts | Premiums | ||||||||||||||||||||||
Outstanding, beginning of period | $ | — | — | $ | — | $ | — | — | $ | — | |||||||||||||||||
Options written | — | — | — | — | (3,000 | ) | (3,040,875 | ) | |||||||||||||||||||
Options exercised | — | — | — | — | 3,000 | 3,040,875 | |||||||||||||||||||||
Options expired | — | — | — | — | — | — | |||||||||||||||||||||
Options sold | — | — | — | — | — | — | |||||||||||||||||||||
Outstanding, end of period | $ | — | — | $ | — | $ | — | — | $ | — |
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
16
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
17
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at a later date at a fixed price. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which can cause the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
18
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, if any, at least annually. The Fund is permitted to, and will from time to time, declare and pay distributions from net investment income, if any, more frequently (e.g. monthly). As of August 31, 2009, all distributions have been paid in cash. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 988,632,658 | $ | 10,250 | $ | (129,330,099 | ) | $ | (129,319,849 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to
19
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 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 incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
From prior to March 1, 2009 through August 2, 2009, the fee on cash redemptions was 2.00% of the amount redeemed. From August 3, 2009 through August 31, 2009, the fee on cash redemptions was 1.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the
20
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
purchase premium or redemption fee relating to a cash purchase or redemption of a Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermedia ry platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. Many of these risks are more pronounced as a result of current global economic conditions that began to unfold in 2008. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Derivatives Risk — The use of derivatives involves risks different from, and potentially greater than, risks associated with direct investments in securities and other assets. Derivatives may increase other Fund risks, including market risk, liquidity risk, and credit and counterparty risk, and their value may or may not correlate with the value of the relevant underlying asset.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. The Fund may be required to sell certain less liquid securities at distressed prices or to meet redemption requests in-kind. Recent changes in credit markets have reduced the liquidity of all types of fixed income securities, including in particular the asset-backed securities held by the Fund through SDCF.
• Focused Investment Risk — Focusing investments in countries, regions, or sectors with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for the Fund because of its exposure to asset-backed securities secured by different types of consumer debt (e.g., credit-card receivables, automobile loans, and home equity loans).
21
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Other principal risks of an investment in the Fund include Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected), Credit and Counterparty Risk (risk of default of an issuer of a portfolio security or a derivatives counterparty or a borrower of the Fund's securities), Leveraging Risk (increased risks from use of reverse repurchase agreements and other derivatives and securities lending), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. For more information about reverse repurchase agreements and other derivatives, please refer to the descriptions of financial instruments (e.g. reverse repurchase agreements, swaps, futures and other types of derivative contracts) in Note 2 above as well as the discussion of the Fund's use of derivatives below.
The Fund invests (including through investment in underlying funds) in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of u nderlying assets or other support available to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities generally. These events reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not continue or that
22
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
they will not deteriorate further. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
The Fund uses its cash balance to meet its collateral obligations and for other purposes. There is no assurance that the Fund's cash balance will be sufficient to meet those obligations. If it is not, the Fund would be required to liquidate portfolio positions. To manage the Fund's cash collateral needs, the Manager reserves the right to reduce or eliminate the Fund's derivative exposures. A reduction in those exposures may cause the performance of the Fund to track its benchmark less closely and make the Fund's performance more dependent on the performance of the asset-backed securities it holds directly or indirectly.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund uses derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund uses derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps (including credit default swaps) or other derivatives on an index, a single security or a basket of securities to gain investment exposures. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
23
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. For example, the Fund may use credit default swaps to take an active short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may attempt to alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed vs. variable and shorter duration vs. longer duration. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
24
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
25
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | 795,815 | — | — | 795,815 | |||||||||||||||||||||
Total | $ | — | $ | — | $ | 795,815 | $ | — | $ | — | $ | 795,815 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
26
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | (3,687,667 | ) | — | — | — | — | (3,687,667 | ) | |||||||||||||||||||
Swap contracts | 6,497,711 | — | (605,196 | ) | — | — | 5,892,515 | ||||||||||||||||||||
Written options | (996,375 | ) | — | — | — | — | (996,375 | ) | |||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | 1,813,669 | $ | — | $ | (605,196 | ) | $ | — | $ | — | $ | 1,208,473 | ||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | 1,547,694 | — | — | — | — | 1,547,694 | |||||||||||||||||||||
Swap contracts | 284,207 | — | (2,826,083 | ) | — | — | (2,541,876 | ) | |||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | 1,831,901 | $ | — | $ | (2,826,083 | ) | $ | — | $ | — | $ | (994,182 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Futures | Swaps | Options | |||||||||||||
Average notional amount outstanding | $ | 208,085,917 | $ | 233,477,469 | $ | 857,143 | |||||||||
Highest notional amount outstanding | 933,826,172 | 1,565,342,285 | 6,000,000 | ||||||||||||
Lowest notional amount outstanding | — | 11,500,000 | — |
Other matters
GMO Special Purpose Holding Fund ("SPHF"), an investment of the Fund, has litigation pending against various entities related to the 2002 default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF.
27
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.10% of average daily net assets. Beginning on April 3, 2009 and continuing through August 31, 2009, the Manager has voluntarily agreed to waive the Fund's management fee by 0.05%. The Manager may change or terminate this waiver at any time, and this waiver is in addition to the Manager's contractual expense reimbursement agreement described below. During any period for which the voluntary management fee waiver is in effect, the Fund will incur management fees at an annual rate lower than 0.10% 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 average daily net a ssets 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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.10% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.10% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.10% of the Fund's average daily net assets.
28
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder of the underlying funds. For the period ended August 31, 2009, 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 | ||||||||||||
0.005 | % | 0.000 | % | 0.002 | % | 0.007 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $14,302 and $4,692, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
4. Purchases and sales of securities
For the period ended August 31, 2009, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | — | $ | 161,877,925 | |||||||
Investments (non-U.S. Government securities) | 127,942,524 | 107,040,339 |
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 75.19% of the shares outstanding of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
29
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of August 31, 2009, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 93.92% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | 38,472,777 | $ | 321,100,621 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 765,227 | 6,493,461 | |||||||||||||||
Shares repurchased | (12,821,339 | ) | (82,320,035 | ) | (12,226,577 | ) | (112,181,837 | ) | |||||||||||
Redemption fees | — | 10,529 | — | 65,120 | |||||||||||||||
Net increase (decrease) | (12,821,339 | ) | $ | (82,309,506 | ) | 27,011,427 | $ | 215,477,365 | |||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 12,490,708 | $ | 80,209,775 | 106,478,381 | $ | 970,656,989 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 3,251,921 | 28,578,791 | |||||||||||||||
Shares repurchased | (9,734 | ) | (79,913 | ) | (80,899,819 | ) | (687,962,635 | ) | |||||||||||
Redemption fees | — | 24,504 | — | 544,931 | |||||||||||||||
Net increase (decrease) | 12,480,974 | $ | 80,154,366 | 28,830,483 | $ | 311,818,076 |
30
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 | $ | 807,523,384 | $ | — | $ | — | $ | 6,145,474 | $ | — | $ | 757,938,615 | |||||||||||||||
GMO Special Purpose Holding Fund | 1,082 | — | — | — | — | 934 | |||||||||||||||||||||
GMO U.S. Treasury Fund | — | 124,374,024 | 101,000,000 | 74,024 | — | 23,432,106 | |||||||||||||||||||||
Totals | $ | 807,524,466 | $ | 124,374,024 | $ | 101,000,000 | $ | 6,219,498 | $ | — | $ | 781,371,655 |
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. On September 14, 2009, the Fund's redemption fee was eliminated.
On March 19, 2009, the Trustees of the Trust adopted a plan to cease the operations of the Fund within two years of that date. On October 19, 2009, the Trustees revoked that plan. "Distributions to shareholders", as disclosed in the Statement of Changes in Net Assets and the Financial Highlights for the period ended August 31, 2009 ("the statements"), have been adjusted to reclassify a portion of the distributions initially declared as a "return of capital" to "distributions from net investment income". The estimated sources of the distributions to shareholders as disclosed in the statements are subject to reclassification (depending on subsequent Fund operations) and will not be finalized until February 28, 2010, the Fund's fiscal year-end.
The Fund previously reported the estimated sources of "dividends" and "distributions from return of capital" paid on a per share basis. Pursuant to Rule 19a-1(e) of the Investment Company Act of 1940, the following serves as an update to the previously reported estimated sources of the distributions paid to shareholders. 3.78% of the distributions designated as "distributions from return of capital" in the six month period ended August 31, 2009 have been reclassified as distributions from "dividends" (income derived from dividends, interest and other income sources).
31
GMO Domestic Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those p ersonnel 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 third-party data services
32
GMO Domestic Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the M anager effectively reimburses the Fund for advisory fees, shareholder fees and most other expenses of the underlying funds 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal
33
GMO Domestic Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
34
GMO Domestic Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including 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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.22 | % | $ | 1,000.00 | $ | 1,153.80 | $ | 1.19 | |||||||||||
2) Hypothetical | 0.22 | % | $ | 1,000.00 | $ | 1,024.10 | $ | 1.12 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.13 | % | $ | 1,000.00 | $ | 1,153.70 | $ | 0.71 | |||||||||||
2) Hypothetical | 0.13 | % | $ | 1,000.00 | $ | 1,024.55 | $ | 0.66 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
35
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Debt Obligations | 93.4 | % | |||||
Options Purchased | 12.8 | ||||||
Short-Term Investments | 8.3 | ||||||
Swaps | (2.3 | ) | |||||
Written Options | (4.0 | ) | |||||
Reverse Repurchase Agreements | (10.1 | ) | |||||
Other | 1.9 | ||||||
100.0 | % | ||||||
Industry Summary | % of Debt Obligations | ||||||
U.S. Government & Agencies | 20.7 | % | |||||
Credit Cards | 14.8 | ||||||
Auto Financing | 11.3 | ||||||
Residential Asset-Backed Securities (United States) | 11.2 | ||||||
Insured Auto Financing | 8.7 | ||||||
Foreign Government Obligations | 5.4 | ||||||
CMBS | 5.1 | ||||||
Residential Mortgage-Backed Securities (European) | 4.1 | ||||||
Business Loans | 3.8 | ||||||
Investment Grade Corporate Collateralized Debt Obligations | 3.4 | ||||||
Student Loans | 2.1 | ||||||
Residential Mortgage-Backed Securities (Australian) | 2.1 | ||||||
Insured Other | 1.7 | ||||||
Equipment Leases | 1.1 | ||||||
Bank Loan Collateralized Debt Obligations | 1.1 | ||||||
Insurance Premiums | 1.0 | ||||||
CMBS Collateralized Debt Obligations | 0.7 | ||||||
Insured Residential Asset-Backed Securities (United States) | 0.6 | ||||||
Insured Time Share | 0.5 | ||||||
Insured Transportation | 0.5 | ||||||
Insured Residential Mortgage-Backed Securities (United States) | 0.1 | ||||||
Residential Mortgage-Backed Securities (United States) | 0.0 | ||||||
100.0 | % |
1
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 93.4% | |||||||||||||||
Asset-Backed Securities — 69.1% | |||||||||||||||
Auto Financing — 10.6% | |||||||||||||||
3,199,036 | BMW Vehicle Lease Trust, Series 07-1, Class A3B, 1 mo. LIBOR + .24%, 0.51%, due 08/15/13 | 3,197,241 | |||||||||||||
6,200,000 | Capital Auto Receivable Asset Trust, Series 07-2, Class A4B, 1 mo. LIBOR + .40%, 0.67%, due 02/18/14 (a) | 6,156,600 | |||||||||||||
9,000,000 | Carmax Auto Owner Trust, Series 08-2, Class A4B, 1 mo. LIBOR + 1.65%, 1.92%, due 08/15/13 | 9,071,460 | |||||||||||||
4,685,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4A, 5.32%, due 11/10/14 | 4,931,731 | |||||||||||||
791,404 | Daimler Chrysler Master Owner Trust, Series 06-A, Class A, 1 mo. LIBOR + .03%, 0.30%, due 11/15/11 | 787,692 | |||||||||||||
6,800,000 | Ford Credit Auto Owner Trust, Series 06-C, Class A4B, 1 mo. LIBOR + .04%, 0.31%, due 02/15/12 (a) | 6,754,644 | |||||||||||||
1,700,000 | Ford Credit Auto Owner Trust, Series 07-B, Class A4B, 1 mo. LIBOR + .38%, 0.65%, due 07/15/12 | 1,678,750 | |||||||||||||
11,790,000 | Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.52%, due 06/15/13 | 10,964,700 | |||||||||||||
9,000,000 | Merrill Auto Trust Securitization, Series 08-1, Class A4B, 1 mo. LIBOR + 2.20%, 2.47%, due 04/15/15 | 9,135,000 | |||||||||||||
3,700,000 | Merrill Auto Trust Securitization, Series 07-1, Class A4, 1 mo. LIBOR + .06%, 0.33%, due 12/15/13 | 3,638,950 | |||||||||||||
11,600,000 | Nissan Auto Receivables Owner Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.27%, due 06/17/13 | 11,538,497 | |||||||||||||
2,000,000 | Swift Master Auto Receivables Trust, Series 07-1, Class A, 1 mo. LIBOR + .10%, 0.37%, due 06/15/12 | 1,860,000 | |||||||||||||
7,100,000 | Truck Retail Installment Paper Corp., Series 05-1A, Class A, 144A, 1 mo. LIBOR + .27%, 0.54%, due 12/15/16 | 6,124,467 | |||||||||||||
11,600,000 | World Omni Auto Receivables Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.27%, due 11/15/12 | 11,425,768 | |||||||||||||
Total Auto Financing | 87,265,500 | ||||||||||||||
Bank Loan Collateralized Debt Obligations — 1.0% | |||||||||||||||
3,687,716 | Arran Corp. Loans No. 1 B.V., Series 06-1A, Class A3, 144A, 3 mo. LIBOR + .17%, 0.78%, due 06/20/25 | 3,433,033 | |||||||||||||
5,360,000 | Omega Capital Europe Plc, Series GLOB-5A, Class A1, 144A, 3 mo. LIBOR + .25%, 0.83%, due 07/05/11 | 4,770,400 | |||||||||||||
Total Bank Loan Collateralized Debt Obligations | 8,203,433 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Business Loans — 3.6% | |||||||||||||||
1,572,649 | Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, 1 mo. LIBOR + .37%, 0.64%, due 01/25/35 | 1,100,855 | |||||||||||||
2,374,371 | Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, 1 mo. LIBOR + .39%, 0.66%, due 01/25/36 | 1,543,341 | |||||||||||||
9,000,000 | Bayview Commercial Asset Trust, Series 07-6A, Class A2, 144A, 1 mo. LIBOR + 1.30%, 1.57%, due 12/25/37 | 5,805,000 | |||||||||||||
605,491 | Capitalsource Commercial Loan Trust, Series 06-1A, Class A1, 144A, 1 mo. LIBOR + .12%, 0.39%, due 08/22/16 | 496,503 | |||||||||||||
1,483,664 | GE Business Loan Trust, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .24%, 0.51%, due 11/15/33 | 919,871 | |||||||||||||
10,900,000 | GE Dealer Floorplan Master Trust, Series 07-2, Class A, 1 mo. LIBOR + .01%, 0.28%, due 07/20/12 | 10,732,140 | |||||||||||||
2,029,960 | Lehman Brothers Small Balance Commercial, Series 05-1A, Class A, 144A, 1 mo. LIBOR + .25%, 0.52%, due 02/25/30 | 1,258,575 | |||||||||||||
1,457,292 | Lehman Brothers Small Balance Commercial, Series 05-2A, Class 1A, 144A, 1 mo. LIBOR + .25%, 0.52%, due 09/25/30 | 874,375 | |||||||||||||
998,937 | Lehman Brothers Small Balance Commercial, Series 07-2A, Class 1A1, 144A, 1 mo. LIBOR + .12%, 0.39%, due 06/25/37 | 749,203 | |||||||||||||
425,912 | Lehman Brothers Small Balance Commercial, Series 07-3A, Class 1A1, 144A, 1 mo. LIBOR + .65%, 0.92%, due 10/25/37 | 370,543 | |||||||||||||
2,700,000 | Lehman Brothers Small Balance Commercial, Series 07-3A, Class 1A2, 144A, 1 mo. LIBOR + .85%, 1.12%, due 10/25/37 | 1,701,000 | |||||||||||||
4,300,000 | Navistar Financial Dealer Note Master Trust, Series 05-1, Class A, 1 mo. LIBOR + .11%, 0.38%, due 02/25/13 | 4,171,000 | |||||||||||||
Total Business Loans | 29,722,406 | ||||||||||||||
CMBS — 4.7% | |||||||||||||||
5,200,000 | Citigroup/Deutsche Bank Commercial Mortgage, Series 05-CD1, Class A2FL, 1 mo. LIBOR + .12%, 0.39%, due 07/15/44 | 3,640,000 | |||||||||||||
11,500,000 | Commercial Mortgage Pass-Through Certificates, Series 06-FL12, Class AJ, 144A, 1 mo. LIBOR + .13%, 0.40%, due 12/15/20 | 6,325,000 | |||||||||||||
5,200,000 | GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45 | 5,217,680 | |||||||||||||
3,600,000 | GE Capital Commercial Mortgage Corp., Series 06-C1, Class A2, 5.51%, due 03/10/44 | 3,616,200 | |||||||||||||
959,788 | Greenwich Capital Commercial Funding Corp., Series 06-FL4A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.37%, due 11/05/21 | 825,418 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
CMBS — continued | |||||||||||||||
6,000,000 | GS Mortgage Securities Corp., Series 06-GG6, Class A2, 5.51%, due 04/10/38 | 5,983,125 | |||||||||||||
554,933 | Lehman Brothers Floating Rate Commercial, Series 06-LLFA, Class A1, 144A, 1 mo. LIBOR + .08%, 0.35%, due 09/15/21 | 474,467 | |||||||||||||
5,400,000 | Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, 5.79%, due 05/12/39 | 5,434,020 | |||||||||||||
2,700,000 | Morgan Stanley Capital I, Series 06-IQ11, Class A3, 5.91%, due 10/15/42 | 2,632,230 | |||||||||||||
6,906,199 | Wachovia Bank Commercial Mortgage Trust, Series 06-WL7A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.36%, due 09/15/21 | 4,972,463 | |||||||||||||
Total CMBS | 39,120,603 | ||||||||||||||
CMBS Collateralized Debt Obligations — 0.7% | |||||||||||||||
6,780,000 | American Capital Strategies Ltd. Commercial Real Estate CDO Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .80%, 1.21%, due 11/23/52 | 474,600 | |||||||||||||
4,673,285 | Guggenheim Structured Real Estate Funding, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .32%, 0.59%, due 08/26/30 | 1,635,650 | |||||||||||||
6,450,000 | Marathon Real Estate CDO, Series 06-1A, Class A1, 144A, 1 mo. LIBOR + .33%, 0.60%, due 05/25/46 | 3,354,000 | |||||||||||||
Total CMBS Collateralized Debt Obligations | 5,464,250 | ||||||||||||||
Credit Cards — 13.8% | |||||||||||||||
7,900,000 | American Express Credit Account Master Trust, Series 05-5, Class A, 1 mo. LIBOR + .04%, 0.31%, due 02/15/13 | 7,861,448 | |||||||||||||
4,100,000 | American Express Credit Account Master Trust, Series 06-1, Class A, 1 mo. LIBOR + .03%, 0.30%, due 12/15/13 | 4,029,533 | |||||||||||||
7,100,000 | Cabela's Master Credit Card Trust, Series 08-4A, Class A2, 144A, 1 mo. LIBOR + 3.00%, 3.27%, due 09/15/14 | 7,286,801 | |||||||||||||
4,500,000 | Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, 3 mo. LIBOR + .15%, 0.59%, due 06/16/14 | 4,411,395 | |||||||||||||
8,700,000 | Capital One Multi-Asset Execution Trust, Series 06-A14, Class A, 1 mo. LIBOR + .01%, 0.28%, due 08/15/13 | 8,569,500 | |||||||||||||
8,100,000 | Capital One Multi-Asset Execution Trust, Series 08-A6, Class A6, 1 mo. LIBOR + 1.10%, 1.37%, due 03/17/14 | 8,039,250 | |||||||||||||
7,700,000 | Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.52%, due 09/15/17 | 7,113,953 | |||||||||||||
9,100,000 | Citibank OMNI Master Trust, Series 07-A9A, Class A9, 144A, 1 mo. LIBOR + 1.10%, 1.37%, due 12/23/13 | 9,063,600 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Credit Cards — continued | |||||||||||||||
4,000,000 | Discover Card Master Trust I, Series 96-4, Class A, 1 mo. LIBOR + .38%, 0.65%, due 10/16/13 | 3,932,400 | |||||||||||||
4,100,000 | Discover Card Master Trust I, Series 05-4, Class A1, 1 mo. LIBOR + .06%, 0.33%, due 06/18/13 | 4,042,354 | |||||||||||||
3,900,000 | Discover Card Master Trust I, Series 05-4, Class A2, 1 mo. LIBOR + .09%, 0.36%, due 06/16/15 | 3,550,219 | |||||||||||||
2,700,000 | Discover Card Master Trust I, Series 06-2, Class A2, 1 mo. LIBOR + .03%, 0.30%, due 01/16/14 | 2,640,001 | |||||||||||||
5,700,000 | GE Capital Credit Card Master Note Trust, Series 05-1, Class A, 1 mo. LIBOR + .04%, 0.31%, due 03/15/13 | 5,673,267 | |||||||||||||
4,400,000 | GE Capital Credit Card Master Note Trust, Series 07-3, Class A1, 1 mo. LIBOR + .01%, 0.28%, due 06/15/13 | 4,347,200 | |||||||||||||
10,600,000 | Household Credit Card Master Note Trust I, Series 07-1, Class A, 1 mo. LIBOR + .05%, 0.32%, due 04/15/13 | 10,434,375 | |||||||||||||
4,600,000 | Household Credit Card Master Note Trust I, Series 07-2, Class A, 1 mo. LIBOR + .55%, 0.82%, due 07/15/13 | 4,508,000 | |||||||||||||
14,300,000 | HSBC Private Label Credit Card Master Note, Series 07-1, Class A, 1 mo. LIBOR + .02%, 0.29%, due 12/16/13 | 14,014,000 | |||||||||||||
4,200,000 | National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.07%, due 05/15/13 | 4,074,000 | |||||||||||||
900,000 | World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, 1 mo. LIBOR + .13%, 0.40%, due 02/15/17 | 810,846 | |||||||||||||
Total Credit Cards | 114,402,142 | ||||||||||||||
Equipment Leases — 1.0% | |||||||||||||||
1,958,399 | CNH Equipment Trust, Series 07-B, Class A3B, 1 mo. LIBOR + .60%, 0.87%, due 10/17/11 | 1,959,104 | |||||||||||||
6,652,287 | GE Equipment Midticket LLC, Series 07-1, Class A3B, 1 mo. LIBOR + .25%, 0.52%, due 06/14/11 | 6,627,341 | |||||||||||||
Total Equipment Leases | 8,586,445 | ||||||||||||||
Insurance Premiums — 0.9% | |||||||||||||||
8,000,000 | AICCO Premium Finance Master Trust, Series 07-AA, Class A, 144A, 1 mo. LIBOR + .05%, 0.32%, due 12/15/11 | 7,684,800 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Auto Financing — 8.1% | |||||||||||||||
4,700,000 | Aesop Funding II LLC, Series 05-1A, Class A3, 144A, MBIA, 1 mo. LIBOR + .12%, 0.39%, due 04/20/11 | 4,602,992 | |||||||||||||
6,000,000 | Aesop Funding II LLC, Series 06-1A, Class A, 144A, MBIA, 1 mo. LIBOR + .22%, 0.49%, due 03/20/12 | 5,587,080 | |||||||||||||
2,494,536 | AmeriCredit Automobile Receivables Trust, Series 05-BM, Class A4, MBIA, 1 mo. LIBOR + .08%, 0.36%, due 05/06/12 | 2,464,951 | |||||||||||||
2,900,000 | AmeriCredit Automobile Receivables Trust, Series 07-AX, Class A4, XL, 1 mo. LIBOR + .04%, 0.32%, due 10/06/13 | 2,784,870 | |||||||||||||
4,627,934 | AmeriCredit Automobile Receivables Trust, Series 07-CM, Class A3B, MBIA, 1 mo. LIBOR + .03%, 0.31%, due 05/07/12 | 4,516,683 | |||||||||||||
2,700,000 | AmeriCredit Automobile Receivables Trust, Series 07-DF, Class A4B, FSA, 1 mo. LIBOR + .80%, 1.08%, due 06/06/14 | 2,343,975 | |||||||||||||
6,000,000 | AmeriCredit Prime Automobile Receivable Trust, Series 07-2M, Class A4B, MBIA, 1 mo. LIBOR + .50%, 0.78%, due 03/08/16 | 5,438,328 | |||||||||||||
5,282,948 | Capital One Auto Finance Trust, Series 06-B, Class A4, MBIA, 1 mo. LIBOR + .02%, 0.29%, due 07/15/13 | 5,136,399 | |||||||||||||
9,700,000 | Capital One Auto Finance Trust, Series 07-A, Class A4, AMBAC, 1 mo. LIBOR + .02%, 0.29%, due 11/15/13 | 9,205,319 | |||||||||||||
1,192,709 | Capital One Auto Finance Trust, Series 07-C, Class A3B, FGIC, 1 mo. LIBOR + .51%, 0.78%, due 04/16/12 | 1,179,398 | |||||||||||||
1,800,000 | Hertz Vehicle Financing LLC, Series 05-2A, Class A5, 144A, AMBAC, 1 mo. LIBOR + .25%, 0.52%, due 11/25/11 | 1,709,856 | |||||||||||||
11,000,000 | Santander Drive Auto Receivables Trust, Series 07-3, Class A4B, FGIC, 1 mo. LIBOR + .65%, 0.92%, due 10/15/14 | 10,237,700 | |||||||||||||
11,000,000 | Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.48%, due 07/14/14 | 10,010,000 | |||||||||||||
2,070,420 | UPFC Auto Receivables Trust, Series 06-B, Class A3, AMBAC, 5.01%, due 08/15/12 | 2,069,447 | |||||||||||||
Total Insured Auto Financing | 67,286,998 | ||||||||||||||
Insured Other — 1.6% | |||||||||||||||
5,000,000 | DB Master Finance LLC, Series 06-1, Class A2, 144A, AMBAC, 5.78%, due 06/20/31 | 4,621,505 | |||||||||||||
3,630,062 | Henderson Receivables LLC, Series 06-3A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.47%, due 09/15/41 | 2,744,072 | |||||||||||||
2,847,241 | Henderson Receivables LLC, Series 06-4A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.47%, due 12/15/41 | 2,167,662 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Other — continued | |||||||||||||||
3,457,564 | TIB Card Receivables Fund, 144A, FGIC, 3 mo. LIBOR + .25%, 0.83%, due 01/05/14 | 3,111,808 | |||||||||||||
9,200,000 | Toll Road Investment Part II, Series C, 144A, MBIA, Zero Coupon, due 02/15/37 | 869,308 | |||||||||||||
Total Insured Other | 13,514,355 | ||||||||||||||
Insured Residential Asset-Backed Securities (United States) — 0.5% | |||||||||||||||
9,833,997 | Ameriquest Mortgage Securities, Inc., Series 04-R6, Class A1, XL, 1 mo. LIBOR + .21%, 0.48%, due 07/25/34 | 4,326,959 | |||||||||||||
Insured Residential Mortgage-Backed Securities (United States) — 0.1% | |||||||||||||||
1,239,547 | SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, 1 mo. LIBOR + .19%, 0.46%, due 11/25/35 | 593,191 | |||||||||||||
Insured Time Share — 0.5% | |||||||||||||||
865,390 | Cendant Timeshare Receivables Funding LLC, Series 05-1A, Class A2, 144A, FGIC, 1 mo. LIBOR + .18%, 0.45%, due 05/20/17 | 787,505 | |||||||||||||
554,899 | Sierra Receivables Funding Co., Series 06-1A, Class A2, 144A, MBIA, 1 mo. LIBOR + .15%, 0.42%, due 05/20/18 | 455,149 | |||||||||||||
4,114,483 | Sierra Receivables Funding Co., Series 07-2A, Class A2, 144A, MBIA, 1 mo. LIBOR + 1.00%, 1.27%, due 09/20/19 | 2,551,885 | |||||||||||||
Total Insured Time Share | 3,794,539 | ||||||||||||||
Insured Transportation — 0.5% | |||||||||||||||
5,273,133 | CLI Funding LLC, Series 06-1A, Class A, 144A, AMBAC, 1 mo. LIBOR + .18%, 0.45%, due 08/18/21 | 3,717,559 | |||||||||||||
Investment Grade Corporate Collateralized Debt Obligations — 3.1% | |||||||||||||||
4,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class II, 144A, 3 mo. LIBOR + .65%, 1.26%, due 12/20/09 | 3,726,000 | |||||||||||||
2,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class III, 144A, 3 mo. LIBOR + .75%, 1.36%, due 12/20/09 | 1,815,000 | |||||||||||||
2,000,000 | Morgan Stanley ACES SPC, Series 05-2A, Class A, 144A, 3 mo. LIBOR + .45%, 1.06%, due 03/20/10 | 1,818,000 | |||||||||||||
2,000,000 | Morgan Stanley ACES SPC, Series 05-10, Class A1, 144A, 3 mo. LIBOR + .52%, 1.13%, due 03/20/10 | 1,753,000 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Investment Grade Corporate Collateralized Debt Obligations — continued | |||||||||||||||
4,000,000 | Morgan Stanley ACES SPC, Series 05-15, Class A, 144A, 3 mo. LIBOR + .40%, 1.01%, due 12/20/10 | 3,366,000 | |||||||||||||
4,800,000 | Morgan Stanley ACES SPC, Series 06-13A, Class A, 144A, 3 mo. LIBOR + .29%, 0.90%, due 06/20/13 | 2,613,600 | |||||||||||||
9,000,000 | Prism Orso Trust, Series 04-MAPL, Class CERT, 144A, 3 mo. LIBOR + .70%, 1.41%, due 08/01/11 | 7,651,800 | |||||||||||||
4,500,000 | Salisbury International Investments Ltd., 3 mo. LIBOR + .42%, 1.03%, due 06/22/10 | 3,231,000 | |||||||||||||
Total Investment Grade Corporate Collateralized Debt Obligations | 25,974,400 | ||||||||||||||
Residential Asset-Backed Securities (United States) — 10.5% | |||||||||||||||
2,087,338 | Accredited Mortgage Loan Trust, Series 07-1, Class A1, 1 mo. LIBOR + .05%, 0.32%, due 02/25/37 | 1,979,832 | |||||||||||||
357,673 | ACE Securities Corp., Series 05-ASP1, Class A2C, 1 mo. LIBOR + .27%, 0.54%, due 09/25/35 | 345,154 | |||||||||||||
278,249 | ACE Securities Corp., Series 05-SDI, Class A1, 1 mo. LIBOR + .40%, 0.67%, due 11/25/50 | 236,512 | |||||||||||||
9,400,000 | ACE Securities Corp., Series 06-ASP5, Class A2C, 1 mo. LIBOR + .18%, 0.45%, due 10/25/36 | 2,444,000 | |||||||||||||
4,390,734 | ACE Securities Corp., Series 06-CW1, Class A2B, 1 mo. LIBOR + .10%, 0.37%, due 07/25/36 | 3,293,050 | |||||||||||||
11,900,000 | ACE Securities Corp., Series 06-HE2, Class A2C, 1 mo. LIBOR + .16%, 0.43%, due 05/25/36 | 3,927,000 | |||||||||||||
1,618,249 | ACE Securities Corp., Series 06-HE3, Class A2B, 1 mo. LIBOR + .09%, 0.36%, due 06/25/36 | 1,213,687 | |||||||||||||
903,808 | ACE Securities Corp., Series 06-SL1, Class A, 1 mo. LIBOR + .16%, 0.43%, due 09/25/35 | 111,846 | |||||||||||||
2,282,387 | ACE Securities Corp., Series 06-SL3, Class A2, 1 mo. LIBOR + .17%, 0.44%, due 06/25/36 | 39,942 | |||||||||||||
2,099,224 | ACE Securities Corp., Series 06-SL3, Class A1, 1 mo. LIBOR + .10%, 0.37%, due 06/25/36 | 68,225 | |||||||||||||
1,257,221 | ACE Securities Corp., Series 06-SL4, Class A1, 1 mo. LIBOR + .12%, 0.39%, due 09/25/36 | 141,752 | |||||||||||||
2,373,663 | ACE Securities Corp., Series 07-WM1, Class A2A, 1 mo. LIBOR + .07%, 0.34%, due 11/25/36 | 1,127,490 | |||||||||||||
4,634,751 | ACE Securities Corp., Series 07-ASL1, Class A2, 1 mo. LIBOR + .17%, 0.44%, due 12/25/36 | 220,151 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
2,347,282 | Argent Securities, Inc., Series 06-W2, Class A2B, 1 mo. LIBOR + .19%, 0.46%, due 03/25/36 | 1,455,315 | |||||||||||||
11,400,000 | Argent Securities, Inc., Series 06-M1, Class A2C, 1 mo. LIBOR + .15%, 0.42%, due 07/25/36 | 2,693,250 | |||||||||||||
2,300,000 | Argent Securities, Inc., Series 06-W5, Class A2C, 1 mo. LIBOR + .15%, 0.42%, due 06/25/36 | 763,672 | |||||||||||||
8,326,236 | Argent Securities, Inc., Series 06-M2, Class A2B, 1 mo. LIBOR + .11%, 0.38%, due 09/25/36 | 4,995,742 | |||||||||||||
7,062,835 | Asset Backed Funding Certificates, Series 07-NC1, Class A1, 144A, 1 mo. LIBOR + .22%, 0.49%, due 05/25/37 | 5,071,822 | |||||||||||||
2,600,000 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3B, 1 mo. LIBOR + .11%, 0.38%, due 10/25/36 | 2,427,360 | |||||||||||||
2,700,000 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3C, 1 mo. LIBOR + .15%, 0.42%, due 10/25/36 | 1,072,710 | |||||||||||||
113,451 | Asset Backed Funding Certificates, Series 06-OPT3, Class A3A, 1 mo. LIBOR + .06%, 0.33%, due 11/25/36 | 110,047 | |||||||||||||
4,223,310 | Bayview Financial Acquisition Trust, Series 05-A, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 02/28/40 | 2,049,995 | |||||||||||||
3,184,310 | Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A1, 1 mo. LIBOR + .11%, 0.38%, due 11/25/36 | 2,224,364 | |||||||||||||
5,400,000 | Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A2, 1 mo. LIBOR + .20%, 0.47%, due 11/25/36 | 1,075,080 | |||||||||||||
2,114,687 | Bear Stearns Mortgage Funding Trust, Series 07-SL2, Class 1A, 1 mo. LIBOR + .16%, 0.43%, due 02/25/37 | 193,251 | |||||||||||||
2,600,000 | Centex Home Equity, Series 06-A, Class AV3, 1 mo. LIBOR + .16%, 0.43%, due 06/25/36 | 1,820,000 | |||||||||||||
6,600,000 | Citigroup Mortgage Loan Trust, Inc., Series 06-WFH4, Class A3, 1 mo. LIBOR + .15%, 0.42%, due 11/25/36 | 2,640,000 | |||||||||||||
2,600,000 | Citigroup Mortgage Loan Trust, Inc., Series 06-HE3, Class A2C, 1 mo. LIBOR + .16%, 0.43%, due 12/25/36 | 806,000 | |||||||||||||
8,112,000 | Countrywide Asset-Backed Certificates, Series 06-BC3, Class 2A2, 1 mo. LIBOR + .14%, 0.41%, due 02/25/37 | 4,429,963 | |||||||||||||
2,175,177 | Countrywide Asset-Backed Certificates, Series 06-BC5, Class 2A1, 1 mo. LIBOR + .08%, 0.35%, due 03/25/37 | 2,031,398 | |||||||||||||
645,573 | Credit-Based Asset Servicing & Securitization, Series 06-RP1, Class A1, 144A, 1 mo. LIBOR + .11%, 0.38%, due 04/25/36 | 595,339 | |||||||||||||
4,400,000 | Fremont Home Loan Trust, Series 06-B, Class 2A3, 1 mo. LIBOR + .16%, 0.43%, due 08/25/36 | 1,258,400 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
1,344,976 | Household Home Equity Loan Trust, Series 05-2, Class A2, 1 mo. LIBOR + .31%, 0.58%, due 01/20/35 | 1,044,038 | |||||||||||||
508,208 | Household Home Equity Loan Trust, Series 05-3, Class A2, 1 mo. LIBOR + .29%, 0.56%, due 01/20/35 | 386,874 | |||||||||||||
6,800,000 | J.P. Morgan Mortgage Acquisition Corp., Series 06-WMC4, Class A3, 1 mo. LIBOR + .12%, 0.39%, due 12/25/36 | 1,948,091 | |||||||||||||
4,400,000 | Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.42%, due 03/25/36 | 1,558,524 | |||||||||||||
3,100,000 | Master Asset-Backed Securities Trust, Series 06-NC3, Class A4, 1 mo. LIBOR + .16%, 0.43%, due 10/25/36 | 893,823 | |||||||||||||
535,288 | Master Asset-Backed Securities Trust, Series 05-FRE1, Class A4, 1 mo. LIBOR + .25%, 0.52%, due 10/25/35 | 466,369 | |||||||||||||
2,700,000 | Master Asset-Backed Securities Trust, Series 06-HE2, Class A3, 1 mo. LIBOR + .15%, 0.42%, due 06/25/36 | 785,646 | |||||||||||||
6,160,000 | Master Asset-Backed Securities Trust, Series 06-HE3, Class A3, 1 mo. LIBOR + .15%, 0.42%, due 08/25/36 | 1,869,129 | |||||||||||||
1,380,184 | Master Second Lien Trust, Series 06-1, Class A, 1 mo. LIBOR + .16%, 0.43%, due 03/25/36 | 44,856 | |||||||||||||
2,957,726 | Merrill Lynch Mortgage Trust, Series 06-SD1, Class A, 1 mo. LIBOR + .28%, 0.55%, due 01/25/47 | 1,827,579 | |||||||||||||
2,300,000 | Morgan Stanley IXIS Real Estate Capital Trust, Series 06-2, Class A3, 1 mo. LIBOR + .15%, 0.42%, due 11/25/36 | 621,000 | |||||||||||||
8,800,000 | Nationstar Home Equity Loan Trust, Series 06-B, Class AV3, 1 mo. LIBOR + .17%, 0.44%, due 09/25/36 | 2,378,750 | |||||||||||||
9,100,000 | Nomura Home Equity Loan, Inc., Series 06-HE3, Class 2A3, 1 mo. LIBOR + .15%, 0.42%, due 07/25/36 | 2,533,781 | |||||||||||||
2,156,362 | People's Choice Home Loan Securities Trust, Series 05-4, Class 1A2, 1 mo. LIBOR + .26%, 0.53%, due 12/25/35 | 1,409,004 | |||||||||||||
201,616 | Residential Asset Mortgage Products, Inc., Series 05-RS4, Class A3, 1 mo. LIBOR + .23%, 0.50%, due 04/25/35 | 191,535 | |||||||||||||
6,500,000 | Saxon Asset Securities Trust, Series 06-3, Class A2, 1 mo. LIBOR + .11%, 0.38%, due 10/25/46 | 5,265,000 | |||||||||||||
9,100,000 | Securitized Asset-Backed Receivables LLC Trust, Series 06-HE1, Class A2C, 1 mo. LIBOR + .16%, 0.43%, due 07/25/36 | 2,702,700 | |||||||||||||
2,039,533 | Security National Mortgage Loan Trust, Series 06-2A, Class A1, 144A, 1 mo. LIBOR + .29%, 0.56%, due 10/25/36 | 1,709,128 | |||||||||||||
571,796 | SG Mortgage Securities Trust, Series 05-OPT1, Class A2, 1 mo. LIBOR + .26%, 0.53%, due 10/25/35 | 517,943 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
3,896,466 | Soundview Home Equity Loan Trust, Series 07-NS1, Class A1, 1 mo. LIBOR + .12%, 0.39%, due 01/25/37 | 3,196,320 | |||||||||||||
3,600,000 | Specialty Underwriting & Residential Finance, Series 06-BC3, Class A2C, 1 mo. LIBOR + .15%, 0.42%, due 06/25/37 | 1,028,160 | |||||||||||||
2,299,645 | Structured Asset Investment Loan Trust, Series 06-1, Class A3, 1 mo. LIBOR + .20%, 0.47%, due 01/25/36 | 1,333,794 | |||||||||||||
1,003,002 | Structured Asset Securities Corp., Series 05-S6, Class A2, 1 mo. LIBOR + .29%, 0.56%, due 11/25/35 | 210,630 | |||||||||||||
Total Residential Asset-Backed Securities (United States) | 86,785,023 | ||||||||||||||
Residential Mortgage-Backed Securities (Australian) — 2.0% | |||||||||||||||
707,405 | Australian Mortgage Securities II, Series G3, Class A1A, 3 mo. LIBOR + .21%, 0.74%, due 01/10/35 | 618,980 | |||||||||||||
2,627,562 | Crusade Global Trust, Series 06-1, Class A1, 144A, 3 mo. LIBOR + .06%, 0.57%, due 07/20/38 | 2,450,837 | |||||||||||||
7,048,164 | Interstar Millennium Trust, Series 04-2G, Class A, 3 mo. LIBOR + .20%, 1.03%, due 03/14/36 | 5,686,599 | |||||||||||||
2,997,318 | Interstar Millennium Trust, Series 05-1G, Class A, 3 mo. LIBOR + .12%, 0.75%, due 12/08/36 | 2,462,747 | |||||||||||||
1,574,486 | Medallion Trust, Series 05-1G, Class A1, 3 mo. LIBOR + .08%, 0.54%, due 05/10/36 | 1,480,322 | |||||||||||||
4,253,400 | Puma Finance Ltd., Series G5, Class A1, 144A, 3 mo. LIBOR + .07%, 0.49%, due 02/21/38 | 3,402,720 | |||||||||||||
Total Residential Mortgage-Backed Securities (Australian) | 16,102,205 | ||||||||||||||
Residential Mortgage-Backed Securities (European) — 3.9% | |||||||||||||||
8,008,343 | Aire Valley Mortgages, Series 06-1A, Class 1A, 144A, 3 mo. LIBOR + .11%, 0.72%, due 09/20/66 | 4,004,171 | |||||||||||||
5,700,000 | Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.61%, due 01/13/39 | 5,003,531 | |||||||||||||
719,880 | Gracechurch Mortgage Funding Plc, Series 1A, Class A2B, 144A, 3 mo. LIBOR + .07%, 0.58%, due 10/11/41 | 679,286 | |||||||||||||
4,242,152 | Granite Master Issuer Plc, Series 06-3, Class A3, 1 mo. LIBOR + .04%, 0.31%, due 12/20/54 | 2,693,767 | |||||||||||||
8,324,053 | Kildare Securities Ltd., Series 07-1A, Class A2, 144A, 3 mo. LIBOR + .06%, 0.71%, due 12/10/43 | 7,293,119 | |||||||||||||
933,975 | Leek Finance Plc, Series 15A, Class AB, 144A, 3 mo. LIBOR + .14%, 0.75%, due 03/21/37 | 822,336 |
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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Mortgage-Backed Securities (European) — continued | |||||||||||||||
3,108,780 | Leek Finance Plc, Series 16A, Class A2B, 144A, 3 mo. LIBOR + .16%, 0.77%, due 09/21/37 | 2,294,569 | |||||||||||||
2,973,783 | Paragon Mortgages Plc, Series 12A, Class A2C, 144A, 3 mo. LIBOR + .11%, 0.55%, due 11/15/38 | 1,669,184 | |||||||||||||
2,702,689 | Paragon Mortgages Plc, Series 14A, Class A2C, 144A, 3 mo. LIBOR + .10%, 0.73%, due 09/15/39 | 1,399,236 | |||||||||||||
2,700,000 | Permanent Master Issuer Plc, Series 06-1, Class 5A, 3 mo. LIBOR + .11%, 0.62%, due 07/15/33 | 2,146,500 | |||||||||||||
4,500,000 | Permanent Master Issuer Plc, Series 07-1, Class 4A, 3 mo. LIBOR + .08%, 0.59%, due 10/15/33 | 3,940,020 | |||||||||||||
Total Residential Mortgage-Backed Securities (European) | 31,945,719 | ||||||||||||||
Residential Mortgage-Backed Securities (United States) — 0.0% | |||||||||||||||
410,158 | GreenPoint Mortgage Funding Trust, Series 05-HE4, Class 2A3C, 1 mo. LIBOR + .25%, 0.52%, due 07/25/30 | 354,595 | |||||||||||||
Student Loans — 2.0% | |||||||||||||||
3,100,000 | College Loan Corp. Trust, Series 07-2, Class A1, 3 mo. LIBOR + .25%, 0.75%, due 01/25/24 | 3,089,344 | |||||||||||||
5,180,000 | College Loan Corp. Trust, Series 07-1, Class A1, 3 mo. LIBOR + .01%, 0.51%, due 01/25/23 | 5,147,625 | |||||||||||||
718,732 | Goal Capital Funding Trust, Series 06-1, Class A1, 3 mo. LIBOR, 0.39%, due 08/25/20 | 713,069 | |||||||||||||
104,185 | Keycorp Student Loan Trust, Series 05-A, Class 2A1, 3 mo. LIBOR + .05%, 0.65%, due 09/27/21 | 103,830 | |||||||||||||
979,148 | Montana Higher Education Student Assistance Corp., Series 05-1, Class A, 3 mo. LIBOR + .04%, 0.65%, due 06/20/15 | 973,077 | |||||||||||||
4,917,839 | National Collegiate Student Loan Trust, Series 05-2, Class A2, 1 mo. LIBOR + .15%, 0.42%, due 02/25/26 | 4,621,047 | |||||||||||||
573,352 | National Collegiate Student Loan Trust, Series 06-1, Class A2, 1 mo. LIBOR + .14%, 0.41%, due 08/25/23 | 530,356 | |||||||||||||
1,249,220 | National Collegiate Student Loan Trust, Series 06-A, Class A1, 144A, 1 mo. LIBOR + .08%, 0.35%, due 08/26/19 | 1,214,867 | |||||||||||||
Total Student Loans | 16,393,215 | ||||||||||||||
Total Asset-Backed Securities | 571,238,337 |
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, 2009 (Unaudited)
Par Value ($) / Principal Amount / Contracts | Description | Value ($) | |||||||||||||
Foreign Government Obligations — 5.0% | |||||||||||||||
GBP | 25,000,000 | U.K. Treasury Bond, 4.25%, due 12/07/46 (a) | 41,761,020 | ||||||||||||
U.S. Government — 19.2% | |||||||||||||||
126,060,080 | U.S. Treasury Inflation Indexed Bond, 0.88%, due 04/15/10 (b) (c) (d) | 125,863,174 | |||||||||||||
55,000,000 | U.S. Treasury Principal Strip Bond, due 11/15/21 (a) | 32,930,205 | |||||||||||||
Total U.S. Government | 158,793,379 | ||||||||||||||
U.S. Government Agency — 0.1% | |||||||||||||||
800,000 | U.S. Department of Transportation, 144A, 6.00%, due 12/07/21 | 772,280 | |||||||||||||
TOTAL DEBT OBLIGATIONS (COST $957,071,084) | 772,565,016 | ||||||||||||||
OPTIONS PURCHASED — 12.8% | |||||||||||||||
Currency Options — 4.4% | |||||||||||||||
AUD | 35,000,000 | AUD Put/NZD Call, Expires 06/08/10, Strike 1.26 | 1,510,753 | ||||||||||||
USD | 700,000,000 | USD Call/JPY Put, Expires 09/05/13, Strike 119.00 | 7,803,600 | ||||||||||||
USD | 700,000,000 | USD Call/JPY Put, Expires 09/05/13, Strike 119.00 | 7,803,600 | ||||||||||||
USD | 700,000,000 | USD Call/JPY Put, Expires 09/10/13, Strike 119.00 | 7,821,800 | ||||||||||||
USD | 700,000,000 | USD Call/JPY Put, Expires 09/12/13, Strike 119.00 | 7,812,700 | ||||||||||||
USD | 350,000,000 | USD Call/JPY Put, Expires 09/24/13, Strike 119.00 | 3,919,300 | ||||||||||||
Total Currency Options | 36,671,753 | ||||||||||||||
Options on Futures — 0.1% | |||||||||||||||
USD | 3,000 | Euro Dollar Future Option Put, Expires 12/14/09, Strike 98.00 | 56,250 | ||||||||||||
USD | 3,000 | Euro Dollar Future Option Put, Expires 12/14/09, Strike 99.00 | 243,750 | ||||||||||||
Total Options on Futures | 300,000 | ||||||||||||||
Options on Interest Rate Swaps — 7.0% | |||||||||||||||
AUD | 500,000,000 | AUD Swaption Call, Expires 07/29/10, Strike 5.00% | 1,029,876 | ||||||||||||
CAD | 100,000,000 | CAD Swaption Call, Expires 12/14/09, Strike 1.12% | 235,579 | ||||||||||||
CAD | 100,000,000 | CAD Swaption Call, Expires 05/20/10, Strike 2.01% | 399,452 | ||||||||||||
EUR | 150,000,000 | EUR Swaption Call, Expires 02/22/10, Strike 3.95% | 5,119,670 |
See accompanying notes to the financial statements.
13
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Principal Amount / Contracts | Description | Value ($) | |||||||||||||
Options on Interest Rate Swaps — continued | |||||||||||||||
EUR | 500,000,000 | EUR Swaption Call, Expires 02/23/10, Strike 1.00% | 139,776 | ||||||||||||
EUR | 500,000,000 | EUR Swaption Call, Expires 07/08/10, Strike 2.25% | 2,506,648 | ||||||||||||
EUR | 600,000,000 | EUR Swaption Call, Expires 02/03/11, Strike 3.39% | 10,290,949 | ||||||||||||
GBP | 500,000,000 | GBP Swaption Call, Expires 10/12/09, Strike 1.20% | 1,176,195 | ||||||||||||
GBP | 500,000,000 | GBP Swaption Call, Expires 10/12/09, Strike 1.70% | 4,795,130 | ||||||||||||
GBP | 500,000,000 | GBP Swaption Call, Expires 07/01/10, Strike 2.50% | 4,059,297 | ||||||||||||
GBP | 14,000,000 | GBP Swaption Put, Expires 02/28/11, Strike 5.17% | 334,257 | ||||||||||||
GBP | 14,000,000 | GBP Swaption Call, Expires 02/28/11, Strike 5.17% | 1,529,070 | ||||||||||||
GBP | 14,000,000 | GBP Swaption Put, Expires 03/03/11, Strike 5.03% | 400,785 | ||||||||||||
GBP | 14,000,000 | GBP Swaption Call, Expires 03/03/11, Strike 5.03% | 1,341,657 | ||||||||||||
GBP | 28,000,000 | GBP Swaption Put, Expires 03/14/11, Strike 4.96% | 893,237 | ||||||||||||
GBP | 28,000,000 | GBP Swaption Call, Expires 03/14/11, Strike 4.96% | 2,494,373 | ||||||||||||
GBP | 35,000,000 | GBP Swaption Put, Expires 03/21/11, Strike 4.92% | 1,193,353 | ||||||||||||
GBP | 35,000,000 | GBP Swaption Call, Expires 03/21/11, Strike 4.92% | 2,973,526 | ||||||||||||
SEK | 500,000,000 | SEK Swaption Call, Expires 05/13/10, Strike 2.61% | 430,501 | ||||||||||||
SEK | 500,000,000 | SEK Swaption Call, Expires 05/17/10, Strike 2.55% | 387,725 | ||||||||||||
USD | 1,000,000,000 | USD Swaption Call, Expires 09/10/09, Strike 1.15% | 4,931,000 | ||||||||||||
USD | 64,000,000 | USD Swaption Straddle, Expires 05/01/18, Strike TBD | 3,576,960 | ||||||||||||
USD | 64,000,000 | USD Swaption Straddle, Expires 04/23/18, Strike TBD | 3,587,264 | ||||||||||||
USD | 64,000,000 | USD Swaption Straddle, Expires 04/10/18, Strike TBD | 3,598,656 | ||||||||||||
Total Options on Interest Rate Swaps | 57,424,936 | ||||||||||||||
Options on Interest Rates — 1.3% | |||||||||||||||
GBP | 150,000,000 | Floor on 3 Month GBP LIBOR, Expires 09/13/09, Strike 6.40% | 3,099,049 | ||||||||||||
GBP | 150,000,000 | Floor on 3 Month GBP LIBOR, Expires 09/13/09, Strike 5.40% | 2,497,114 | ||||||||||||
GBP | 700,000,000 | Floor on 3 Month GBP LIBOR, Expires 06/08/11, Strike 2.00% | 5,432,311 | ||||||||||||
USD | 300,000,000 | USD 3 Month LIBOR Cap Call, Expires 04/15/10, Strike 2.64% | — | ||||||||||||
Total Options on Interest Rates | 11,028,474 | ||||||||||||||
TOTAL OPTIONS PURCHASED (COST $60,222,695) | 105,425,163 |
See accompanying notes to the financial statements.
14
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 8.3% | |||||||||||||||
Money Market Funds — 8.3% | |||||||||||||||
40,575,995 | State Street Institutional Liquid Reserves Fund-Institutional Class | 40,575,995 | |||||||||||||
28,277,588 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 28,277,588 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $68,853,583) | 68,853,583 | ||||||||||||||
TOTAL INVESTMENTS — 114.5% (Cost $1,086,147,362) | 946,843,762 | ||||||||||||||
Other Assets and Liabilities (net) — (14.5%) | (119,803,097 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 827,040,665 |
See accompanying notes to the financial statements.
15
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Written Options
A summary of open written option contracts of the Fund at August 31, 2009 is as follows:
Notional Amount/ Contracts | Expiration Date | Description | Premiums | Market Value | |||||||||||||||||||||||
Call | 500,000,000 | 7/29/2010 | AUD | Interest Rate Swaption, | |||||||||||||||||||||||
Strike 4.00% | $ | (330,292 | ) | $ | (166,082 | ) | |||||||||||||||||||||
Call | 200,000,000 | 12/14/2009 | CAD | Interest Rate Swaption, Strike 0.60% | (71,588 | ) | (28,134 | ) | |||||||||||||||||||
Call | 500,000,000 | 7/8/2010 | EUR | Interest Rate Swaption, Strike 1.75% | (907,400 | ) | (634,368 | ) | |||||||||||||||||||
Call | 600,000,000 | 2/3/2011 | EUR | Interest Rate Swaption, Strike 2.39% | (1,787,928 | ) | (2,843,688 | ) | |||||||||||||||||||
Call | 1,000,000,000 | 10/12/2009 | GBP | Interest Rate Swaption, Strike 1.45% | (663,400 | ) | (5,702,713 | ) | |||||||||||||||||||
Call | 500,000,000 | 7/1/2010 | GBP | Interest Rate Swaption, Strike 2.00% | (1,155,910 | ) | (1,960,867 | ) | |||||||||||||||||||
Put | 1,400,000,000 | 6/8/2011 | GBP | Floor on 3 Month GBP LIBOR, Strike 1.00% | (449,806 | ) | (1,891,679 | ) | |||||||||||||||||||
Call | 300,000,000 | 9/13/2009 | GBP | Floor on 3 Month GBP LIBOR, Strike 5.90% | (1,167,900 | ) | (5,596,408 | ) | |||||||||||||||||||
Call | 1,000,000,000 | 9/10/2009 | USD | Interest Rate Swaption, Strike 0.90% | (400,000 | ) | (2,451,000 | ) | |||||||||||||||||||
Call | 55,000,000 | 10/3/2011 | USD | Interest Rate Swaption, Strike 4.88% | (3,025,000 | ) | (4,668,510 | ) | |||||||||||||||||||
Put | 120,000,000 | 10/3/2011 | USD | Interest Rate Swaption, Strike 4.88% | (6,600,000 | ) | (5,686,440 | ) | |||||||||||||||||||
Put | 6,000 | 12/14/2009 | USD | Euro Dollar Future Option Put, Strike 98.50 | (813,000 | ) | (225,000 | ) | |||||||||||||||||||
Call | 175,000,000 | 2/9/2010 | USD | USD Call/JPY Put, Strike 102.25 | (2,485,000 | ) | (1,073,625 | ) | |||||||||||||||||||
$ | (19,857,224 | ) | $ | (32,928,514 | ) |
See accompanying notes to the financial statements.
16
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
13,000,000 | USD | 9/20/2010 | Morgan Stanley | Receive | 0.40 | % | 4.08 | % | Eagle | 13,000,000 | USD | $ | (505,180 | ) | |||||||||||||||||||||||||||||
Creek | |||||||||||||||||||||||||||||||||||||||||||
CDO | |||||||||||||||||||||||||||||||||||||||||||
50,000,000 | USD | 12/20/2012 | Morgan Stanley | (Pay) | 1.93% | 2.50 | % | Reference security within CDX index | NA | 679,995 | |||||||||||||||||||||||||||||||||
97,228,457 | USD | 12/20/2012 | Morgan Stanley | Receive | 0.71 | % | 0.30 | % | Reference security within CDX index | 97,228,457 | USD | 1,440,368 | |||||||||||||||||||||||||||||||
252,793,989 | USD | 12/20/2012 | Morgan Stanley | Receive | 0.71 | % | 0.30 | % | Reference security within CDX Index | 252,793,989 | USD | 3,744,957 | |||||||||||||||||||||||||||||||
100,000,000 | USD | 12/20/2012 | Morgan Stanley | (Pay) | 1.20% | 0.65 | % | Reference security within CDX Index | NA | (2,010,533 | ) | ||||||||||||||||||||||||||||||||
7,000,000 | USD | 3/20/2013 | Morgan Stanley | Receive | 0.25 | % | 6.22 | % | MS Synthetic 2006-1 | 7,000,000 | USD | (1,341,116 | ) | ||||||||||||||||||||||||||||||
$ | 2,008,491 | ||||||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
^ Receive - Fund receives premium and sells credit protection.
(Pay) - Fund pays premium and buys credit protection.
See accompanying notes to the financial statements.
17
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2009, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider (i.e. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to make as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
182,000,000 | USD | 5/26/2014 | Barclays Bank PLC | (Pay) | 2.59 | % | 3 month LIBOR | $ | 686,742 | ||||||||||||||||||||||
182,000,000 | USD | 5/29/2014 | Citigroup | (Pay) | 2.80 | % | 3 month LIBOR | (1,069,195 | ) | ||||||||||||||||||||||
119,000,000 | USD | 5/26/2019 | JP Morgan Chase Bank | Receive | 3.45 | % | 3 month LIBOR | (1,319,618 | ) | ||||||||||||||||||||||
100,000,000 | USD | 5/26/2019 | Barclays Bank PLC | Receive | 3.46 | % | 3 month LIBOR | (1,056,526 | ) | ||||||||||||||||||||||
119,000,000 | USD | 5/29/2019 | Morgan Stanley | Receive | 3.73 | % | 3 month LIBOR | 1,444,031 | |||||||||||||||||||||||
100,000,000 | USD | 5/29/2019 | Citigroup | Receive | 3.74 | % | 3 month LIBOR | 1,255,431 | |||||||||||||||||||||||
55,000,000 | USD | 11/15/2021 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | (7,341,419 | ) | ||||||||||||||||||||||
65,000,000 | USD | 5/15/2022 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | (4,078,199 | ) | ||||||||||||||||||||||
105,000,000 | USD | 8/15/2022 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | (6,485,010 | ) | ||||||||||||||||||||||
76,500,000 | AUD | 4/16/2023 | Deutsche Bank AG | Receive | 6.36 | % | 6 month AUD BBSW | 388,420 | |||||||||||||||||||||||
41,100,000 | AUD | 4/17/2038 | Deutsche Bank AG | (Pay) | 4.34 | % | 6 month AUD BBSW | 1,103,577 | |||||||||||||||||||||||
57,000,000 | USD | 5/26/2039 | JP Morgan Chase Bank | (Pay) | 3.95 | % | 3 month LIBOR | 1,269,429 | |||||||||||||||||||||||
57,000,000 | USD | 5/29/2039 | Morgan Stanley | (Pay) | 4.21 | % | 3 month LIBOR | (1,283,583 | ) | ||||||||||||||||||||||
25,000,000 | GBP | 12/7/2046 | Merrill Lynch | (Pay) | 4.36 | % | 6 month GBP LIBOR | (2,992,492 | ) | ||||||||||||||||||||||
$ | (19,478,412 | ) | |||||||||||||||||||||||||||||
Accretion since inception for zero coupon interest rate swaps | $ | 5,953,010 |
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
See accompanying notes to the financial statements.
18
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
65,000,000 | USD | 9/11/2009 | JP Morgan | 1.00 | % | Return on Treasury | |||||||||||||||||||||
Chase Bank | Coupon STRIP | $ | (691,678 | ) | |||||||||||||||||||||||
105,000,000 | USD | 9/11/2009 | JP Morgan Chase Bank | 1.00 | % | Return on Treasury Coupon STRIP | (1,241,902 | ) | |||||||||||||||||||
$ | (1,933,580 | ) | |||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
Reverse Repurchase Agreements
Face Value | Description | Market Value | |||||||||
USD | 4,885,000 | Goldman Sachs, 1.27%, dated 08/13/09, to be repurchased on demand at face value plus accrued interest. | $ | (4,888,102 | ) | ||||||
USD | 5,385,000 | Goldman Sachs, 1.27%, dated 08/13/09, to be repurchased on demand at face value plus accrued interest. | (5,388,420 | ) | |||||||
GBP | 25,447,500 | Barclays Bank PLC, 0.55%, dated 08/18/09, to be repurchased on demand at face value plus accrued interest. | (41,431,727 | ) | |||||||
USD | 31,625,000 | Barclays Bank PLC, 0.40%, dated 08/21/09, to be repurchased on demand at face value plus accrued interest. | (31,625,351 | ) | |||||||
$ | (83,333,600 | ) |
Average balance outstanding | $ | (36,118,284 | ) | ||||
Average interest rate | 1.27 | % | |||||
Maximum balance outstanding | $ | (42,011,250 | ) | ||||
Average shares outstanding | 42,728,625 | ||||||
Average balance per share outstanding | $ | (0.85 | ) | ||||
Days outstanding | 126 |
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund has entered into reverse repurchase agreements.
See accompanying notes to the financial statements.
19
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
As of August 31, 2009, for the swap contracts held, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
144A - Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
BBSW - Bank Bill Swap Reference Rate
CDO - Collateralized Debt Obligation
CMBS - Commercial Mortgage Backed Security
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
GBP LIBOR - London Interbank Offered Rate denominated in British Pounds.
LIBOR - London Interbank Offered Rate
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at August 31, 2009, which are subject to change based on the terms of the security.
(a) All or a portion of this security has been pledged to cover collateral requirements on reverse repurchase agreements (Note 2).
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic.
(c) All or a portion of this security has been segregated to cover collateral requirements on open swap contracts (Note 2).
(d) All or a portion of this security has been segregated to cover collateral requirements on purchased options (Note 2).
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
NZD - New Zealand Dollar
SEK - Swedish Krona
USD - United States Dollar
See accompanying notes to the financial statements.
20
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $1,086,147,362) (Note 2) | $ | 946,843,762 | |||||
Cash | 19,637,098 | ||||||
Foreign currency, at value (cost $9,220) (Note 2) | 9,368 | ||||||
Interest receivable | 1,276,874 | ||||||
Interest receivable for open swap contracts | 4,412,451 | ||||||
Receivable for open swap contracts (Note 2) | 12,012,950 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 18,383 | ||||||
Total assets | 984,210,886 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 9,187,567 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 1,639 | ||||||
Payable for open swap contracts (Note 2) | 31,416,451 | ||||||
Payable for reverse repurchase agreements (Note 2) | 83,333,600 | ||||||
Written options outstanding, at value (premiums $19,857,224) (Note 2) | 32,928,514 | ||||||
Miscellaneous payable | 146,504 | ||||||
Accrued expenses | 155,946 | ||||||
Total liabilities | 157,170,221 | ||||||
Net assets | $ | 827,040,665 | |||||
Shares outstanding: | 42,728,625 | ||||||
Net asset value per share: | $ | 19.36 |
See accompanying notes to the financial statements.
21
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Interest | $ | 9,168,862 | |||||
Dividends | 84,263 | ||||||
Total investment income | 9,253,125 | ||||||
Expenses: | |||||||
Interest expense (Note 2) | 157,761 | ||||||
Custodian, fund accounting agent and transfer agent fees | 55,476 | ||||||
Audit and tax fees | 50,784 | ||||||
Legal fees | 24,564 | ||||||
Trustees fees and related expenses (Note 3) | 8,165 | ||||||
Miscellaneous | 5,612 | ||||||
Total expenses | 302,362 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (123,464 | ) | |||||
Expense reductions (Note 2) | (617 | ) | |||||
Net expenses | 178,281 | ||||||
Net investment income (loss) | 9,074,844 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (39,673,380 | ) | |||||
Closed futures contracts | 1,532,181 | ||||||
Closed swap contracts | 7,679,920 | ||||||
Written options | 35,153,406 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (3,125,561 | ) | |||||
Net realized gain (loss) | 1,566,566 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 105,812,103 | ||||||
Open swap contracts | 627,578 | ||||||
Written options | (2,946,944 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 701,150 | ||||||
Net unrealized gain (loss) | 104,193,887 | ||||||
Net realized and unrealized gain (loss) | 105,760,453 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 114,835,297 |
See accompanying notes to the financial statements.
22
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 9,074,844 | $ | 38,279,698 | |||||||
Net realized gain (loss) | 1,566,566 | (224,621,365 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 104,193,887 | (160,835,159 | ) | ||||||||
Net increase (decrease) in net assets from operations | 114,835,297 | (347,176,826 | ) | ||||||||
Cash distributions to shareholders | (71,650,000 | ) | — | ||||||||
Net share transactions (Note 7): | (6,624,317 | ) | (340,951,905 | ) | |||||||
Redemption fees (Notes 2 and 7): | — | 432,682 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (6,624,317 | ) | (340,519,223 | ) | |||||||
Total increase (decrease) in net assets | 36,560,980 | (687,696,049 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 790,479,685 | 1,478,175,734 | |||||||||
End of period | $ | 827,040,665 | $ | 790,479,685 |
See accompanying notes to the financial statements.
23
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Financial Highlights
(For a share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005(a) | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 18.35 | $ | 25.68 | $ | 25.99 | $ | 25.23 | $ | 25.17 | $ | 25.00 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.21 | 0.76 | 1.41 | 1.36 | 0.96 | 0.15 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.48 | (8.09 | ) | (1.72 | ) | (0.60 | ) | (0.90 | ) | 0.02 | |||||||||||||||||
Total from investment operations | 2.69 | (7.33 | ) | (0.31 | ) | 0.76 | 0.06 | 0.17 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From cash distributions | (1.68 | ) | — | — | — | — | — | ||||||||||||||||||||
Total distributions | (1.68 | ) | — | — | — | — | — | ||||||||||||||||||||
Net asset value, end of period | $ | 19.36 | $ | 18.35 | $ | 25.68 | $ | 25.99 | $ | 25.23 | $ | 25.17 | |||||||||||||||
Total Return(b) | 15.62 | %** | (28.54 | )% | (1.19 | )% | 3.01 | % | 0.24 | % | 0.68 | %** | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 827,041 | $ | 790,480 | $ | 1,478,176 | $ | 1,750,067 | $ | 1,012,277 | $ | 582,279 | |||||||||||||||
Net operating expenses to average daily net assets | 0.00 | %(c)(d)* | 0.00 | %(c) | 0.00 | %(c) | 0.00 | %(c) | 0.00 | %(c) | 0.01 | %* | |||||||||||||||
Interest expense to average daily net assets | 0.04 | %* | — | 0.07 | % | 0.00 | %(c) | — | — | ||||||||||||||||||
Total net expenses to average daily net assets | 0.04 | %(d)* | 0.00 | %(c) | 0.07 | % | 0.00 | %(c) | 0.00 | %(c) | 0.01 | %* | |||||||||||||||
Net investment income to average daily net assets | 2.28 | %* | 3.19 | % | 5.38 | % | 5.36 | % | 3.84 | % | 2.21 | %* | |||||||||||||||
Portfolio turnover rate | 15 | %** | 59 | % | 41 | % | 93 | % | 31 | % | 8 | %** | |||||||||||||||
0.03 | %* | 0.04 | % | 0.02 | % | 0.03 | % | 0.03 | % | 0.06 | %* | ||||||||||||||||
Redemption fees consisted of the following per share amounts: | $ | 0.00 | (e) | $ | 0.01 | — | — | — | — |
(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. Calculation excludes redemption fees which are borne by the shareholder.
(c) Ratio is less than 0.01%.
(d) The net expense ratio does not include the effect of expense reductions.
(e) There were no redemption fees during the period.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
24
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO World Opportunity Overlay Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the J.P. Morgan 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 to seek to exploit misvaluations in world interest rates, currencies and credit markets, and to add value relative to the Fund's benchmark. The other component of the Fund's investment program involves direct investments, primarily in asset-backed securities and other adjustable rate fixed income securities. Derivative positions taken by the Fund are implemented primarily through interest rate swaps and/or futures contracts, currency forwards and/or options, and credit default swaps on single-issuers or indexes. The Fund has a substantial investment in asset-backed securities, including, but not limited to, securities backed by pools of residential and commercial mortgages, credit-card rec eivables, home equity loans, automobile loans, educational loans, corporate and sovereign bonds, and bank loans made to corporations. In addition, the Fund may invest in government securities, corporate debt securities, money market instruments, and commercial paper, and enter into credit default swaps, reverse repurchase agreements, and repurchase agreements. The Fund's fixed income securities primarily have adjustable interest rates (or may be hedged using derivatives to convert the fixed rate interest payments into adjustable rate interest payments), but may also include all types of interest rate, payment, and reset terms, including fixed rate, zero coupon, contingent, deferred, payment-in-kind, and auction rate features. The Fund also may invest in unaffiliated money market funds. Because of the deterioration in credit markets that became acute in October of 2008, the Fund currently holds and may continue to hold material positions of below investment grade securities.
From prior to March 1, 2009 through July 12, 2009, the Fund had a policy to effect redemptions of its shares in-kind above de minimis levels. The Fund had established de minimis amounts below which redemptions would be honored for cash. Beginning July 13, 2009, the Fund had a policy to pay redemption requests with cash (less a redemption fee).
As of the date of this report, shares of the Fund were not publicly offered and were principally available only to other series of the Trust and certain accredited investors.
25
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty.
Typically the Fund values debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by the Fund, those alternative sources would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund. As of August 31, 200 9, the total value of securities held that were fair valued or for which no alternative pricing source was available represented 17.74% of the net assets of the Fund.
26
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund also utilizes third party valuation services (which use industry standard models and inputs from pricing vendors) to value credit default swaps.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Asset-Backed Securities | $ | — | $ | 71,589,208 | $ | 499,649,129 | $ | 571,238,337 | |||||||||||
Foreign Government Obligations | — | 41,761,020 | — | 41,761,020 | |||||||||||||||
U.S. Government | — | 158,793,379 | — | 158,793,379 | |||||||||||||||
U.S. Government Agency | — | 772,280 | — | 772,280 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 272,915,887 | 499,649,129 | 772,565,016 | |||||||||||||||
Options Purchased | 300,000 | 105,125,163 | — | 105,425,163 | |||||||||||||||
Short-Term Investments | — | 68,853,583 | — | 68,853,583 | |||||||||||||||
Total Investments | 300,000 | 446,894,633 | 499,649,129 | 946,843,762 | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements | — | 6,147,630 | 5,865,320 | 12,012,950 | |||||||||||||||
Total | $ | 300,000 | $ | 453,042,263 | $ | 505,514,449 | $ | 958,856,712 |
27
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Written Options | $ | (225,000 | ) | $ | (32,703,514 | ) | $ | — | $ | (32,928,514 | ) | ||||||||
Swap Agreements | — | (27,559,622 | ) | (3,856,829 | ) | (31,416,451 | ) | ||||||||||||
Total | $ | (225,000 | ) | $ | (60,263,136 | ) | $ | (3,856,829 | ) | $ | (64,344,965 | ) |
The aggregate net values of the Fund's direct investments in securities and other financial instruments using Level 3 inputs were 60.41% and 0.24% of total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||
Asset-Backed Securities | $ | 606,666,299 | $ | (114,677,006 | ) | $ | 276,094 | $ | (3,921,177 | ) | $ | 82,894,126 | $ | (71,589,208 | ) | $ | 499,649,128 | ||||||||||||||
Swaps | 1,618,925 | (196,994 | ) | — | 196,994 | 389,566 | — | 2,008,491 | |||||||||||||||||||||||
Total | $ | 608,285,224 | $ | (114,874,000 | ) | $ | 276,094 | $ | (3,724,183 | ) | $ | 83,283,692 | $ | (71,589,208 | ) | $ | 501,657,619 |
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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.
28
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. When purchasing options, the Fund and/or the purchased option counterparty may post or receive
29
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
cash or securities as collateral. Options contracts purchased by the Fund and outstanding at the end of the period are listed in the Fund's Schedule of Investments.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. Written options outstanding at the end of the period are listed in the Fund's Schedule of Investments.
For the period ended August 31, 2009, investment activity in options contracts written by the Fund was as follows:
Puts | Calls | ||||||||||||||||||||||||||
Principal Amount of Contracts | Number of Contracts | Premiums | Principal Amount of Contracts | Number of Contracts | Premiums | ||||||||||||||||||||||
Outstanding, beginning of period | $ | (420,000,000 | ) | — | $ | (7,995,000 | ) | $ | (1,435,000,000 | ) | — | $ | (11,388,532 | ) | |||||||||||||
Options written | (1,765,010,000 | ) | (16,000 | ) | (6,188,056 | ) | (5,620,000,000 | ) | (47,200 | ) | (44,255,343 | ) | |||||||||||||||
Options bought back | — | — | — | 535,000,000 | 18,800 | 17,871,395 | |||||||||||||||||||||
Options expired | 665,010,000 | 10,000 | 6,320,250 | 1,690,000,000 | 28,400 | 25,778,062 | |||||||||||||||||||||
Outstanding, end of period | $ | (1,520,000,000 | ) | (6,000 | ) | $ | (7,862,806 | ) | $ | (4,830,000,000 | ) | — | $ | (11,994,418 | ) |
30
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
31
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at a later date at a fixed price. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which can cause the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer's
32
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. As of August 31, 2009, the Fund had entered into reverse repurchase agreements, plus accrued interest, amounting to $83,333,600, selling securities with a market value, plus accrued interest, of $88,006,624. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
Taxes
The Fund has elected to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Fund is not itself subject to federal income tax. Instead, each shareholder is required to take into account in determining its tax liability its distributive share of items of Fund income, gain, loss, deduction, credit, and tax preference for each taxable year substantially as though such items have been realized directly by the shareholder and without regard to whether any distribution by the Fund has been or will be received. Accordingly, no provision (benefit) for federal and state income taxes is reflected in the accompanying financial statements.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,086,147,362 | $ | 58,697,593 | $ | (198,001,193 | ) | $ | (139,303,600 | ) |
For the period ended August 31, 2009, the Fund had net realized loss attributed to redemption in-kind transactions of $3,278,412.
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or
33
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Distributions
Because the Fund has elected to be treated as a partnership for tax purposes, it is not required to make distributions to its shareholders. It is the policy of the Fund to declare and pay distributions as determined by the Trustees (or their delegates). Cash distributions made to shareholders during the period are presented in the Fund's Statement of Changes in Net Assets.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds.
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. Many of these risks are more pronounced as a result of current global economic conditions that began to unfold in 2008. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other
34
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Leveraging Risk — The Fund's use of reverse repurchase agreements and other derivatives and securities lending may cause its portfolio to be leveraged. The Fund is not limited in the extent to which it may use derivatives or in the absolute face value of its derivative positions. Leverage increases the Fund's portfolio losses and reduces opportunities for gain when interest rates or currency rates are changing.
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to a repurchase or reverse repurchase agreement or other OTC derivatives contracts, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it invests primarily in sovereign debt of emerging countries, which is typically below investment grade. Below investment grade bonds ("junk bonds") have speculative characteristics, and changes in economic conditions or other circumstances are more likely to lead to an issuer's weakened capacity to make principal and interest payments than is the case with investment grade bonds. This risk is also particularly pronounced for the Fund because it typically uses OTC derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Because the Fund typically invests in securities that are of lesser quality than those in its benchmark, in rapidly declining markets the percentage decline in the value of the Fund is likely to exceed that of its benchmark.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. The Fund invests in asset-backed securities that may be less liquid than the Fund's benchmark. The Fund may be required to sell certain less liquid securities at distressed prices or meet redemption requests in-kind. Recent changes in credit markets have reduced the liquidity of all types of fixed income securities, including in particular the asset-backed securities held by the Fund.
• Derivatives Risk — The use of derivatives involves risks different from, and potentially greater than, risks associated with direct investments in securities and other assets. Derivatives may increase other Fund risks, including market risk, liquidity risk, and credit and counterparty risk, and their value may or may not correlate with the value of the relevant underlying asset.
• Focused Investment Risk — Focusing investments in countries, regions, or sectors with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for the Fund because of its exposure to asset-backed securities secured by different types of consumer debt (e.g., credit-card receivables, automobile loans, and home equity loans).
35
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities), Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies), Market Disruption and Geopolitical Risk (the risk that geopolitical events may increase marke t volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. For more information about reverse r epurchase agreements and other derivatives, please refer to the descriptions of financial instruments (e.g. reverse repurchase agreements, swaps, futures and other types of derivative contracts) in Note 2 above as well as the discussion of the Fund's use of derivatives below.
The Fund invests in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of underlying assets or other support available to prod uce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities generally. These events reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed
36
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
and other fixed income securities. There can be no assurance these conditions will not continue or that they will not deteriorate further. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
The Fund uses its cash balance to meet its collateral obligations and for other purposes. There is no assurance that the Fund's cash balance will be sufficient to meet those obligations. If it is not, the Fund would be required to liquidate portfolio positions. To manage the Fund's cash collateral needs, the Manager reserves the right to reduce or eliminate the Fund's derivative exposures. A reduction in those exposures may cause the performance of the Fund to track its benchmark less closely and make the Fund's performance more dependent on the performance of the asset-backed securities it holds directly or indirectly.
Purchases and redemptions of Fund shares
From prior to March 1, 2009 until August 2, 2009, the fee on cash redemptions was 2.00% of the amount redeemed. From August 3, 2009 through August 31, 2009, the fee on cash redemptions was 1.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relatin g to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a
37
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund uses derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund uses derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps (including credit default swaps) or other derivatives on an index, a single security or a basket of securities to gain investment exposures. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. For example, the Fund may use credit default swaps to take an active short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may attempt to alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed vs. variable and shorter duration vs. longer duration. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
38
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some
39
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | 68,753,410 | $ | 36,671,753 | $ | — | $ | — | $ | — | $ | 105,425,163 | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | 6,147,630 | — | 5,865,320 | — | — | 12,012,950 | |||||||||||||||||||||
Total | $ | 74,901,040 | $ | 36,671,753 | $ | 5,865,320 | $ | — | $ | — | $ | 117,438,113 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | (31,854,889 | ) | $ | (1,073,625 | ) | $ | — | $ | — | $ | — | $ | (32,928,514 | ) | ||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | (27,559,622 | ) | — | (3,856,829 | ) | — | — | (31,416,451 | ) | ||||||||||||||||||
Total | $ | (59,414,511 | ) | $ | (1,073,625 | ) | $ | (3,856,829 | ) | $ | — | $ | — | $ | (64,344,965 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's
40
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | (32,097,764 | ) | $ | (3,527,550 | ) | $ | — | $ | — | $ | — | $ | (35,625,314 | ) | ||||||||||||
Futures contracts | 1,532,181 | — | — | — | — | 1,532,181 | |||||||||||||||||||||
Swap contracts | 7,482,925 | — | 196,995 | — | — | 7,679,920 | |||||||||||||||||||||
Written options | 31,253,406 | — | 3,900,000 | — | — | 35,153,406 | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | 8,170,748 | $ | (3,527,550 | ) | $ | 4,096,995 | $ | — | $ | — | $ | 8,740,193 | ||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | 12,332,768 | $ | 5,670,937 | $ | — | $ | — | $ | — | $ | 18,003,705 | |||||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | 238,012 | — | 389,566 | — | — | 627,578 | |||||||||||||||||||||
Written options | (4,358,319 | ) | 1,411,375 | — | — | — | (2,946,944 | ) | |||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | 8,212,461 | $ | 7,082,312 | $ | 389,566 | $ | — | $ | — | $ | 15,684,339 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Forwards | Swaps | Options | |||||||||||||
Average notional amount outstanding | $ | 11,116 | $ | 1,779,738,533 | $ | 14,778,688,618 | |||||||||
Highest notional amount outstanding | 77,814 | 2,437,002,216 | 22,167,170,439 | ||||||||||||
Lowest notional amount outstanding | — | 1,161,913,886 | 8,739,901,529 |
41
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 expenses incurred by the Fund through at least June 30, 2010 (excluding fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraor dinary, non-recurring and certain other unusual expenses (including taxes)).
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $6,509 and $3,772, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
4. Purchases and sales of securities
For the period ended August 31, 2009, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 93,611,748 | $ | — | |||||||
Investments (non-U.S. Government securities) | 96,272,949 | 123,640,502 |
Proceeds from sales of securities for in-kind transactions for the period ended August 31, 2009 were $6,279,242.
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
42
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2009, 55.64% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. The shareholder is another fund of the Trust.
As of August 31, 2009, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 99.89% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||
Shares sold | — | $ | — | 6,499,921 | $ | 163,700,000 | |||||||||||||
Shares repurchased | (357,685 | ) | (6,624,317 | ) | (20,970,764 | ) | (504,651,905 | ) | |||||||||||
Redemption fees | — | — | — | 432,682 | |||||||||||||||
Net increase (decrease) | (357,685 | ) | $ | (6,624,317 | ) | (14,470,843 | ) | $ | (340,519,223 | ) |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. On September 14, 2009, the Fund's redemption fee was eliminated.
43
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including a one-year period and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered that the Fund is intended to complement other strategies offered by the Manager and is not intended to stand on its own, and concluded that the usefulness of the Fund's performance relative to its benchmark was limited because the Fund is not managed to a benchmark. The Trustees also considered the qualifications and experience of the personnel resp onsible 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 so-called "fallout benefits" to the Manager, such as the possible reputational value derived from serving as
44
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
45
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including redemption fees; 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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
1) Actual | 0.04 | % | $ | 1,000.00 | $ | 1,156.20 | $ | 0.22 | |||||||||||
2) Hypothetical | 0.04 | % | $ | 1,000.00 | $ | 1,025.00 | $ | 0.20 |
* Expenses are calculated using the annualized expense ratio (including interest expense) for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
46
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 98.8 | % | |||||
Short-Term Investments | 2.0 | ||||||
Other | (0.8 | ) | |||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 22.4 | % | |||||
Software & Services | 14.6 | ||||||
Food, Beverage & Tobacco | 11.3 | ||||||
Energy | 10.9 | ||||||
Technology Hardware & Equipment | 8.8 | ||||||
Food & Staples Retailing | 6.6 | ||||||
Health Care Equipment & Services | 5.8 | ||||||
Household & Personal Products | 4.5 | ||||||
Retailing | 3.9 | ||||||
Telecommunication Services | 1.9 | ||||||
Capital Goods | 1.8 | ||||||
Consumer Services | 1.7 | ||||||
Insurance | 1.5 | ||||||
Diversified Financials | 1.2 | ||||||
Banks | 0.5 | ||||||
Consumer Durables & Apparel | 0.5 | ||||||
Transportation | 0.4 | ||||||
Materials | 0.4 | ||||||
Utilities | 0.4 | ||||||
Media | 0.4 | ||||||
Semiconductors & Semiconductor Equipment | 0.3 | ||||||
Commercial & Professional Services | 0.1 | ||||||
Automobiles & Components | 0.1 | ||||||
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 98.8% | |||||||||||||||
Automobiles & Components — 0.1% | |||||||||||||||
200 | Harley-Davidson, Inc. | 4,796 | |||||||||||||
300 | Johnson Controls, Inc. | 7,431 | |||||||||||||
Total Automobiles & Components | 12,227 | ||||||||||||||
Banks — 0.5% | |||||||||||||||
600 | BB&T Corp. | 16,764 | |||||||||||||
100 | Comerica, Inc. | 2,667 | |||||||||||||
100 | People's United Financial, Inc. | 1,606 | |||||||||||||
200 | US Bancorp | 4,524 | |||||||||||||
1,000 | Wells Fargo & Co. | 27,520 | |||||||||||||
Total Banks | 53,081 | ||||||||||||||
Capital Goods — 1.8% | |||||||||||||||
1,000 | 3M Co. | 72,100 | |||||||||||||
200 | Fastenal Co. | 7,240 | |||||||||||||
600 | General Dynamics Corp. | 35,514 | |||||||||||||
1,300 | General Electric Co. | 18,070 | |||||||||||||
100 | Parker-Hannifin Corp. | 4,866 | |||||||||||||
700 | United Technologies Corp. | 41,552 | |||||||||||||
100 | URS Corp.* | 4,323 | |||||||||||||
Total Capital Goods | 183,665 | ||||||||||||||
Commercial & Professional Services — 0.1% | |||||||||||||||
200 | Copart, Inc.* | 7,068 | |||||||||||||
200 | Waste Management, Inc. | 5,986 | |||||||||||||
Total Commercial & Professional Services | 13,054 | ||||||||||||||
Consumer Durables & Apparel — 0.4% | |||||||||||||||
1,000 | Coach, Inc. | 28,290 | |||||||||||||
400 | Leggett & Platt, Inc. | 7,300 | |||||||||||||
100 | Polo Ralph Lauren Corp. | 6,638 | |||||||||||||
300 | Pulte Homes, Inc. | 3,834 | |||||||||||||
Total Consumer Durables & Apparel | 46,062 |
See accompanying notes to the financial statements.
2
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Consumer Services — 1.6% | |||||||||||||||
900 | Apollo Group, Inc.-Class A* | 58,338 | |||||||||||||
200 | Darden Restaurants, Inc. | 6,586 | |||||||||||||
400 | H&R Block, Inc. | 6,912 | |||||||||||||
200 | ITT Educational Services, Inc.* | 20,998 | |||||||||||||
1,200 | McDonald's Corp. | 67,488 | |||||||||||||
400 | Starbucks Corp.* | 7,596 | |||||||||||||
Total Consumer Services | 167,918 | ||||||||||||||
Diversified Financials — 1.2% | |||||||||||||||
2,400 | Bank of America Corp. | 42,216 | |||||||||||||
300 | Goldman Sachs Group (The), Inc. | 49,638 | |||||||||||||
100 | IntercontinentalExchange, Inc.* | 9,380 | |||||||||||||
200 | JPMorgan Chase & Co. | 8,692 | |||||||||||||
300 | Morgan Stanley | 8,688 | |||||||||||||
300 | SEI Investments Co. | 5,532 | |||||||||||||
Total Diversified Financials | 124,146 | ||||||||||||||
Energy — 10.8% | |||||||||||||||
100 | Anadarko Petroleum Corp. | 5,287 | |||||||||||||
400 | BJ Services Co. | 6,424 | |||||||||||||
5,500 | Chevron Corp. | 384,670 | |||||||||||||
200 | Cimarex Energy Co. | 7,808 | |||||||||||||
1,574 | ConocoPhillips | 70,877 | |||||||||||||
8,100 | Exxon Mobil Corp. | 560,115 | |||||||||||||
700 | Nabors Industries Ltd.* | 12,376 | |||||||||||||
100 | Noble Energy, Inc. | 6,046 | |||||||||||||
200 | Occidental Petroleum Corp. | 14,620 | |||||||||||||
300 | Patterson-UTI Energy, Inc. | 3,987 | |||||||||||||
200 | Southwestern Energy Co.* | 7,372 | |||||||||||||
200 | Sunoco, Inc. | 5,380 | |||||||||||||
600 | Valero Energy Corp. | 11,244 | |||||||||||||
Total Energy | 1,096,206 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Food & Staples Retailing — 6.5% | |||||||||||||||
400 | Kroger Co. (The) | 8,636 | |||||||||||||
9,900 | Wal-Mart Stores, Inc. | 503,613 | |||||||||||||
4,300 | Walgreen Co. | 145,684 | |||||||||||||
100 | Whole Foods Market, Inc.* | 2,908 | |||||||||||||
Total Food & Staples Retailing | 660,841 | ||||||||||||||
Food, Beverage & Tobacco — 11.2% | |||||||||||||||
5,200 | Altria Group, Inc. | 95,056 | |||||||||||||
200 | Archer-Daniels-Midland Co. | 5,766 | |||||||||||||
200 | Campbell Soup Co. | 6,272 | |||||||||||||
8,300 | Coca-Cola Co. (The) | 404,791 | |||||||||||||
300 | Coca-Cola Enterprises, Inc. | 6,063 | |||||||||||||
500 | General Mills, Inc. | 29,865 | |||||||||||||
200 | Hansen Natural Corp.* | 6,532 | |||||||||||||
400 | Hershey Co. (The) | 15,692 | |||||||||||||
200 | HJ Heinz Co. | 7,700 | |||||||||||||
100 | JM Smucker Co. (The) | 5,227 | |||||||||||||
400 | Kellogg Co. | 18,836 | |||||||||||||
500 | Kraft Foods, Inc.-Class A | 14,175 | |||||||||||||
100 | Lorillard, Inc. | 7,277 | |||||||||||||
200 | Pepsi Bottling Group (The), Inc. | 7,146 | |||||||||||||
4,600 | PepsiCo, Inc. | 260,682 | |||||||||||||
5,300 | Philip Morris International, Inc. | 242,263 | |||||||||||||
400 | Tyson Foods, Inc.-Class A | 4,796 | |||||||||||||
Total Food, Beverage & Tobacco | 1,138,139 | ||||||||||||||
Health Care Equipment & Services — 5.8% | |||||||||||||||
700 | AmerisourceBergen Corp. | 14,917 | |||||||||||||
100 | Baxter International, Inc. | 5,692 | |||||||||||||
400 | Cardinal Health, Inc. | 13,832 | |||||||||||||
100 | Cerner Corp.* | 6,171 | |||||||||||||
200 | Cigna Corp. | 5,886 | |||||||||||||
300 | Coventry Health Care, Inc.* | 6,549 | |||||||||||||
300 | Express Scripts, Inc.* | 21,666 |
See accompanying notes to the financial statements.
4
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Health Care Equipment & Services — continued | |||||||||||||||
500 | McKesson Corp. | 28,430 | |||||||||||||
200 | Medco Health Solutions, Inc.* | 11,044 | |||||||||||||
2,200 | Medtronic, Inc. | 84,260 | |||||||||||||
200 | Omnicare, Inc. | 4,578 | |||||||||||||
200 | Quest Diagnostics, Inc. | 10,792 | |||||||||||||
200 | Stryker Corp. | 8,292 | |||||||||||||
8,921 | UnitedHealth Group, Inc. | 249,788 | |||||||||||||
1,600 | WellPoint, Inc.* | 84,560 | |||||||||||||
700 | Zimmer Holdings, Inc.* | 33,145 | |||||||||||||
Total Health Care Equipment & Services | 589,602 | ||||||||||||||
Household & Personal Products — 4.4% | |||||||||||||||
500 | Avon Products, Inc. | 15,935 | |||||||||||||
300 | Clorox Co. | 17,727 | |||||||||||||
1,800 | Colgate-Palmolive Co. | 130,860 | |||||||||||||
100 | Energizer Holdings, Inc.* | 6,543 | |||||||||||||
200 | Estee Lauder Cos. (The), Inc.-Class A | 7,170 | |||||||||||||
900 | Kimberly-Clark Corp. | 54,414 | |||||||||||||
4,000 | Procter & Gamble Co. (The) | 216,440 | |||||||||||||
Total Household & Personal Products | 449,089 | ||||||||||||||
Insurance — 1.4% | |||||||||||||||
100 | Aflac, Inc. | 4,062 | |||||||||||||
700 | Allstate Corp. (The) | 20,573 | |||||||||||||
400 | Chubb Corp. | 19,756 | |||||||||||||
300 | Fidelity National Financial, Inc.-Class A | 4,506 | |||||||||||||
200 | HCC Insurance Holdings, Inc. | 5,288 | |||||||||||||
500 | Marsh & McLennan Cos., Inc. | 11,770 | |||||||||||||
200 | MetLife, Inc. | 7,552 | |||||||||||||
500 | Old Republic International Corp. | 5,955 | |||||||||||||
200 | Prudential Financial, Inc. | 10,116 | |||||||||||||
1,000 | Travelers Cos. (The), Inc. | 50,420 | |||||||||||||
300 | W.R. Berkley Corp. | 7,665 | |||||||||||||
Total Insurance | 147,663 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Materials — 0.4% | |||||||||||||||
700 | Dow Chemical Co. (The) | 14,903 | |||||||||||||
100 | Freeport-McMoRan Copper & Gold, Inc. | 6,298 | |||||||||||||
200 | Pactiv Corp.* | 4,970 | |||||||||||||
100 | Reliance Steel & Aluminum Co. | 3,694 | |||||||||||||
300 | Southern Copper Corp. | 8,478 | |||||||||||||
100 | Steel Dynamics, Inc. | 1,655 | |||||||||||||
Total Materials | 39,998 | ||||||||||||||
Media — 0.4% | |||||||||||||||
1,200 | Comcast Corp.-Class A | 18,384 | |||||||||||||
300 | DirecTV Group (The), Inc.* | 7,428 | |||||||||||||
200 | Time Warner Cable, Inc. | 7,384 | |||||||||||||
200 | Viacom, Inc.* | 5,008 | |||||||||||||
Total Media | 38,204 | ||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 22.1% | |||||||||||||||
3,000 | Abbott Laboratories | 135,690 | |||||||||||||
100 | Allergan, Inc. | 5,592 | |||||||||||||
4,500 | Amgen, Inc.* | 268,830 | |||||||||||||
300 | Biogen Idec, Inc.* | 15,063 | |||||||||||||
3,200 | Bristol-Myers Squibb Co. | 70,816 | |||||||||||||
100 | Cephalon, Inc.* | 5,693 | |||||||||||||
200 | Dendreon Corp.* | 4,674 | |||||||||||||
4,200 | Eli Lilly & Co. | 140,532 | |||||||||||||
1,200 | Forest Laboratories, Inc.* | 35,124 | |||||||||||||
100 | Genzyme Corp.* | 5,571 | |||||||||||||
800 | Gilead Sciences, Inc.* | 36,048 | |||||||||||||
8,100 | Johnson & Johnson | 489,564 | |||||||||||||
5,700 | Merck & Co., Inc. | 184,851 | |||||||||||||
200 | Myriad Genetics, Inc.* | 6,114 | |||||||||||||
36,430 | Pfizer, Inc. | 608,381 | |||||||||||||
800 | Schering-Plough Corp. | 22,544 | |||||||||||||
200 | Vertex Pharmaceuticals, Inc.* | 7,482 | |||||||||||||
4,400 | Wyeth | 210,540 | |||||||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 2,253,109 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Retailing — 3.9% | |||||||||||||||
100 | Advance Auto Parts, Inc. | 4,230 | |||||||||||||
300 | Amazon.com, Inc.* | 24,357 | |||||||||||||
300 | American Eagle Outfitters, Inc. | 4,050 | |||||||||||||
200 | AutoNation, Inc.* | 3,796 | |||||||||||||
100 | AutoZone, Inc.* | 14,725 | |||||||||||||
500 | Bed Bath & Beyond, Inc.* | 18,240 | |||||||||||||
400 | Best Buy Co., Inc. | 14,512 | |||||||||||||
200 | Dollar Tree, Inc.* | 9,988 | |||||||||||||
200 | Family Dollar Stores, Inc. | 6,056 | |||||||||||||
400 | Gap (The), Inc. | 7,860 | |||||||||||||
5,400 | Home Depot, Inc. | 147,366 | |||||||||||||
400 | Kohl's Corp.* | 20,636 | |||||||||||||
400 | Limited Brands, Inc. | 5,968 | |||||||||||||
2,100 | Lowe's Cos., Inc. | 45,150 | |||||||||||||
200 | O'Reilly Automotive, Inc.* | 7,656 | |||||||||||||
300 | PetSmart, Inc. | 6,273 | |||||||||||||
200 | Ross Stores, Inc. | 9,328 | |||||||||||||
200 | Sherwin-Williams Co. (The) | 12,040 | |||||||||||||
300 | Staples, Inc. | 6,483 | |||||||||||||
400 | Target Corp. | 18,800 | |||||||||||||
300 | Urban Outfitters, Inc.* | 8,529 | |||||||||||||
Total Retailing | 396,043 | ||||||||||||||
Semiconductors & Semiconductor Equipment — 0.3% | |||||||||||||||
100 | Altera Corp. | 1,921 | |||||||||||||
200 | Broadcom Corp.-Class A* | 5,690 | |||||||||||||
400 | NVIDIA Corp.* | 5,808 | |||||||||||||
300 | Texas Instruments, Inc. | 7,377 | |||||||||||||
300 | Xilinx, Inc. | 6,672 | |||||||||||||
Total Semiconductors & Semiconductor Equipment | 27,468 | ||||||||||||||
Software & Services — 14.5% | |||||||||||||||
100 | Affiliated Computer Services, Inc.-Class A* | 4,480 | |||||||||||||
100 | Alliance Data Systems Corp.* | 5,556 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Software & Services — continued | |||||||||||||||
200 | Automatic Data Processing, Inc. | 7,670 | |||||||||||||
200 | BMC Software, Inc.* | 7,130 | |||||||||||||
200 | Citrix Systems, Inc.* | 7,136 | |||||||||||||
200 | Cognizant Technology Solutions Corp.-Class A* | 6,976 | |||||||||||||
100 | Computer Sciences Corp.* | 4,885 | |||||||||||||
2,361 | eBay, Inc.* | 52,272 | |||||||||||||
100 | Fiserv, Inc.* | 4,825 | |||||||||||||
200 | Global Payments, Inc. | 8,488 | |||||||||||||
610 | Google, Inc.-Class A* | 281,619 | |||||||||||||
200 | Intuit, Inc.* | 5,554 | |||||||||||||
200 | McAfee, Inc.* | 7,956 | |||||||||||||
22,400 | Microsoft Corp. | 552,160 | |||||||||||||
23,100 | Oracle Corp. | 505,197 | |||||||||||||
200 | Red Hat, Inc.* | 4,592 | |||||||||||||
600 | Symantec Corp.* | 9,072 | |||||||||||||
Total Software & Services | 1,475,568 | ||||||||||||||
Technology Hardware & Equipment — 8.7% | |||||||||||||||
200 | Apple, Inc.* | 33,642 | |||||||||||||
13,600 | Cisco Systems, Inc.* | 293,760 | |||||||||||||
400 | Corning, Inc. | 6,032 | |||||||||||||
1,400 | Dell, Inc.* | 22,162 | |||||||||||||
500 | EMC Corp.* | 7,950 | |||||||||||||
400 | Hewlett-Packard Co. | 17,956 | |||||||||||||
1,200 | International Business Machines Corp. | 141,660 | |||||||||||||
200 | Juniper Networks, Inc.* | 4,614 | |||||||||||||
900 | Motorola, Inc. | 6,462 | |||||||||||||
7,400 | Qualcomm, Inc. | 343,508 | |||||||||||||
300 | SanDisk Corp.* | 5,310 | |||||||||||||
100 | Western Digital Corp.* | 3,428 | |||||||||||||
Total Technology Hardware & Equipment | 886,484 | ||||||||||||||
Telecommunication Services — 1.9% | |||||||||||||||
3,463 | AT&T, Inc. | 90,211 | |||||||||||||
200 | CenturyTel, Inc. | 6,446 |
See accompanying notes to the financial statements.
8
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Telecommunication Services — continued | |||||||||||||||
3,042 | Verizon Communications, Inc. | 94,424 | |||||||||||||
Total Telecommunication Services | 191,081 | ||||||||||||||
Transportation — 0.4% | |||||||||||||||
200 | CH Robinson Worldwide, Inc. | 11,252 | |||||||||||||
200 | Norfolk Southern Corp. | 9,174 | |||||||||||||
400 | United Parcel Service, Inc.-Class B | 21,384 | |||||||||||||
Total Transportation | 41,810 | ||||||||||||||
Utilities — 0.4% | |||||||||||||||
500 | CMS Energy Corp. | 6,705 | |||||||||||||
200 | Consolidated Edison, Inc. | 8,038 | |||||||||||||
100 | FPL Group, Inc. | 5,618 | |||||||||||||
300 | PG&E Corp. | 12,177 | |||||||||||||
200 | Southern Co. | 6,240 | |||||||||||||
Total Utilities | 38,778 | ||||||||||||||
TOTAL COMMON STOCKS (COST $9,254,103) | 10,070,236 | ||||||||||||||
SHORT-TERM INVESTMENTS — 2.0% | |||||||||||||||
Money Market Funds — 2.0% | |||||||||||||||
208,221 | State Street Institutional Treasury Money Market Fund-Institutional Class | 208,221 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $208,221) | 208,221 | ||||||||||||||
TOTAL INVESTMENTS — 100.8% (Cost $9,462,324) | 10,278,457 | ||||||||||||||
Other Assets and Liabilities (net) — (0.8%) | (85,859 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 10,192,598 |
Notes to Schedule of Investments:
* Non-income producing security.
See accompanying notes to the financial statements.
9
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $9,462,324) (Note 2) | $ | 10,278,457 | |||||
Receivable for Fund shares sold | 35,000 | ||||||
Dividends receivable | 32,624 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 8,246 | ||||||
Total assets | 10,354,327 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 116,231 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 2,855 | ||||||
Shareholder service fee | 1,297 | ||||||
Accrued expenses | 41,346 | ||||||
Total liabilities | 161,729 | ||||||
Net assets | $ | 10,192,598 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 29,443,283 | |||||
Accumulated undistributed net investment income | 35,258 | ||||||
Accumulated net realized loss | (20,102,076 | ) | |||||
Net unrealized appreciation | 816,133 | ||||||
$ | 10,192,598 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 10,192,598 | |||||
Shares outstanding: | |||||||
Class III | 1,048,644 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.72 |
See accompanying notes to the financial statements.
10
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 130,217 | |||||
Total investment income | 130,217 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 16,167 | ||||||
Shareholder service fee – Class III (Note 3) | 7,348 | ||||||
Audit and tax fees | 28,152 | ||||||
Custodian, fund accounting agent and transfer agent fees | 19,136 | ||||||
Registration fees | 644 | ||||||
Legal fees | 184 | ||||||
Trustees fees and related expenses (Note 3) | 33 | ||||||
Total expenses | 71,664 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (48,116 | ) | |||||
Expense reductions (Note 2) | (8 | ) | |||||
Net expenses | 23,540 | ||||||
Net investment income (loss) | 106,677 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (1,004,665 | ) | |||||
Change in net unrealized appreciation (depreciation) on investments | 3,232,944 | ||||||
Net realized and unrealized gain (loss) | 2,228,279 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 2,334,956 |
See accompanying notes to the financial statements.
11
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 106,677 | $ | 933,776 | |||||||
Net realized gain (loss) | (1,004,665 | ) | (20,799,343 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 3,232,944 | (2,169,581 | ) | ||||||||
Net increase (decrease) in net assets from operations | 2,334,956 | (22,035,148 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (110,858 | ) | (1,107,627 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | (2,230,226 | ) | (55,344,097 | ) | |||||||
Total increase (decrease) in net assets | (6,128 | ) | (78,486,872 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 10,198,726 | 88,685,598 | |||||||||
End of period (including accumulated undistributed net investment income of $35,258 and $39,439, respectively) | $ | 10,192,598 | $ | 10,198,726 |
See accompanying notes to the financial statements.
12
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.74 | $ | 12.21 | $ | 13.48 | $ | 12.83 | $ | 12.14 | $ | 11.58 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.10 | 0.18 | 0.21 | 0.19 | 0.20 | 0.16 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 1.97 | (4.45 | ) | (1.08 | ) | 0.64 | 0.69 | 0.54 | |||||||||||||||||||
Total from investment operations | 2.07 | (4.27 | ) | (0.87 | ) | 0.83 | 0.89 | 0.70 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.09 | ) | (0.20 | ) | (0.22 | ) | (0.18 | ) | (0.20 | ) | (0.14 | ) | |||||||||||||||
From net realized gains | — | — | (0.18 | ) | — | — | — | ||||||||||||||||||||
Total distributions | (0.09 | ) | (0.20 | ) | (0.40 | ) | (0.18 | ) | (0.20 | ) | (0.14 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.72 | $ | 7.74 | $ | 12.21 | $ | 13.48 | $ | 12.83 | $ | 12.14 | |||||||||||||||
Total Return(a) | 27.02 | %** | (35.43 | )% | (6.78 | )% | 6.53 | % | 7.46 | % | 6.12 | %(b) | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 10,193 | $ | 10,199 | $ | 88,686 | $ | 116,725 | $ | 121,339 | $ | 81,374 | |||||||||||||||
Net expenses to average daily net assets | 0.48 | %(c)* | 0.48 | %(c) | 0.48 | %(c) | 0.48 | % | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 2.18 | %* | 1.55 | % | 1.55 | % | 1.46 | % | 1.65 | % | 1.39 | % | |||||||||||||||
Portfolio turnover rate | 23 | %** | 66 | % | 62 | % | 67 | % | 62 | % | 87 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.98 | % | 0.17 | % | 0.12 | % | 0.11 | % | 0.08 | % | 0.08 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(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 the total return.
(c) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
13
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Tax-Managed U.S. Equities Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 its benchmark, the Russell 3000 Index. The Fund typically makes equity investments in companies that issue stocks included in the Russell 3000 Index, a U.S. stock index, and in companies with similar market capitalizations. The Fund 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. Under normal circumstances, the Fund invests at least 80% of its assets in equity investments (which include common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depository receipts) tied economically to the U.S. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. To the extent the Fund t akes temporary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the counter derivatives, including options, futures, and swap contracts. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price.
14
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
Asset Valuation Inputs | Investments in Securities | Other Financial Instruments | |||||||||
Level 1 - Quoted Prices | $ | 10,070,236 | $ | — | |||||||
Level 2 - Other Significant Observable Inputs | 208,221 | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | 10,278,457 | $ | — | |||||||
Liability Valuation Inputs | Investments in Securities | Other Financial Instruments | |||||||||
Level 1 - Quoted Prices | $ | — | $ | — | |||||||
Level 2 - Other Significant Observable Inputs | — | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | — | $ | — |
15
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
All of the Fund's common stocks are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks. All short-term investments are classified as Level 2.
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
16
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the
17
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $10,340,010.
18
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (8,413,466 | ) | ||||
Total | $ | (8,413,466 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 9,633,604 | $ | 1,007,619 | $ | (362,766 | ) | $ | 644,853 |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds.
19
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. There can be no assurance that the Fund's tax management strategies will be effective, and investors may incur tax liabilities that exceed their economic return. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund's securities may not increase to what the Manager believes to be their fundamental value or that the Manager may have overestimated their fundamental value), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Credit and Counterparty Risk (risk of default of a derivatives counterparty), Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
20
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund adopted SFAS 161 on March 1, 2009. As of August 31, 2009, the Fund held no derivative contracts for the purposes of SFAS 161.
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.33% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of theTrust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund ) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 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.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $33 and $0, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $2,234,302 and $4,396,656, respectively.
21
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 90.91% of the outstanding shares of the Fund were held by four shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 0.35% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 9,307 | $ | 86,009 | 147,299 | $ | 1,297,188 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 6,159 | 49,560 | 85,574 | 960,217 | |||||||||||||||
Shares repurchased | (284,772 | ) | (2,365,795 | ) | (6,181,090 | ) | (57,601,502 | ) | |||||||||||
Net increase (decrease) | (269,306 | ) | $ | (2,230,226 | ) | (5,948,217 | ) | $ | (55,344,097 | ) |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
22
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees
23
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets u nder management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and expanding existing client 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
24
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (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.
Following their review, on June 15, 2009, 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, 2009.
25
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.48 | % | $ | 1,000.00 | $ | 1,270.20 | $ | 2.75 | |||||||||||
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, 2009, 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 U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.7 | % | |||||
Short-Term Investments | 4.9 | ||||||
Futures Contracts | 0.3 | ||||||
Other | (1.9 | ) | |||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments | ||||||
Software & Services | 11.2 | % | |||||
Retailing | 10.4 | ||||||
Health Care Equipment & Services | 10.0 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 7.7 | ||||||
Capital Goods | 7.1 | ||||||
Technology Hardware & Equipment | 6.9 | ||||||
Materials | 5.6 | ||||||
Semiconductors & Semiconductor Equipment | 5.4 | ||||||
Consumer Services | 5.3 | ||||||
Energy | 4.8 | ||||||
Diversified Financials | 4.7 | ||||||
Food, Beverage & Tobacco | 4.7 | ||||||
Commercial & Professional Services | 4.5 | ||||||
Transportation | 2.9 | ||||||
Consumer Durables & Apparel | 2.3 | ||||||
Household & Personal Products | 1.3 | ||||||
Insurance | 1.2 | ||||||
Media | 1.0 | ||||||
Telecommunication Services | 1.0 | ||||||
Food & Staples Retailing | 0.8 | ||||||
Real Estate | 0.7 | ||||||
Automobiles & Components | 0.4 | ||||||
Banks | 0.1 | ||||||
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 96.7% | |||||||||||||||
Automobiles & Components — 0.4% | |||||||||||||||
100 | Cooper Tire & Rubber Co. | 1,428 | |||||||||||||
800 | Exide Technologies * | 5,688 | |||||||||||||
500 | Goodyear Tire & Rubber Co. (The) * | 8,245 | |||||||||||||
200 | TRW Automotive Holdings Corp. * | 3,530 | |||||||||||||
Total Automobiles & Components | 18,891 | ||||||||||||||
Banks — 0.1% | |||||||||||||||
100 | Westamerica Bancorporation | 5,143 | |||||||||||||
Capital Goods — 6.9% | |||||||||||||||
200 | AAR Corp. * | 3,402 | |||||||||||||
200 | Aerovironment, Inc. * | 5,626 | |||||||||||||
100 | American Science & Engineering, Inc. | 6,159 | |||||||||||||
100 | Applied Industrial Technologies, Inc. | 2,063 | |||||||||||||
100 | Applied Signal Technology, Inc. | 2,547 | |||||||||||||
200 | Argon ST, Inc. * | 3,996 | |||||||||||||
100 | AZZ, Inc. * | 3,442 | |||||||||||||
100 | Badger Meter, Inc. | 3,619 | |||||||||||||
900 | Beacon Roofing Supply, Inc. * | 15,138 | |||||||||||||
100 | Chart Industries, Inc. * | 1,866 | |||||||||||||
100 | CIRCOR International, Inc. | 2,581 | |||||||||||||
200 | Colfax Corp. * | 2,120 | |||||||||||||
44 | DigitalGlobe, Inc. * | 883 | |||||||||||||
200 | Dynamic Materials Corp. | 3,238 | |||||||||||||
400 | EMCOR Group, Inc. * | 9,268 | |||||||||||||
200 | ESCO Technologies, Inc. * | 7,412 | |||||||||||||
1,100 | Force Protection, Inc. * | 5,830 | |||||||||||||
100 | General Cable Corp. * | 3,528 | |||||||||||||
100 | Gorman-Rupp Co. | 2,355 | |||||||||||||
300 | GrafTech International Ltd. * | 4,269 | |||||||||||||
100 | II-VI, Inc. * | 2,676 | |||||||||||||
400 | KBR, Inc. | 9,060 |
See accompanying notes to the financial statements.
2
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Capital Goods — continued | |||||||||||||||
600 | Lennox International, Inc. | 21,528 | |||||||||||||
1,700 | MasTec, Inc. * | 16,082 | |||||||||||||
100 | Michael Baker Corp. * | 3,348 | |||||||||||||
300 | MSC Industrial Direct Co., Inc.-Class A | 11,853 | |||||||||||||
600 | Navistar International Corp. * | 25,944 | |||||||||||||
300 | Oshkosh Corp. | 10,080 | |||||||||||||
200 | Pall Corp. | 5,946 | |||||||||||||
700 | Polypore International, Inc. * | 7,959 | |||||||||||||
300 | Quanex Building Products Corp. | 4,041 | |||||||||||||
400 | Raven Industries, Inc. | 11,560 | |||||||||||||
200 | Sauer-Danfoss, Inc. | 1,116 | |||||||||||||
400 | Shaw Group (The), Inc. * | 11,732 | |||||||||||||
300 | Stanley, Inc. * | 7,695 | |||||||||||||
200 | Sun Hydraulics Corp. | 3,686 | |||||||||||||
200 | Textainer Group Holdings Ltd. | 2,838 | |||||||||||||
300 | Titan Machinery, Inc. * | 3,615 | |||||||||||||
500 | TransDigm Group, Inc. * | 22,260 | |||||||||||||
100 | URS Corp. * | 4,323 | |||||||||||||
100 | Valmont Industries, Inc. | 8,233 | |||||||||||||
200 | Watsco, Inc. | 10,566 | |||||||||||||
600 | WESCO International, Inc. * | 14,418 | |||||||||||||
Total Capital Goods | 309,901 | ||||||||||||||
Commercial & Professional Services — 4.3% | |||||||||||||||
300 | Administaff, Inc. | 7,242 | |||||||||||||
400 | American Ecology Corp. | 7,312 | |||||||||||||
700 | Brink's Co. (The) | 18,445 | |||||||||||||
300 | CBIZ, Inc. * | 2,148 | |||||||||||||
200 | Deluxe Corp. | 3,342 | |||||||||||||
300 | Dun & Bradstreet Corp. | 21,912 | |||||||||||||
200 | Equifax, Inc. | 5,528 | |||||||||||||
200 | Exponent, Inc. * | 5,656 | |||||||||||||
600 | Healthcare Services Group, Inc. | 10,608 | |||||||||||||
200 | Herman Miller, Inc. | 3,244 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Commercial & Professional Services — continued | |||||||||||||||
100 | HNI Corp. | 2,148 | |||||||||||||
200 | ICF International, Inc. * | 5,470 | |||||||||||||
100 | Kforce, Inc. * | 1,120 | |||||||||||||
600 | Knoll, Inc. | 5,778 | |||||||||||||
500 | Navigant Consulting, Inc. * | 6,295 | |||||||||||||
700 | Resources Connection, Inc. * | 10,787 | |||||||||||||
900 | Robert Half International, Inc. | 23,661 | |||||||||||||
800 | Rollins, Inc. | 14,280 | |||||||||||||
200 | Team, Inc. * | 3,486 | |||||||||||||
500 | Tetra Tech, Inc. * | 14,770 | |||||||||||||
100 | TrueBlue, Inc. * | 1,360 | |||||||||||||
500 | Watson Wyatt Worldwide, Inc. | 21,850 | |||||||||||||
Total Commercial & Professional Services | 196,442 | ||||||||||||||
Consumer Durables & Apparel — 2.2% | |||||||||||||||
400 | CROCS, Inc. * | 2,540 | |||||||||||||
100 | Iconix Brand Group, Inc. * | 1,718 | |||||||||||||
400 | Phillips-Van Heusen Corp. | 15,112 | |||||||||||||
100 | Polaris Industries, Inc. | 3,771 | |||||||||||||
300 | Smith & Wesson Holding Corp. * | 1,614 | |||||||||||||
2,400 | Tempur-Pedic International, Inc. * | 35,520 | |||||||||||||
500 | True Religion Apparel, Inc. * | 11,315 | |||||||||||||
300 | Universal Electronics, Inc. * | 5,646 | |||||||||||||
500 | Warnaco Group (The), Inc. * | 19,025 | |||||||||||||
100 | Wolverine World Wide, Inc. | 2,491 | |||||||||||||
Total Consumer Durables & Apparel | 98,752 | ||||||||||||||
Consumer Services — 5.1% | |||||||||||||||
100 | Brink's Home Security Holdings, Inc. * | 3,127 | |||||||||||||
2,800 | Brinker International, Inc. | 40,768 | |||||||||||||
200 | Buffalo Wild Wings, Inc. * | 8,246 | |||||||||||||
200 | California Pizza Kitchen, Inc. * | 2,812 | |||||||||||||
100 | Career Education Corp. * | 2,375 | |||||||||||||
400 | CEC Entertainment, Inc. * | 10,700 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Consumer Services — continued | |||||||||||||||
800 | Cheesecake Factory (The), Inc. * | 14,696 | |||||||||||||
900 | Corinthian Colleges, Inc. * | 17,253 | |||||||||||||
400 | Cracker Barrel Old Country Store, Inc. | 11,364 | |||||||||||||
600 | ITT Educational Services, Inc. * | 62,994 | |||||||||||||
200 | Jack in the Box, Inc. * | 4,078 | |||||||||||||
100 | Panera Bread Co.-Class A * | 5,221 | |||||||||||||
200 | Papa John's International, Inc. * | 4,666 | |||||||||||||
600 | Penn National Gaming, Inc. * | 17,526 | |||||||||||||
300 | PF Chang's China Bistro, Inc. * | 9,573 | |||||||||||||
200 | Pre-Paid Legal Services, Inc. * | 9,168 | |||||||||||||
100 | Universal Technical Institute, Inc. * | 2,013 | |||||||||||||
200 | Wyndham Worldwide Corp. | 3,030 | |||||||||||||
Total Consumer Services | 229,610 | ||||||||||||||
Diversified Financials — 4.6% | |||||||||||||||
100 | Affiliated Managers Group, Inc. * | 6,533 | |||||||||||||
600 | AmeriCredit Corp. * | 10,356 | |||||||||||||
500 | Credit Acceptance Corp. * | 15,255 | |||||||||||||
100 | Duff & Phelps Corp-Class A | 1,704 | |||||||||||||
700 | Eaton Vance Corp. | 19,999 | |||||||||||||
400 | EZCORP, Inc.-Class A * | 5,348 | |||||||||||||
900 | Federated Investors Inc.-Class B | 23,625 | |||||||||||||
400 | First Cash Financial Services, Inc. * | 7,516 | |||||||||||||
100 | GAMCO Investors, Inc.-Class A | 4,513 | |||||||||||||
800 | GFI Group, Inc. | 5,728 | |||||||||||||
500 | Greenhill & Co., Inc. | 39,600 | |||||||||||||
700 | Knight Capital Group, Inc.-Class A * | 14,084 | |||||||||||||
100 | Life Partners Holdings, Inc. | 1,714 | |||||||||||||
200 | MF Global Ltd. * | 1,430 | |||||||||||||
300 | optionsXpress Holdings, Inc. | 4,992 | |||||||||||||
100 | SEI Investments Co. | 1,844 | |||||||||||||
1 | Teton Advisors, Inc.-Class B * | 2 | |||||||||||||
1,400 | Waddell and Reed Financial, Inc. | 37,142 | |||||||||||||
200 | World Acceptance Corp. * | 5,206 | |||||||||||||
Total Diversified Financials | 206,591 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Energy — 4.6% | |||||||||||||||
200 | Arena Resources, Inc. * | 6,116 | |||||||||||||
200 | Concho Resources Inc. * | 6,518 | |||||||||||||
500 | CVR Energy, Inc. * | 4,840 | |||||||||||||
100 | Dawson Geophysical Co. * | 2,479 | |||||||||||||
700 | Dresser-Rand Group, Inc. * | 20,790 | |||||||||||||
100 | Dril-Quip, Inc. * | 4,266 | |||||||||||||
100 | Encore Acquisition Co. * | 3,769 | |||||||||||||
2,800 | Frontier Oil Corp. | 35,924 | |||||||||||||
200 | Golar LNG Ltd. | 1,990 | |||||||||||||
1,000 | Holly Corp. | 22,840 | |||||||||||||
1,100 | International Coal Group, Inc. * | 3,344 | |||||||||||||
200 | Knightsbridge Tankers Ltd. | 2,592 | |||||||||||||
100 | Lufkin Industries, Inc. | 4,425 | |||||||||||||
1,000 | Oceaneering International, Inc. * | 52,173 | |||||||||||||
100 | Petroleum Development Corp. * | 1,369 | |||||||||||||
200 | Petroquest Energy, Inc. * | 832 | |||||||||||||
100 | PHI, Inc. * | 2,086 | |||||||||||||
100 | T-3 Energy Services, Inc. * | 1,758 | |||||||||||||
1,900 | Tesoro Corp. | 26,752 | |||||||||||||
600 | USEC, Inc. * | 2,730 | |||||||||||||
200 | VAALCO Energy, Inc. | 944 | |||||||||||||
Total Energy | 208,537 | ||||||||||||||
Food & Staples Retailing — 0.8% | |||||||||||||||
200 | Pantry, Inc. * | 3,030 | |||||||||||||
1,100 | Whole Foods Market, Inc. * | 31,988 | |||||||||||||
Total Food & Staples Retailing | 35,018 | ||||||||||||||
Food, Beverage & Tobacco — 4.6% | |||||||||||||||
800 | Cal-Maine Foods, Inc. | 22,840 | |||||||||||||
100 | Coca-Cola Bottling Co. | 5,406 | |||||||||||||
400 | Darling International, Inc. * | 2,804 | |||||||||||||
2,700 | Dean Foods Co. * | 48,978 | |||||||||||||
400 | Green Mountain Coffee Roasters, Inc. * | 24,076 |
See accompanying notes to the financial statements.
6
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Food, Beverage & Tobacco — continued | |||||||||||||||
2,300 | Hansen Natural Corp. * | 75,118 | |||||||||||||
400 | Lancaster Colony Corp. | 20,104 | |||||||||||||
200 | National Beverage Corp. * | 2,028 | |||||||||||||
100 | Sanderson Farms, Inc. | 4,160 | |||||||||||||
Total Food, Beverage & Tobacco | 205,514 | ||||||||||||||
Health Care Equipment & Services — 9.6% | |||||||||||||||
200 | Abaxis, Inc. * | 5,320 | |||||||||||||
200 | Almost Family, Inc. * | 5,514 | |||||||||||||
300 | American Medical Systems Holdings, Inc. * | 4,572 | |||||||||||||
100 | AMN Healthcare Services, Inc. * | 987 | |||||||||||||
100 | CardioNet, Inc. * | 720 | |||||||||||||
300 | Catalyst Health Solutions, Inc. * | 8,568 | |||||||||||||
200 | Centene Corp. * | 3,462 | |||||||||||||
300 | Cerner Corp. * | 18,513 | |||||||||||||
400 | Chemed Corp. | 17,416 | |||||||||||||
100 | Computer Programs & Systems, Inc. | 3,870 | |||||||||||||
400 | CorVel Corp. * | 12,024 | |||||||||||||
700 | CryoLife, Inc. * | 5,215 | |||||||||||||
1,100 | Edwards Lifesciences Corp. * | 68,071 | |||||||||||||
300 | Emergency Medical Services, LP * | 13,605 | |||||||||||||
100 | Ensign Group, Inc. (The) | 1,387 | |||||||||||||
200 | Exactech, Inc. * | 2,974 | |||||||||||||
400 | Gentiva Health Services, Inc. * | 8,820 | |||||||||||||
300 | Haemonetics Corp. * | 15,792 | |||||||||||||
3,100 | Health Management Associates, Inc. * | 21,421 | |||||||||||||
100 | Health Net, Inc. * | 1,532 | |||||||||||||
300 | Healthways, Inc. * | 3,924 | |||||||||||||
600 | HMS Holdings Corp. * | 22,566 | |||||||||||||
100 | ICU Medical, Inc. * | 3,719 | |||||||||||||
200 | Kensey Nash Corp. * | 5,222 | |||||||||||||
100 | Landauer, Inc. | 5,504 | |||||||||||||
600 | LHC Group, Inc. * | 14,670 | |||||||||||||
500 | Lincare Holdings, Inc. * | 13,195 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Health Care Equipment & Services — continued | |||||||||||||||
700 | Merit Medical Systems, Inc. * | 12,635 | |||||||||||||
200 | Natus Medical, Inc. * | 2,850 | |||||||||||||
200 | Odyssey HealthCare, Inc. * | 2,576 | |||||||||||||
500 | Omnicare, Inc. | 11,445 | |||||||||||||
100 | Orthofix International NV * | 2,737 | |||||||||||||
200 | Owens & Minor, Inc. | 8,850 | |||||||||||||
100 | PSS World Medical, Inc. * | 2,044 | |||||||||||||
500 | Quality Systems, Inc. | 26,920 | |||||||||||||
700 | ResMed, Inc. * | 32,137 | |||||||||||||
5,700 | Tenet Healthcare Corp. * | 26,562 | |||||||||||||
100 | Thoratec Corp. * | 2,624 | |||||||||||||
300 | VCA Antech, Inc. * | 7,425 | |||||||||||||
200 | WellCare Health Plans, Inc. * | 4,854 | |||||||||||||
100 | Young Innovations, Inc. | 2,348 | |||||||||||||
Total Health Care Equipment & Services | 434,590 | ||||||||||||||
Household & Personal Products — 1.2% | |||||||||||||||
500 | Energizer Holdings, Inc. * | 32,715 | |||||||||||||
100 | Herbalife Ltd. | 3,028 | |||||||||||||
50 | Inter Parfums, Inc. | 482 | |||||||||||||
400 | Nu Skin Enterprises, Inc.-Class A | 6,900 | |||||||||||||
200 | USANA Health Sciences, Inc. * | 6,304 | |||||||||||||
200 | WD-40 Co. | 5,396 | |||||||||||||
Total Household & Personal Products | 54,825 | ||||||||||||||
Insurance — 1.2% | |||||||||||||||
500 | Axis Capital Holdings Ltd. | 15,240 | |||||||||||||
100 | eHealth, Inc. * | 1,850 | |||||||||||||
100 | Fidelity National Financial, Inc.-Class A | 1,502 | |||||||||||||
100 | First Mercury Financial Corp. | 1,449 | |||||||||||||
2,700 | Genworth Financial, Inc.-Class A | 28,512 | |||||||||||||
200 | Tower Group, Inc. | 4,798 | |||||||||||||
Total Insurance | 53,351 |
See accompanying notes to the financial statements.
8
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Materials — 5.4% | |||||||||||||||
300 | Allied Nevada Gold Corp. * | 2,427 | |||||||||||||
300 | Balchem Corp.-Class B | 7,470 | |||||||||||||
800 | Ball Corp. | 38,768 | |||||||||||||
100 | Bway Holding Co. * | 1,550 | |||||||||||||
400 | Calgon Carbon Corp. * | 5,720 | |||||||||||||
600 | Crown Holdings, Inc. * | 14,898 | |||||||||||||
200 | Eagle Materials, Inc. | 5,266 | |||||||||||||
200 | FMC Corp. | 9,540 | |||||||||||||
100 | Greif, Inc.-Class A | 4,954 | |||||||||||||
200 | Headwaters, Inc. * | 768 | |||||||||||||
100 | Innophos Holdings, Inc. | 1,909 | |||||||||||||
100 | International Flavors & Fragrances, Inc. | 3,562 | |||||||||||||
100 | Lubrizol Corp. | 6,372 | |||||||||||||
400 | NewMarket Corp. | 33,248 | |||||||||||||
100 | Quaker Chemical Corp. | 2,072 | |||||||||||||
200 | Rock-Tenn Co.-Class A | 10,258 | |||||||||||||
100 | Schnitzer Steel Industries, Inc.-Class A | 5,401 | |||||||||||||
1,700 | Scotts Miracle-Gro Co. (The)-Class A | 69,173 | |||||||||||||
300 | ShengdaTech, Inc. * | 1,773 | |||||||||||||
100 | Silgan Holdings, Inc. | 4,862 | |||||||||||||
200 | Steel Dynamics, Inc. | 3,310 | |||||||||||||
400 | Terra Industries, Inc. | 12,444 | |||||||||||||
Total Materials | 245,745 | ||||||||||||||
Media — 1.0% | |||||||||||||||
200 | Arbitron, Inc. | 3,664 | |||||||||||||
700 | Marvel Entertainment, Inc. * | 33,859 | |||||||||||||
200 | National CineMedia, Inc. | 3,000 | |||||||||||||
300 | Valassis Communications, Inc. * | 4,710 | |||||||||||||
Total Media | 45,233 | ||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 7.4% | |||||||||||||||
100 | Acorda Therapeutics, Inc. * | 2,262 | |||||||||||||
200 | Albany Molecular Research, Inc. * | 1,612 | |||||||||||||
700 | Allos Therapeutics * | 5,145 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — continued | |||||||||||||||
300 | Bruker Corp. * | 3,045 | |||||||||||||
500 | Cadence Pharmaceuticals, Inc. * | 5,455 | |||||||||||||
200 | Dendreon Corp. * | 4,674 | |||||||||||||
100 | Dionex Corp. * | 6,014 | |||||||||||||
1,300 | Emergent Biosolutions, Inc. * | 24,089 | |||||||||||||
200 | Endo Pharmaceuticals Holdings, Inc. * | 4,514 | |||||||||||||
900 | eResearchTechnology, Inc. * | 5,661 | |||||||||||||
300 | Geron Corp. * | 2,130 | |||||||||||||
700 | ImmunoGen, Inc. * | 5,103 | |||||||||||||
100 | Kendle International, Inc. * | 1,314 | |||||||||||||
500 | Life Technologies Corp. * | 22,265 | |||||||||||||
900 | MannKind Corp. * | 7,011 | |||||||||||||
100 | MAP Pharmaceuticals, Inc. * | 884 | |||||||||||||
400 | Medicis Pharmaceutical Corp.-Class A | 7,388 | |||||||||||||
100 | Medivation, Inc. * | 2,532 | |||||||||||||
800 | Millipore Corp. * | 52,984 | |||||||||||||
300 | Momenta Pharmaceuticals, Inc. * | 2,970 | |||||||||||||
500 | Mylan, Inc. * | 7,335 | |||||||||||||
2,800 | Myriad Genetics, Inc. * | 85,599 | |||||||||||||
700 | NPS Pharmaceuticals, Inc. * | 2,919 | |||||||||||||
600 | PAREXEL International Corp. * | 7,698 | |||||||||||||
100 | PDL BioPharma, Inc. | 905 | |||||||||||||
500 | Protalix BioTherapeutics, Inc. * | 3,200 | |||||||||||||
400 | Rigel Pharmaceuticals, Inc. * | 2,820 | |||||||||||||
200 | Sequenom, Inc. * | 1,278 | |||||||||||||
1,400 | Valeant Pharmaceuticals International * | 36,246 | |||||||||||||
100 | Varian, Inc. * | 5,122 | |||||||||||||
400 | Watson Pharmaceuticals, Inc. * | 14,116 | |||||||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 334,290 | ||||||||||||||
Real Estate — 0.6% | |||||||||||||||
700 | CB Richard Ellis Group, Inc. * | 8,288 | |||||||||||||
500 | DuPont Fabros Technology, Inc. REIT | 6,540 | |||||||||||||
100 | Omega Healthcare Investors, Inc. REIT | 1,691 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Real Estate — continued | |||||||||||||||
200 | Potlatch Corp. REIT | 5,820 | |||||||||||||
100 | Redwood Trust, Inc. REIT | 1,603 | |||||||||||||
100 | Tanger Factory Outlet Centers, Inc. REIT | 3,762 | |||||||||||||
55 | Walter Investment Management Corp. REIT | 794 | |||||||||||||
Total Real Estate | 28,498 | ||||||||||||||
Retailing — 10.0% | |||||||||||||||
500 | 1-800-FLOWERS.COM, Inc. * | 1,545 | |||||||||||||
700 | Advance Auto Parts, Inc. | 29,610 | |||||||||||||
2,000 | Aeropostale, Inc. * | 78,300 | |||||||||||||
3,200 | American Eagle Outfitters, Inc. | 43,200 | |||||||||||||
300 | AutoNation, Inc. * | 5,694 | |||||||||||||
600 | Buckle (The), Inc. | 15,870 | |||||||||||||
100 | Cato Corp. (The)-Class A | 1,708 | |||||||||||||
6,000 | Chico's FAS, Inc. * | 76,380 | |||||||||||||
400 | Dollar Tree, Inc. * | 19,976 | |||||||||||||
100 | Family Dollar Stores, Inc. | 3,028 | |||||||||||||
600 | Finish Line (The), Inc.-Class A | 4,950 | |||||||||||||
100 | Guess?, Inc. | 3,504 | |||||||||||||
200 | hhgregg, Inc. * | 3,456 | |||||||||||||
200 | Hibbett Sports, Inc. * | 3,514 | |||||||||||||
500 | Jos. A. Bank Clothiers, Inc. * | 22,005 | |||||||||||||
1,000 | Netflix, Inc. * | 43,660 | |||||||||||||
200 | New York & Co., Inc. * | 926 | |||||||||||||
600 | NutriSystem, Inc. | 8,538 | |||||||||||||
200 | O'Reilly Automotive, Inc. * | 7,656 | |||||||||||||
200 | Office Depot, Inc. * | 1,044 | |||||||||||||
1,800 | PetSmart, Inc. | 37,638 | |||||||||||||
600 | Ross Stores, Inc. | 27,984 | |||||||||||||
600 | Williams-Sonoma, Inc. | 11,478 | |||||||||||||
Total Retailing | 451,664 | ||||||||||||||
Semiconductors & Semiconductor Equipment — 5.3% | |||||||||||||||
700 | Cree, Inc. * | 25,788 | |||||||||||||
2,500 | Cypress Semiconductor Corp. * | 25,300 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Semiconductors & Semiconductor Equipment — continued | |||||||||||||||
500 | Diodes, Inc. * | 10,135 | |||||||||||||
200 | Hittite Microwave Corp. * | 6,884 | |||||||||||||
100 | Intersil Corp-Class A | 1,479 | |||||||||||||
500 | IXYS Corp. | 3,400 | |||||||||||||
1,000 | Micrel, Inc. | 7,770 | |||||||||||||
200 | Netlogic Microsystems, Inc. * | 8,782 | |||||||||||||
800 | Novellus System, Inc. * | 15,328 | |||||||||||||
5,200 | ON Semiconductor Corp. * | 41,964 | |||||||||||||
200 | Pericom Semiconductor Corp. * | 1,722 | |||||||||||||
1,400 | PMC-Sierra, Inc. * | 12,712 | |||||||||||||
100 | Power Integrations, Inc. | 3,275 | |||||||||||||
800 | Semtech Corp. * | 14,616 | |||||||||||||
1,700 | Silicon Image, Inc. * | 5,168 | |||||||||||||
400 | Silicon Laboratories, Inc. * | 18,016 | |||||||||||||
1,400 | Skyworks Solutions, Inc. * | 16,310 | |||||||||||||
100 | Supertex, Inc. * | 2,584 | |||||||||||||
300 | Tessera Technologies, Inc. * | 7,539 | |||||||||||||
500 | Volterra Semiconductor Corp. * | 8,855 | |||||||||||||
Total Semiconductors & Semiconductor Equipment | 237,627 | ||||||||||||||
Software & Services — 10.9% | |||||||||||||||
800 | ACI Worldwide, Inc. * | 10,848 | |||||||||||||
300 | Actuate Corp. * | 1,686 | |||||||||||||
900 | Broadridge Financial Solutions, Inc. | 18,738 | |||||||||||||
100 | CACI International, Inc.-Class A * | 4,596 | |||||||||||||
1,100 | Cadence Design Systems, Inc. * | 6,897 | |||||||||||||
200 | Cass Information Systems, Inc. | 6,244 | |||||||||||||
700 | Compuware Corp. * | 5,047 | |||||||||||||
100 | Convergys Corp. * | 1,084 | |||||||||||||
900 | CSG Systems International, Inc. * | 13,563 | |||||||||||||
500 | Digital River, Inc. * | 17,660 | |||||||||||||
800 | EarthLink, Inc. * | 6,656 | |||||||||||||
100 | Forrester Research, Inc. * | 2,354 | |||||||||||||
100 | Global Cash Access Holdings, Inc. * | 725 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Software & Services — continued | |||||||||||||||
300 | Global Payments, Inc. | 12,732 | |||||||||||||
500 | Hewitt Associates Inc.-Class A * | 18,010 | |||||||||||||
900 | Integral Systems, Inc. * | 5,643 | |||||||||||||
900 | j2 Global Communications, Inc. * | 19,233 | |||||||||||||
200 | Mantech International Corp.-Class A * | 10,568 | |||||||||||||
300 | MAXIMUS, Inc. | 12,495 | |||||||||||||
800 | McAfee, Inc. * | 31,824 | |||||||||||||
100 | Micros Systems, Inc. * | 2,787 | |||||||||||||
100 | NCI, Inc. * | 2,935 | |||||||||||||
300 | Net 1 UEPS Technologies, Inc. * | 5,727 | |||||||||||||
100 | NeuStar, Inc. * | 2,318 | |||||||||||||
100 | Opnet Technologies, Inc. | 946 | |||||||||||||
600 | Pegasystems, Inc. | 18,378 | |||||||||||||
400 | Radiant Systems, Inc. * | 4,288 | |||||||||||||
1,100 | Red Hat, Inc. * | 25,256 | |||||||||||||
500 | Renaissance Learning, Inc. | 4,955 | |||||||||||||
1,400 | Rovi Corp. * | 42,616 | |||||||||||||
500 | SAIC, Inc. * | 9,245 | |||||||||||||
200 | Smith Micro Software, Inc. * | 2,310 | |||||||||||||
100 | SPSS, Inc. * | 4,980 | |||||||||||||
1,000 | Sybase, Inc. * | 34,850 | |||||||||||||
300 | Synchronoss Technologies, Inc. * | 3,189 | |||||||||||||
400 | Syntel, Inc. | 16,028 | |||||||||||||
2,300 | TeleCommunication Systems, Inc. * | 17,342 | |||||||||||||
100 | TIBCO Software, Inc. * | 887 | |||||||||||||
200 | TNS, Inc. * | 5,192 | |||||||||||||
600 | Tyler Technologies, Inc. * | 9,138 | |||||||||||||
900 | Valueclick, Inc. * | 9,225 | |||||||||||||
1,200 | VistaPrint Ltd. * | 49,728 | |||||||||||||
100 | Websense, Inc. * | 1,516 | |||||||||||||
300 | Wright Express Corp. * | 9,456 | |||||||||||||
Total Software & Services | 489,895 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Technology Hardware & Equipment — 6.7% | |||||||||||||||
700 | Acme Packet, Inc. * | 5,712 | |||||||||||||
300 | ADTRAN, Inc. | 6,822 | |||||||||||||
700 | Airvana, Inc. * | 4,543 | |||||||||||||
400 | Arrow Electronics, Inc. * | 11,056 | |||||||||||||
1,100 | Avnet, Inc. * | 29,315 | |||||||||||||
100 | AVX Corp. | 1,161 | |||||||||||||
500 | Blue Coat Systems, Inc. * | 9,805 | |||||||||||||
1,100 | Brocade Communications Systems, Inc. * | 7,953 | |||||||||||||
100 | Cogent, Inc. * | 1,050 | |||||||||||||
800 | Cogo Group, Inc. * | 4,320 | |||||||||||||
1,100 | F5 Networks, Inc. * | 37,939 | |||||||||||||
300 | Faro Technologies, Inc. * | 5,103 | |||||||||||||
900 | InterDigital, Inc. * | 18,864 | |||||||||||||
900 | Jabil Circuit, Inc. | 9,855 | |||||||||||||
200 | Multi-Fineline Electronix, Inc. * | 5,528 | |||||||||||||
100 | Novatel Wireless, Inc. * | 965 | |||||||||||||
2,400 | Palm, Inc. * | 31,992 | |||||||||||||
200 | Plexus Corp. * | 5,036 | |||||||||||||
300 | Polycom, Inc. * | 7,077 | |||||||||||||
700 | Riverbed Technology, Inc. * | 13,496 | |||||||||||||
300 | Rofin-Sinar Technologies, Inc. * | 6,822 | |||||||||||||
200 | Scansource, Inc. * | 5,598 | |||||||||||||
200 | ShoreTel, Inc. * | 1,260 | |||||||||||||
1,800 | Starent Networks Corp. * | 36,432 | |||||||||||||
300 | STEC, Inc. * | 12,159 | |||||||||||||
600 | Stratasys, Inc. * | 8,634 | |||||||||||||
500 | Synaptics, Inc. * | 12,890 | |||||||||||||
Total Technology Hardware & Equipment | 301,387 | ||||||||||||||
Telecommunication Services — 1.0% | |||||||||||||||
300 | Neutral Tandem, Inc. * | 7,503 | |||||||||||||
300 | Premiere Global Services, Inc. * | 2,808 | |||||||||||||
700 | Shenandoah Telecommunications Co. | 12,075 | |||||||||||||
1,200 | Syniverse Holdings, Inc. * | 21,444 | |||||||||||||
Total Telecommunication Services | 43,830 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Transportation — 2.8% | |||||||||||||||
3,400 | Airtran Holdings, Inc. * | 22,610 | |||||||||||||
100 | Allegiant Travel Co. * | 3,919 | |||||||||||||
5,300 | AMR Corp. * | 28,938 | |||||||||||||
800 | Avis Budget Group, Inc. * | 7,784 | |||||||||||||
100 | Continental Airlines, Inc. * | 1,327 | |||||||||||||
600 | Copa Holdings SA | 25,062 | |||||||||||||
1,700 | Delta Air Lines, Inc. * | 12,274 | |||||||||||||
100 | Hawaiian Holdings, Inc. * | 732 | |||||||||||||
100 | HUB Group Inc.-Class A * | 2,193 | |||||||||||||
100 | JB Hunt Transport Services, Inc. | 2,803 | |||||||||||||
300 | Knight Transportation, Inc. | 4,947 | |||||||||||||
300 | Old Dominion Freight Line, Inc. * | 10,734 | |||||||||||||
300 | Pacer International, Inc. | 1,242 | |||||||||||||
100 | UAL Corp. * | 623 | |||||||||||||
Total Transportation | 125,188 | ||||||||||||||
TOTAL COMMON STOCKS (COST $4,433,649) | 4,360,522 | ||||||||||||||
SHORT-TERM INVESTMENTS — 4.9% | |||||||||||||||
Money Market Funds — 4.9% | |||||||||||||||
223,224 | State Street Institutional Treasury Money Market Fund - Institutional Class | 223,224 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $223,224) | 223,224 | ||||||||||||||
TOTAL INVESTMENTS — 101.6% (Cost $4,656,873) | 4,583,746 | ||||||||||||||
Other Assets and Liabilities (net) — (1.6%) | (74,333 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 4,509,413 |
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)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
1 | Russell 2000 Mini | September 2009 | $ | 57,170 | $ | 6,113 | |||||||||||||
1 | S&P Midcap 400 E-Mini | September 2009 | 65,400 | 7,268 | |||||||||||||||
$ | 122,570 | $ | 13,381 |
As of August 31, 2009, for the futures contracts held, 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 U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $4,656,873) (Note 2) | $ | 4,583,746 | |||||
Cash | 12,248 | ||||||
Receivable for investments sold | 97,057 | ||||||
Dividends receivable | 1,830 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 10,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 5,859 | ||||||
Total assets | 4,710,740 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 134,312 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 1,183 | ||||||
Shareholder service fee | 572 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 1,539 | ||||||
Accrued expenses | 63,721 | ||||||
Total liabilities | 201,327 | ||||||
Net assets | $ | 4,509,413 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 8,318,984 | |||||
Accumulated undistributed net investment income | 956 | ||||||
Accumulated net realized loss | (3,750,781 | ) | |||||
Net unrealized depreciation | (59,746 | ) | |||||
$ | 4,509,413 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 4,509,413 | |||||
Shares outstanding: | |||||||
Class III | 460,430 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.79 |
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, 2009 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 16,924 | |||||
Interest | 158 | ||||||
Total investment income | 17,082 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 6,997 | ||||||
Shareholder service fee – Class III (Note 3) | 3,385 | ||||||
Audit and tax fees | 28,152 | ||||||
Custodian, fund accounting agent and transfer agent fees | 18,124 | ||||||
Registration fees | 460 | ||||||
Legal fees | 92 | ||||||
Trustees fees and related expenses (Note 3) | 25 | ||||||
Total expenses | 57,235 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (46,828 | ) | |||||
Net expenses | 10,407 | ||||||
Net investment income (loss) | 6,675 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (1,023,936 | ) | |||||
Closed futures contracts | 17,803 | ||||||
Net realized gain (loss) | (1,006,133 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 2,130,883 | ||||||
Open futures contracts | 24,935 | ||||||
Net unrealized gain (loss) | 2,155,818 | ||||||
Net realized and unrealized gain (loss) | 1,149,685 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 1,156,360 |
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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 6,675 | $ | 23,157 | |||||||
Net realized gain (loss) | (1,006,133 | ) | (1,374,773 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 2,155,818 | (1,711,859 | ) | ||||||||
Net increase (decrease) in net assets from operations | 1,156,360 | (3,063,475 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (5,845 | ) | (22,611 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | (528,333 | ) | (1,236,081 | ) | |||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 4,866 | 6,384 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | (523,467 | ) | (1,229,697 | ) | |||||||
Total increase (decrease) in net assets | 627,048 | (4,315,783 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 3,882,365 | 8,198,148 | |||||||||
End of period (including accumulated undistributed net investment income of $956 and $126, respectively) | $ | 4,509,413 | $ | 3,882,365 |
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.54 | $ | 13.59 | $ | 18.93 | $ | 19.67 | $ | 21.96 | $ | 21.78 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.01 | 0.04 | 0.06 | 0.07 | 0.06 | 0.03 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.25 | (6.05 | ) | (1.79 | ) | 0.79 | 2.93 | 1.96 | |||||||||||||||||||
Total from investment operations | 2.26 | (6.01 | ) | (1.73 | ) | 0.86 | 2.99 | 1.99 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.01 | ) | (0.04 | ) | (0.06 | ) | (0.09 | ) | (0.07 | ) | (0.01 | ) | |||||||||||||||
From net realized gains | — | — | (3.49 | ) | (1.51 | ) | (5.21 | ) | (1.80 | ) | |||||||||||||||||
Return of capital | — | — | (0.06 | ) | — | — | — | ||||||||||||||||||||
Total distributions | (0.01 | ) | (0.04 | ) | (3.61 | ) | (1.60 | ) | (5.28 | ) | (1.81 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.79 | $ | 7.54 | $ | 13.59 | $ | 18.93 | $ | 19.67 | $ | 21.96 | |||||||||||||||
Total Return(a) | 30.01 | %** | (44.27 | )% | (11.74 | )% | 4.86 | % | 14.63 | % | 10.50 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 4,509 | $ | 3,882 | $ | 8,198 | $ | 25,314 | $ | 29,804 | $ | 38,801 | |||||||||||||||
Net expenses to average daily net assets | 0.46 | %* | 0.46 | % | 0.46 | % | 0.46 | % | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 0.30 | %* | 0.35 | % | 0.30 | % | 0.38 | % | 0.30 | % | 0.16 | % | |||||||||||||||
Portfolio turnover rate | 65 | %** | 127 | % | 118 | % | 109 | % | 87 | % | 110 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 2.07 | %* | 1.74 | % | 0.48 | % | 0.60 | % | 0.35 | % | 0.26 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.01 | $ | 0.07 | $ | 0.03 | $ | 0.08 | $ | 0.04 |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. 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.
20
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO U.S. Small/Mid Cap Growth Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 long-term capital growth. The Fund seeks to achieve its objective by outperforming its benchmark, the Russell 2500 Growth Index. The Fund typically makes equity investments in U.S. companies that issue stocks included in the Russell 2500 Index, a U.S. stock index, and in companies with similar market capitalizations ("small- and mid-cap companies"). Under normal circumstances, the Fund invests at least 80% of its assets in investments in small- and mid-cap companies tied economically to the U.S. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the counter derivatives, including options, f utures, and swap contracts. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost.
21
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
Asset Valuation Inputs | Investments in Securities | Other Financial Instruments* | |||||||||
Level 1 - Quoted Prices | $ | 4,360,522 | $ | 13,381 | |||||||
Level 2 - Other Significant Observable Inputs | 223,224 | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | 4,583,746 | $ | 13,381 |
* Other financial instruments include futures contracts.
Liability Valuation Inputs | Investments in Securities | Other Financial Instruments | |||||||||
Level 1 - Quoted Prices | $ | — | $ | — | |||||||
Level 2 - Other Significant Observable Inputs | — | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | — | $ | — |
22
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
All of the Fund's common stocks and futures are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks. All short-term investments are classified as Level 2.
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. 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 various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset
23
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
24
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
25
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $830,507.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (1,886,733 | ) | ||||
Total | $ | (1,886,733 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 4,676,386 | $ | 367,125 | $ | (459,765 | ) | $ | (92,640 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
26
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds.
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Smaller Company Risk — The securities of small- and mid-cap companies typically are less widely held, trade less frequently and in lesser quantities, and have market prices that may fluctuate more than those of securities of larger capitalization companies.
• Market Risk — Growth Securities — Growth securities typically trade at higher multiples of current earnings than other securities. The market prices of growth securities are often more sensitive to market fluctuations because of their heavy dependence on future earnings expectations.
Other principal risks of an investment in the Fund include Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Credit and Counterparty Risk (risk of default of a derivatives counterparty or borrower of the Fund's securities), Liquidity Risk (difficulty in selling Fund investments), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts
27
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified.
Purchases and redemptions of Fund shares
For the six-month period ended August 31, 2009, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.50% of the amount invested or redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of a Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are receiv ed.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
28
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index).
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
29
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
30
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | 13,381 | — | 13,381 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 13,381 | $ | — | $ | 13,381 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
31
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | 17,803 | — | 17,803 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | $ | 17,803 | $ | — | $ | 17,803 | ||||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | 24,935 | — | 24,935 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 24,935 | — | $ | 24,935 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Futures | |||||||
Average notional amount outstanding | $ | 130,270 | |||||
Highest notional amount outstanding | 272,660 | ||||||
Lowest notional amount outstanding | 77,700 |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 average daily net assets at the annual rate of 0.15% for Class III shares.
32
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.31% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fun d) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.31% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.31% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $25 and $0, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $2,780,871 and $3,360,673, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
33
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2009, 83.58% of the outstanding shares of the Fund were held by five shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
As of February 28, 2009, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 96.48% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 27,153 | $ | 219,853 | 1,626 | $ | 15,144 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 468 | 3,952 | 1,557 | 15,161 | |||||||||||||||
Shares repurchased | (82,367 | ) | (752,138 | ) | (91,318 | ) | (1,266,386 | ) | |||||||||||
Purchase premiums | — | 1,105 | — | 64 | |||||||||||||||
Redemption fees | — | 3,761 | — | 6,320 | |||||||||||||||
Net increase (decrease) | (54,746 | ) | $ | (523,467 | ) | (88,135 | ) | $ | (1,229,697 | ) |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
34
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In
35
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, 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 to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to separate account clients and the impact on the Manager of, and expenses and risks associated with, the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and chan ges in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 facto rs, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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
36
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
37
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.46 | % | $ | 1,000.00 | $ | 1,300.10 | $ | 2.67 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 |
* Expenses are calculated using the Class's annualized expense ratio for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
38
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 97.2 | % | |||||
Short-Term Investments | 1.4 | ||||||
Futures Contracts | 0.6 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Preferred Stocks | 0.0 | ||||||
Other | 0.7 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
Japan | 28.2 | % | |||||
United Kingdom | 22.1 | ||||||
France | 11.1 | ||||||
Switzerland | 6.0 | ||||||
Italy | 5.3 | ||||||
Germany | 4.6 | ||||||
Australia | 3.3 | ||||||
Canada | 3.0 | ||||||
Spain | 2.9 | ||||||
Sweden | 2.6 | ||||||
Netherlands | 2.2 | ||||||
Singapore | 1.8 | ||||||
Hong Kong | 1.6 | ||||||
Belgium | 1.5 | ||||||
Greece | 1.0 | ||||||
Finland | 0.9 | ||||||
Denmark | 0.5 | ||||||
Ireland | 0.5 | ||||||
New Zealand | 0.5 | ||||||
Norway | 0.2 | ||||||
Austria | 0.1 | ||||||
Portugal | 0.1 | ||||||
Malta | 0.0 | ||||||
100.0 | % |
1
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Industry Group Summary | % of Equity Investments | ||||||
Banks | 16.0 | % | |||||
Pharmaceuticals, Biotechnology & Life Sciences | 13.8 | ||||||
Energy | 9.3 | ||||||
Materials | 6.9 | ||||||
Telecommunication Services | 6.4 | ||||||
Capital Goods | 5.4 | ||||||
Utilities | 5.1 | ||||||
Automobiles & Components | 5.0 | ||||||
Diversified Financials | 4.3 | ||||||
Food, Beverage & Tobacco | 4.0 | ||||||
Retailing | 3.9 | ||||||
Consumer Durables & Apparel | 3.1 | ||||||
Food & Staples Retailing | 2.5 | ||||||
Insurance | 2.1 | ||||||
Technology Hardware & Equipment | 2.1 | ||||||
Transportation | 1.8 | ||||||
Real Estate | 1.7 | ||||||
Software & Services | 1.5 | ||||||
Media | 1.3 | ||||||
Household & Personal Products | 1.2 | ||||||
Consumer Services | 0.9 | ||||||
Health Care Equipment & Services | 0.7 | ||||||
Semiconductors & Semiconductor Equipment | 0.6 | ||||||
Commercial & Professional Services | 0.4 | ||||||
100.0 | % |
2
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 97.2% | |||||||||||||||
Australia — 3.2% | |||||||||||||||
255,587 | AGL Energy Ltd | 3,009,116 | |||||||||||||
1,303,750 | Australia and New Zealand Banking Group Ltd | 23,421,627 | |||||||||||||
3,037,541 | BlueScope Steel Ltd | 7,348,878 | |||||||||||||
278,273 | Coca Cola Amatil Ltd | 2,326,801 | |||||||||||||
1,716,397 | Foster's Group Ltd | 7,939,683 | |||||||||||||
15,984,486 | GPT Group (REIT) | 8,325,645 | |||||||||||||
216,844 | JB Hi-Fi Ltd | 3,263,826 | |||||||||||||
226,478 | Macquarie Group Ltd | 9,722,513 | |||||||||||||
4,475,919 | Macquarie Infrastructure Group | 5,024,211 | |||||||||||||
16,549,057 | Macquarie Office Trust | 3,774,295 | |||||||||||||
6,385,197 | Mirvac Group | 7,944,761 | |||||||||||||
658,654 | National Australia Bank Ltd | 15,848,048 | |||||||||||||
4,851,964 | Stockland | 15,440,624 | |||||||||||||
1,710,390 | Suncorp-Metway Ltd | 11,310,877 | |||||||||||||
1,072,390 | TABCORP Holdings Ltd | 6,074,630 | |||||||||||||
2,801,371 | Telstra Corp Ltd | 7,712,635 | |||||||||||||
493,578 | Woodside Petroleum Ltd | 20,480,198 | |||||||||||||
437,201 | Woolworths Ltd | 10,336,414 | |||||||||||||
Total Australia | 169,304,782 | ||||||||||||||
Austria — 0.1% | |||||||||||||||
150,187 | OMV AG | 5,929,656 | |||||||||||||
Belgium — 1.5% | |||||||||||||||
438,869 | Anheuser-Busch InBev NV | 18,975,201 | |||||||||||||
22,089 | Bekaert NV | 2,938,985 | |||||||||||||
262,919 | Belgacom SA | 9,876,050 | |||||||||||||
40,372 | Colruyt SA | 9,269,494 | |||||||||||||
124,448 | Delhaize Group | 8,345,693 | |||||||||||||
1,657,930 | Dexia SA * | 14,219,957 | |||||||||||||
1,118,233 | Fortis * | 4,770,343 | |||||||||||||
59,448 | Mobistar SA | 3,831,181 | |||||||||||||
61,190 | Solvay SA | 6,451,480 | |||||||||||||
Total Belgium | 78,678,384 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Canada — 2.9% | |||||||||||||||
653,700 | Bank of Montreal | 31,647,500 | |||||||||||||
192,000 | Bank of Nova Scotia | 8,043,042 | |||||||||||||
51,900 | Canadian Imperial Bank of Commerce | 3,045,969 | |||||||||||||
110,500 | Canadian National Railway Co | 5,341,548 | |||||||||||||
172,800 | Canadian Pacific Railway Ltd | 8,274,196 | |||||||||||||
64,200 | Enbridge Inc | 2,398,520 | |||||||||||||
476,300 | Hudbay Minerals Inc * | 3,672,046 | |||||||||||||
170,000 | IGM Financial Inc | 6,351,222 | |||||||||||||
203,900 | Magna International Inc Class A | 9,238,128 | |||||||||||||
95,700 | Metro Inc Class A | 3,229,192 | |||||||||||||
428,200 | National Bank of Canada | 24,035,524 | |||||||||||||
294,200 | Penn West Energy Trust | 3,791,881 | |||||||||||||
420,600 | Sun Life Financial Inc | 12,447,993 | |||||||||||||
880,768 | Suncor Energy Inc | 26,943,978 | |||||||||||||
92,200 | Toronto Dominion Bank (The) | 5,700,019 | |||||||||||||
Total Canada | 154,160,758 | ||||||||||||||
Denmark — 0.4% | |||||||||||||||
277,841 | Danske Bank A/S * | 7,448,572 | |||||||||||||
1,406 | NeuroSearch A/S * | 34,582 | |||||||||||||
267,063 | Novo-Nordisk A/S Class B | 16,293,276 | |||||||||||||
Total Denmark | 23,776,430 | ||||||||||||||
Finland — 0.9% | |||||||||||||||
319,626 | Neste Oil Oyj | 5,318,058 | |||||||||||||
876,590 | Nokia Oyj | 12,305,419 | |||||||||||||
193,683 | Nokian Renkaat Oyj | 4,365,589 | |||||||||||||
225,579 | Outokumpu Oyj | 4,780,863 | |||||||||||||
157,487 | Rautaruukki Oyj | 3,687,189 | |||||||||||||
414,483 | Sampo Oyj Class A | 9,935,010 | |||||||||||||
38,955 | Stockmann Oyj AB Class A | 1,055,343 | |||||||||||||
201,993 | Tieto Oyj | 3,697,396 | |||||||||||||
Total Finland | 45,144,867 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
France — 10.8% | |||||||||||||||
84,053 | Air Liquide SA | 8,990,999 | |||||||||||||
511,607 | ArcelorMittal | 18,297,223 | |||||||||||||
1,106,962 | BNP Paribas | 89,256,353 | |||||||||||||
15,189 | Bongrain SA * | 1,088,192 | |||||||||||||
116,777 | Carrefour SA | 5,514,852 | |||||||||||||
114,756 | Casino Guichard-Perrachon SA | 8,707,782 | |||||||||||||
17,468 | CNP Assurances | 1,745,096 | |||||||||||||
281,650 | Compagnie de Saint-Gobain | 12,724,784 | |||||||||||||
143,212 | Dassault Systemes SA | 7,335,261 | |||||||||||||
160,122 | Essilor International SA | 8,662,990 | |||||||||||||
179,752 | European Aeronautic Defense and Space Co NV | 3,738,532 | |||||||||||||
103,886 | Eutelsat Communications | 2,781,840 | |||||||||||||
962,310 | France Telecom SA | 24,473,529 | |||||||||||||
3,655 | Fromageries Bel | 681,867 | |||||||||||||
260,517 | GDF Suez | 11,011,606 | |||||||||||||
114,962 | Hermes International | 17,043,684 | |||||||||||||
113,509 | L'Oreal SA | 11,205,312 | |||||||||||||
113,451 | Nexans SA | 8,311,636 | |||||||||||||
324,119 | Peugeot SA * | 9,407,673 | |||||||||||||
29,467 | PPR | 3,430,367 | |||||||||||||
152,061 | Publicis Groupe | 5,604,531 | |||||||||||||
522,939 | Renault SA * | 23,595,874 | |||||||||||||
2,218,387 | Sanofi-Aventis | 151,044,922 | |||||||||||||
118,915 | SCOR | 3,135,786 | |||||||||||||
207,748 | SES | 4,078,531 | |||||||||||||
683,581 | Societe Generale | 55,253,595 | |||||||||||||
42,978 | Sodexo | 2,478,687 | |||||||||||||
86,395 | Technip SA | 5,357,634 | |||||||||||||
2,063,413 | Thomson * | 2,832,608 | |||||||||||||
967,705 | Total SA | 55,526,645 | |||||||||||||
21,790 | Unibail-Rodamco | 4,319,296 | |||||||||||||
105,494 | Wendel | 4,986,200 | |||||||||||||
Total France | 572,623,887 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Germany — 4.5% | |||||||||||||||
199,669 | Adidas AG | 9,417,132 | |||||||||||||
50,324 | Allianz SE (Registered) | 5,830,770 | |||||||||||||
205,107 | Aurubis AG | 7,821,141 | |||||||||||||
186,527 | BASF AG | 9,748,094 | |||||||||||||
392,414 | Bayerische Motoren Werke AG | 17,910,517 | |||||||||||||
52,544 | Demag Cranes AG | 1,586,801 | |||||||||||||
302,138 | Deutsche Bank AG (Registered) | 20,520,351 | |||||||||||||
528,515 | Deutsche Post AG (Registered) | 9,137,346 | |||||||||||||
1,545,233 | Deutsche Telekom AG (Registered) | 20,574,660 | |||||||||||||
450,090 | E.ON AG | 19,071,100 | |||||||||||||
91,753 | Freenet AG * | 1,231,717 | |||||||||||||
201,331 | Gildemeister AG | 2,554,309 | |||||||||||||
263,563 | Hannover Rueckversicherung AG (Registered) * | 11,611,379 | |||||||||||||
554,053 | Heidelberger Druckmaschinen AG * | 4,854,267 | |||||||||||||
178,816 | Kloeckner & Co AG * | 4,780,836 | |||||||||||||
135,086 | MTU Aero Engines Holding AG | 5,711,887 | |||||||||||||
53,974 | Muenchener Rueckversicherungs-Gesellschaft AG (Registered) | 8,065,040 | |||||||||||||
23,697 | Puma AG Rudolf Dassler Sport | 6,685,733 | |||||||||||||
111,971 | RWE AG | 10,382,675 | |||||||||||||
166,522 | Salzgitter AG | 15,893,536 | |||||||||||||
543,833 | SAP AG | 26,554,094 | |||||||||||||
56,392 | Software AG | 4,328,052 | |||||||||||||
272,692 | ThyssenKrupp AG | 9,300,084 | |||||||||||||
36,172 | Vossloh AG | 4,269,414 | |||||||||||||
Total Germany | 237,840,935 | ||||||||||||||
Greece — 0.9% | |||||||||||||||
21,657 | Agricultural Bank of Greece * | 50,015 | |||||||||||||
712,575 | Alpha Bank A.E. * | 11,831,905 | |||||||||||||
44,754 | Intracom Holdings SA * | 96,542 | |||||||||||||
669,398 | National Bank of Greece SA * | 21,025,305 | |||||||||||||
505,400 | OPAP SA | 12,343,983 | |||||||||||||
187,868 | Public Power Corp SA * | 4,430,217 | |||||||||||||
Total Greece | 49,777,967 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Hong Kong — 1.6% | |||||||||||||||
2,939,000 | BOC Hong Kong Holdings Ltd | 5,869,934 | |||||||||||||
4,398,598 | CLP Holdings Ltd | 29,431,098 | |||||||||||||
1,040,000 | Esprit Holdings Ltd | 6,301,042 | |||||||||||||
145,000 | Guoco Group | 1,395,369 | |||||||||||||
5,462,300 | Hong Kong & China Gas | 11,842,457 | |||||||||||||
138,700 | Hong Kong Aircraft Engineering Co Ltd | 1,624,128 | |||||||||||||
3,641,469 | Hong Kong Electric Holdings Ltd | 20,356,350 | |||||||||||||
547,700 | Hong Kong Ferry Co Ltd | 448,746 | |||||||||||||
2,160,400 | Yue Yuen Industrial Holdings | 5,637,488 | |||||||||||||
Total Hong Kong | 82,906,612 | ||||||||||||||
Ireland — 0.5% | |||||||||||||||
576,115 | C&C Group Plc | 2,150,753 | |||||||||||||
780,347 | CRH Plc | 19,965,873 | |||||||||||||
197,740 | DCC Plc | 4,795,929 | |||||||||||||
212,480 | Kingspan Group Plc * | 1,908,368 | |||||||||||||
Total Ireland | 28,820,923 | ||||||||||||||
Italy — 5.1% | |||||||||||||||
1,117,969 | A2A SPA | 2,168,634 | |||||||||||||
189,502 | Ansaldo STS SPA | 3,831,698 | |||||||||||||
1,157,690 | Bulgari SPA | 8,408,508 | |||||||||||||
5,354,849 | Enel SPA | 31,646,222 | |||||||||||||
3,531,551 | ENI SPA | 83,911,636 | |||||||||||||
115,228 | Fondiaria-Sai SPA-Di RISP | 1,351,355 | |||||||||||||
829,338 | Intesa San Paolo * | 3,603,698 | |||||||||||||
213,451 | Italcementi SPA-Di RISP | 1,657,074 | |||||||||||||
191,850 | Luxottica Group SPA * | 4,657,325 | |||||||||||||
346,064 | Maire Tecnimont SPA | 1,484,144 | |||||||||||||
1,636,898 | Mediaset SPA | 10,790,522 | |||||||||||||
97,300 | Natuzzi SPA ADR * | 194,600 | |||||||||||||
1,686,887 | Parmalat SPA | 4,337,694 | |||||||||||||
131,735 | Saipem SPA | 3,541,215 | |||||||||||||
1,723,130 | Snam Rete Gas SPA | 8,014,719 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Italy — continued | |||||||||||||||
9,653,569 | Telecom Italia SPA | 15,644,506 | |||||||||||||
11,571,092 | Telecom Italia SPA-Di RISP | 13,145,827 | |||||||||||||
1,934,433 | Terna SPA | 7,137,199 | |||||||||||||
18,723,796 | UniCredit SPA * | 68,015,425 | |||||||||||||
Total Italy | 273,542,001 | ||||||||||||||
Japan — 27.4% | |||||||||||||||
257,800 | Aeon Credit Service Co Ltd | 2,913,287 | |||||||||||||
1,187,050 | Aiful Corp | 3,543,765 | |||||||||||||
320,300 | Aisin Seiki Co Ltd | 8,008,912 | |||||||||||||
1,139,200 | Alps Electric Co Ltd | 6,855,258 | |||||||||||||
288,400 | Asahi Breweries Ltd | 5,004,278 | |||||||||||||
369,000 | Asahi Glass Co Ltd | 3,209,491 | |||||||||||||
2,199,000 | Asahi Kasei Corp | 10,575,998 | |||||||||||||
526,200 | Astellas Pharma Inc | 21,032,123 | |||||||||||||
763,000 | Bank of Yokohama Ltd (The) | 4,305,537 | |||||||||||||
37,800 | Benesse Corp | 1,858,200 | |||||||||||||
175,200 | Bridgestone Corp | 3,197,311 | |||||||||||||
314,800 | Canon Inc | 12,033,755 | |||||||||||||
263,500 | Chubu Electric Power Co Inc | 6,126,485 | |||||||||||||
146,600 | Chugai Pharmaceutical Co Ltd | 2,985,872 | |||||||||||||
128,800 | Chugoku Electric Power Co Inc | 2,829,788 | |||||||||||||
138,700 | Circle K Sunkus Co Ltd | 2,253,556 | |||||||||||||
333,000 | COMSYS Holdings Corp | 3,838,884 | |||||||||||||
1,954,000 | Cosmo Oil Co Ltd | 5,997,536 | |||||||||||||
613,900 | CSK Holdings Corp * | 2,958,661 | |||||||||||||
517,200 | Culture Convenience Club Co Ltd | 3,821,264 | |||||||||||||
2,040 | CyberAgent Inc | 1,933,648 | |||||||||||||
190,000 | Dai Nippon Printing Co Ltd | 2,770,577 | |||||||||||||
586,200 | Daiei Inc * | 2,600,207 | |||||||||||||
307,000 | Daihatsu Motor Co Ltd | 3,146,684 | |||||||||||||
2,448,000 | Daikyo Inc * | 6,363,115 | |||||||||||||
560,000 | Dainippon Screen Manufacturing Co Ltd * | 1,931,697 | |||||||||||||
185,400 | Daito Trust Construction Co Ltd | 8,835,353 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
1,398,000 | Daiwa Securities Group Inc | 8,609,857 | |||||||||||||
727,000 | Denki Kagaku Kogyo K K | 3,072,959 | |||||||||||||
310,800 | Denso Corp | 9,044,914 | |||||||||||||
305,100 | Don Quijote Co Ltd | 7,303,454 | |||||||||||||
2,081,000 | Dowa Holdings Co Ltd | 11,715,412 | |||||||||||||
1,241,000 | Ebara Corp * | 5,559,591 | |||||||||||||
238,400 | Electric Power Development Co Ltd | 7,230,504 | |||||||||||||
555,200 | Elpida Memory Inc * | 8,656,944 | |||||||||||||
114,700 | Fast Retailing Co Ltd | 13,733,158 | |||||||||||||
2,848,000 | Fuji Heavy Industries Ltd | 12,306,680 | |||||||||||||
302,900 | Fuji Oil Co Ltd | 4,250,258 | |||||||||||||
1,663,000 | Fujikura Ltd | 8,747,903 | |||||||||||||
556,000 | Fujitsu Ltd | 3,733,276 | |||||||||||||
53,100 | Funai Electric Co Ltd | 2,121,976 | |||||||||||||
799,000 | Hankyu Hanshin Holdings Inc | 3,825,719 | |||||||||||||
1,237,000 | Hanwa Co Ltd | 4,872,130 | |||||||||||||
10,089,000 | Haseko Corp * | 11,371,427 | |||||||||||||
175,200 | Hikari Tsushin Inc | 3,783,367 | |||||||||||||
73,200 | Hirose Electric Co Ltd | 9,035,649 | |||||||||||||
1,580,000 | Hitachi Ltd | 5,558,006 | |||||||||||||
393,100 | Hokkaido Electric Power Co Inc | 8,101,268 | |||||||||||||
111,700 | Hokuriku Electric Power Co | 2,705,611 | |||||||||||||
1,695,700 | Honda Motor Co Ltd | 53,169,611 | |||||||||||||
241,900 | Hosiden Corp | 3,574,344 | |||||||||||||
89,700 | Ibiden Co Ltd | 3,184,765 | |||||||||||||
553 | INPEX Corp | 4,503,005 | |||||||||||||
1,077,000 | Iseki & Co Ltd * | 4,900,366 | |||||||||||||
1,362,000 | Itochu Corp | 9,640,306 | |||||||||||||
621,900 | JFE Holdings Inc | 21,703,899 | |||||||||||||
107,000 | K's Holdings Corp | 3,281,724 | |||||||||||||
1,900,000 | Kajima Corp | 5,327,027 | |||||||||||||
108,500 | Kansai Electric Power Co Inc | 2,493,322 | |||||||||||||
1,175,000 | Kao Corp | 29,759,619 | |||||||||||||
2,767,000 | Kawasaki Kisen Kaisha Ltd | 12,130,096 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
6,469 | Kenedix Inc * | 3,121,117 | |||||||||||||
8,984 | KK daVinci Holdings * | 1,376,587 | |||||||||||||
144,300 | Komatsu Ltd | 2,599,823 | |||||||||||||
271,600 | Konami Corp | 5,341,706 | |||||||||||||
52,500 | Kyocera Corp | 4,363,127 | |||||||||||||
224,000 | Kyowa Exeo Corp | 2,255,097 | |||||||||||||
215,500 | Kyushu Electric Power Co Inc | 4,758,740 | |||||||||||||
144,200 | Lawson Inc | 6,243,753 | |||||||||||||
1,147,000 | Leopalace21 Corp | 10,374,983 | |||||||||||||
1,849,000 | Marubeni Corp | 9,182,325 | |||||||||||||
703,900 | Matsui Securities Co Ltd | 6,517,533 | |||||||||||||
4,675,000 | Mazda Motor Corp | 12,975,071 | |||||||||||||
138,000 | Miraca Holdings Inc | 3,979,152 | |||||||||||||
2,112,500 | Mitsubishi Chemical Holdings Corp | 9,589,532 | |||||||||||||
516,200 | Mitsubishi Corp | 10,434,930 | |||||||||||||
377,000 | Mitsubishi Gas Chemical Co Inc | 2,210,562 | |||||||||||||
966,000 | Mitsubishi Rayon Co Ltd | 3,185,812 | |||||||||||||
3,509,900 | Mitsubishi UFJ Financial Group Inc | 22,313,371 | |||||||||||||
218,420 | Mitsubishi UFJ Lease & Finance Co Ltd | 6,921,867 | |||||||||||||
3,783,000 | Mitsui Mining & Smelting Co Ltd * | 10,795,954 | |||||||||||||
2,562,000 | Mitsui OSK Lines Ltd | 16,338,836 | |||||||||||||
9,301,900 | Mizuho Financial Group Inc | 22,630,644 | |||||||||||||
145,600 | Murata Manufacturing Co Ltd | 6,901,634 | |||||||||||||
153,000 | Nabtesco Corp | 1,700,676 | |||||||||||||
686,000 | NEC Corp * | 2,472,727 | |||||||||||||
2,204 | Net One Systems Co Ltd | 3,624,433 | |||||||||||||
131,000 | NGK Insulators Ltd | 3,048,251 | |||||||||||||
216,000 | NHK Spring Co Ltd | 1,591,392 | |||||||||||||
71,700 | Nichicon Corp | 997,386 | |||||||||||||
845,000 | Nichirei Corp | 3,263,996 | |||||||||||||
17,500 | Nintendo Co Ltd | 4,742,905 | |||||||||||||
351,000 | Nippon Denko Co Ltd | 2,688,409 | |||||||||||||
183,000 | Nippon Electric Glass Co Ltd | 1,898,434 | |||||||||||||
132,000 | Nippon Kayaku Co Ltd | 1,155,832 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
4,068,500 | Nippon Mining Holdings Inc | 20,234,425 | |||||||||||||
5,088,000 | Nippon Oil Corp | 29,050,669 | |||||||||||||
131,800 | Nippon Paper Group Inc | 3,873,608 | |||||||||||||
767,700 | Nippon Telegraph & Telephone Corp | 34,176,448 | |||||||||||||
1,160,000 | Nippon Yakin Koguo Co Ltd | 6,771,813 | |||||||||||||
2,835,000 | Nippon Yusen KK | 12,263,741 | |||||||||||||
9,444,500 | Nissan Motor Co Ltd | 65,897,570 | |||||||||||||
56,300 | Nissha Printing Co Ltd | 2,965,157 | |||||||||||||
212,000 | Nisshin Seifun Group Inc | 2,807,571 | |||||||||||||
878,000 | Nisshinbo Holdings Inc | 10,243,903 | |||||||||||||
40,050 | Nitori Co Ltd | 3,093,917 | |||||||||||||
137,000 | Nitto Denko Corp | 4,154,680 | |||||||||||||
377,800 | Nomura Holdings Inc | 3,347,783 | |||||||||||||
236,000 | Nomura Research Institute Ltd | 5,619,847 | |||||||||||||
22,356 | NTT Docomo Inc | 34,419,668 | |||||||||||||
1,322,000 | Obayashi Corp | 5,948,901 | |||||||||||||
374,000 | Odakyu Electric Railway Co Ltd | 3,356,962 | |||||||||||||
347,000 | OJI Paper Co Ltd | 1,634,976 | |||||||||||||
26,400 | Okinawa Electric Power Co | 1,572,515 | |||||||||||||
39,100 | Ono Pharmaceutical Co Ltd | 1,922,064 | |||||||||||||
44,300 | Oriental Land Co Ltd | 2,994,981 | |||||||||||||
397,080 | ORIX Corp | 30,426,381 | |||||||||||||
5,303,000 | Osaka Gas Co Ltd | 18,327,257 | |||||||||||||
1,497,000 | Pacific Metals Co Ltd | 12,536,847 | |||||||||||||
1,028,300 | Pioneer Corp * | 3,310,352 | |||||||||||||
120,600 | Point Inc | 7,372,234 | |||||||||||||
488,000 | Rengo Co Ltd | 3,038,874 | |||||||||||||
1,194,800 | Resona Holdings Inc | 16,274,878 | |||||||||||||
874,000 | Ricoh Company Ltd | 12,573,605 | |||||||||||||
59,500 | Rohm Co Ltd | 4,016,012 | |||||||||||||
146,800 | Ryohin Keikaku Co Ltd | 6,699,391 | |||||||||||||
128,000 | Saizeriya Co Ltd | 2,120,834 | |||||||||||||
313,900 | Sankyo Co Ltd | 19,744,425 | |||||||||||||
1,535,000 | Sanyo Electric Co Ltd * | 4,137,669 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
1,101,200 | Sega Sammy Holdings Inc | 14,347,667 | |||||||||||||
182,000 | Seino Holdings Co Ltd | 1,619,054 | |||||||||||||
2,041,200 | Seven & I Holdings Co Ltd | 49,263,674 | |||||||||||||
471,000 | Sharp Corp | 5,436,887 | |||||||||||||
77,500 | Shikoku Electric Power Co Inc | 2,397,215 | |||||||||||||
83,700 | Shimamura Co Ltd | 7,491,086 | |||||||||||||
176,000 | Shin-Etsu Chemical Co Ltd | 10,392,980 | |||||||||||||
1,022,200 | Showa Shell Sekiyu KK | 10,663,242 | |||||||||||||
252,300 | SoftBank Corp | 5,649,486 | |||||||||||||
5,615,500 | Sojitz Corp | 11,999,205 | |||||||||||||
443,300 | SUMCO Corp | 9,040,026 | |||||||||||||
1,171,400 | Sumitomo Corp | 11,984,555 | |||||||||||||
1,264,300 | Sumitomo Electric Industries Ltd | 16,312,143 | |||||||||||||
4,116,000 | Sumitomo Metal Industries Ltd | 10,300,152 | |||||||||||||
1,033,000 | Sumitomo Metal Mining Co Ltd | 15,893,855 | |||||||||||||
1,359,000 | Sumitomo Osaka Cement Co Ltd | 2,888,102 | |||||||||||||
2,926,286 | Sumitomo Trust & Banking Co Ltd | 17,850,435 | |||||||||||||
250,600 | Suzuki Motor Corp | 5,972,261 | |||||||||||||
2,080,000 | Taiheiyo Cement Co Ltd | 3,595,420 | |||||||||||||
2,713,000 | Taisei Corp | 5,947,314 | |||||||||||||
401,000 | Taiyo Yuden Co Ltd | 4,775,895 | |||||||||||||
720,700 | Takeda Pharmaceutical Co Ltd | 28,991,725 | |||||||||||||
885,950 | Takefuji Corp | 4,526,301 | |||||||||||||
737,000 | Toho Zinc Co Ltd | 3,603,916 | |||||||||||||
197,800 | Tohoku Electric Power Co Inc | 4,281,078 | |||||||||||||
82,100 | Tokai Rika Co Ltd | 1,468,881 | |||||||||||||
478,200 | Tokyo Electric Power Co Inc (The) | 12,456,518 | |||||||||||||
69,300 | Tokyo Electron Ltd | 3,763,758 | |||||||||||||
2,160,000 | Tokyo Gas Co Ltd | 8,649,794 | |||||||||||||
892,000 | Tokyo Steel Manufacturing Co | 11,743,360 | |||||||||||||
2,073,000 | Tokyo Tatemono Co Ltd | 12,245,367 | |||||||||||||
656,000 | TonenGeneral Sekiyu KK | 6,271,678 | |||||||||||||
407,000 | Toppan Printing Co Ltd | 4,012,451 | |||||||||||||
3,147,000 | Tosoh Corp | 9,122,994 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
841,000 | Toyo Engineering Corp | 3,006,154 | |||||||||||||
77,000 | Toyo Suisan Kaisha Ltd | 1,959,648 | |||||||||||||
119,200 | Toyota Boshoku Corp | 2,103,562 | |||||||||||||
34,000 | Toyota Industries Corp | 916,413 | |||||||||||||
359,500 | Toyota Motor Corp | 15,327,014 | |||||||||||||
566,000 | Toyota Tsusho Corp | 9,171,242 | |||||||||||||
130,800 | Ulvac Inc | 3,762,410 | |||||||||||||
35,200 | Unicharm Corp | 3,153,722 | |||||||||||||
902,200 | UNY Co Ltd | 7,624,642 | |||||||||||||
112,870 | USS Co Ltd | 7,106,723 | |||||||||||||
825 | Wacom Co Ltd | 1,657,632 | |||||||||||||
14,006 | Yahoo Japan Corp | 4,758,983 | |||||||||||||
86,300 | Yamato Kogyo Co | 2,571,581 | |||||||||||||
216,000 | Yamazaki Baking Co Ltd | 2,925,903 | |||||||||||||
Total Japan | 1,459,470,048 | ||||||||||||||
Malta — 0.0% | |||||||||||||||
15,984,486 | BGP Holding Plc * | — | |||||||||||||
Netherlands — 2.2% | |||||||||||||||
2,747,421 | Aegon NV * | 20,712,645 | |||||||||||||
11,644 | Gamma Holdings NV * | 114,558 | |||||||||||||
339,149 | Heineken NV | 14,346,151 | |||||||||||||
3,595,337 | ING Groep NV * | 54,210,340 | |||||||||||||
820,724 | Koninklijke Ahold NV | 9,638,320 | |||||||||||||
202,525 | Koninklijke DSM NV | 7,392,630 | |||||||||||||
304,829 | Reed Elsevier NV | 3,238,743 | |||||||||||||
241,233 | Unilever NV | 6,758,810 | |||||||||||||
Total Netherlands | 116,412,197 | ||||||||||||||
New Zealand — 0.5% | |||||||||||||||
1,497,393 | Fletcher Building Ltd | 8,056,945 | |||||||||||||
8,469,967 | Telecom Corp of New Zealand | 15,906,421 | |||||||||||||
1,357 | Vector Ltd | 1,879 | |||||||||||||
Total New Zealand | 23,965,245 |
See accompanying notes to the financial statements.
13
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Norway — 0.2% | |||||||||||||||
1,140,700 | DnB NOR ASA * | 11,711,281 | |||||||||||||
Portugal — 0.1% | |||||||||||||||
571,825 | Portugal Telecom SGPS SA | 5,929,260 | |||||||||||||
Singapore — 1.8% | |||||||||||||||
7,117,000 | CapitaCommercial Trust | 4,398,656 | |||||||||||||
2,058,000 | Indofood Agri Resources Ltd * | 2,372,935 | |||||||||||||
9,473,500 | Neptune Orient Lines Ltd | 10,591,175 | |||||||||||||
2,548,200 | Noble Group Ltd | 3,745,998 | |||||||||||||
1,567,000 | Oversea-Chinese Banking Corp Ltd | 8,418,058 | |||||||||||||
3,160,100 | Sembcorp Industries Ltd | 7,041,467 | |||||||||||||
4,650,000 | SembCorp Marine Ltd | 9,962,898 | |||||||||||||
1,213,000 | Singapore Exchange Ltd | 7,039,580 | |||||||||||||
4,653,000 | Singapore Press Holdings Ltd | 11,813,764 | |||||||||||||
2,327,000 | Singapore Technologies Engineering Ltd | 4,183,946 | |||||||||||||
7,590,000 | Singapore Telecommunications | 16,544,267 | |||||||||||||
624,000 | United Overseas Bank Ltd | 7,237,632 | |||||||||||||
119,000 | Venture Corp Ltd | 711,149 | |||||||||||||
Total Singapore | 94,061,525 | ||||||||||||||
Spain — 2.8% | |||||||||||||||
68,027 | ACS Actividades de Construccion y Servicios SA | 3,512,547 | |||||||||||||
1,339,828 | Banco Bilbao Vizcaya Argentaria SA | 23,821,214 | |||||||||||||
903,513 | Banco Popular Espanol SA | 9,738,426 | |||||||||||||
2,795,869 | Banco Santander SA | 43,042,812 | |||||||||||||
198,372 | Inditex SA | 10,818,552 | |||||||||||||
1,112,433 | Repsol YPF SA | 27,650,305 | |||||||||||||
1,299,316 | Telefonica SA | 32,853,187 | |||||||||||||
Total Spain | 151,437,043 | ||||||||||||||
Sweden — 2.5% | |||||||||||||||
1,368,737 | Boliden AB | 14,098,282 | |||||||||||||
165,817 | Electrolux AB Series B * | 3,446,885 |
See accompanying notes to the financial statements.
14
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Sweden — continued | |||||||||||||||
1,469,895 | Ericsson LM B Shares | 14,104,623 | |||||||||||||
590,433 | Hennes & Mauritz AB Class B | 32,783,464 | |||||||||||||
246,700 | Investor AB Class B | 4,600,319 | |||||||||||||
104,425 | Modern Times Group AB Class B | 4,266,897 | |||||||||||||
1,783,427 | Nordea Bank AB | 18,706,167 | |||||||||||||
877,803 | Skandinaviska Enskilda Banken AB Class A * | 6,190,540 | |||||||||||||
541,476 | SKF AB Class B | 8,296,523 | |||||||||||||
184,353 | Svenska Cellulosa AB Class B * | 2,409,847 | |||||||||||||
771,832 | Svenska Handelsbanken AB Class A | 20,284,261 | |||||||||||||
494,141 | Swedbank AB Class A * | 5,188,340 | |||||||||||||
Total Sweden | 134,376,148 | ||||||||||||||
Switzerland — 5.8% | |||||||||||||||
277,742 | Clariant AG (Registered) * | 2,518,858 | |||||||||||||
247,719 | Compagnie Financiere Richemont SA Class A | 6,762,136 | |||||||||||||
449,688 | Credit Suisse Group AG (Registered) | 22,942,625 | |||||||||||||
1,398,322 | Nestle SA (Registered) | 58,216,449 | |||||||||||||
2,550,859 | Novartis AG (Registered) | 118,495,345 | |||||||||||||
340,055 | Roche Holding AG (Non Voting) | 54,162,507 | |||||||||||||
36,977 | Swatch Group AG | 7,993,261 | |||||||||||||
14,320 | Swisscom AG (Registered) | 4,962,070 | |||||||||||||
125,617 | Synthes Inc | 14,717,477 | |||||||||||||
966,418 | UBS AG (Registered) * | 17,791,201 | |||||||||||||
Total Switzerland | 308,561,929 | ||||||||||||||
United Kingdom — 21.5% | |||||||||||||||
1,197,072 | 3i Group Plc | 5,857,522 | |||||||||||||
818,853 | Amlin Plc | 4,894,081 | |||||||||||||
384,913 | Antofagasta Plc | 4,754,852 | |||||||||||||
2,703,065 | AstraZeneca Plc | 125,434,909 | |||||||||||||
18,262,928 | Barclays Plc * | 111,791,646 | |||||||||||||
1,062,068 | Barratt Developments Plc * | 4,220,321 | |||||||||||||
1,938,388 | BG Group Plc | 31,803,383 | |||||||||||||
2,911,193 | BP Plc | 24,950,665 |
See accompanying notes to the financial statements.
15
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
836,270 | British American Tobacco Plc | 25,410,307 | |||||||||||||
7,037,915 | BT Group Plc | 15,972,106 | |||||||||||||
1,208,798 | Burberry Group Plc | 9,467,462 | |||||||||||||
1,336,720 | Cable & Wireless Plc | 3,213,238 | |||||||||||||
850,281 | Cadbury Plc | 7,983,807 | |||||||||||||
662,152 | Capita Group Plc | 7,317,315 | |||||||||||||
1,097,931 | Centrica Plc | 4,487,075 | |||||||||||||
2,451,066 | Cobham Plc | 8,030,930 | |||||||||||||
1,316,970 | Compass Group Plc | 6,955,778 | |||||||||||||
142,438 | CSR Plc * | 1,090,693 | |||||||||||||
720,386 | Daily Mail and General Trust Plc | 4,542,221 | |||||||||||||
1,891,031 | Debenhams Plc | 2,434,690 | |||||||||||||
1,278,616 | Diageo Plc | 19,786,711 | |||||||||||||
977,689 | Drax Group Plc | 7,597,605 | |||||||||||||
17,792,237 | DSG International Plc | 8,006,151 | |||||||||||||
465,214 | Experian Plc | 3,893,120 | |||||||||||||
388,944 | FirstGroup Plc | 2,388,976 | |||||||||||||
1,413,198 | Game Group Plc | 3,757,168 | |||||||||||||
9,914,448 | GlaxoSmithKline Plc | 193,607,264 | |||||||||||||
3,397,189 | Home Retail Group Plc | 17,126,056 | |||||||||||||
2,833,042 | HSBC Holdings Plc | 30,620,986 | |||||||||||||
181,251 | Imperial Tobacco Group Plc | 5,083,782 | |||||||||||||
476,855 | J Sainsbury Plc | 2,515,467 | |||||||||||||
367,464 | Jardine Lloyd Thompson Group Plc | 2,878,468 | |||||||||||||
315,120 | JD Wetherspoon Plc | 2,417,633 | |||||||||||||
203,013 | Kazakhmys Plc | 3,221,843 | |||||||||||||
1,858,924 | Kesa Electricals Plc | 4,230,032 | |||||||||||||
3,257,084 | Kingfisher Plc | 11,158,922 | |||||||||||||
784,527 | Lancashire Holdings Ltd | 5,909,673 | |||||||||||||
19,899,896 | Lloyds Banking Group Plc | 35,633,047 | |||||||||||||
312,032 | London Stock Exchange | 4,068,835 | |||||||||||||
1,468,571 | Marks & Spencer Group Plc | 8,078,498 | |||||||||||||
311,341 | Micro Focus International Plc | 1,910,429 | |||||||||||||
800,447 | Mitchells & Butler Plc * | 3,688,499 |
See accompanying notes to the financial statements.
16
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
489,292 | Next Plc | 12,978,657 | |||||||||||||
1,926,966 | Old Mutual Plc | 2,921,778 | |||||||||||||
689,456 | Pearson Plc | 8,386,772 | |||||||||||||
248,825 | Petrofac Ltd | 3,541,403 | |||||||||||||
392,429 | Reckitt Benckiser Group Plc | 18,144,928 | |||||||||||||
1,040,138 | Reed Elsevier Plc | 7,524,307 | |||||||||||||
11,419,048 | Royal Bank of Scotland Group Plc | 10,575,534 | |||||||||||||
2,280,087 | Royal Dutch Shell Plc A Shares (London) | 63,063,535 | |||||||||||||
1,591,922 | Royal Dutch Shell Plc B Shares (London) | 42,950,903 | |||||||||||||
1,283,430 | RSA Insurance Group Plc | 2,711,661 | |||||||||||||
118,984 | SABMiller Plc | 2,743,933 | |||||||||||||
1,394,768 | Sage Group Plc | 4,987,203 | |||||||||||||
490,476 | Scottish & Southern Energy Plc | 8,903,402 | |||||||||||||
328,423 | Signet Jewelers Ltd * | 7,768,726 | |||||||||||||
904,637 | Smith & Nephew Plc | 7,659,364 | |||||||||||||
708,760 | Standard Chartered Plc | 15,997,793 | |||||||||||||
5,588,676 | Taylor Wimpey Plc * | 4,720,387 | |||||||||||||
1,375,491 | Tesco Plc | 8,372,937 | |||||||||||||
77,877 | Thomson Reuters Plc | 2,443,310 | |||||||||||||
797,833 | Travis Perkins Plc | 10,409,676 | |||||||||||||
222,455 | Unilever Plc | 6,078,792 | |||||||||||||
572,671 | United Utilities Group Plc | 4,202,769 | |||||||||||||
63,879 | Vedanta Resources Plc | 1,845,018 | |||||||||||||
29,037,540 | Vodafone Group Plc | 62,832,122 | |||||||||||||
258,857 | Weir Group Plc (The) | 2,708,335 | |||||||||||||
1,897,695 | William Hill Plc | 5,692,252 | |||||||||||||
517,723 | Wolseley Plc * | 12,115,207 | |||||||||||||
1,668,222 | Wolseley Plc (Deferred) * | — | |||||||||||||
1,203,070 | Xstrata Plc | 15,961,564 | |||||||||||||
Total United Kingdom | 1,146,434,434 | ||||||||||||||
TOTAL COMMON STOCKS (COST $5,698,345,842) | 5,174,866,312 |
See accompanying notes to the financial statements.
17
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||||||
PREFERRED STOCKS — 0.0% | |||||||||||||||
Germany — 0.0% | |||||||||||||||
9,049 | Villeroy & Boch AG (Non Voting) 7.87% * | 57,303 | |||||||||||||
TOTAL PREFERRED STOCKS (COST $95,178) | 57,303 | ||||||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||||||
Finland — 0.0% | |||||||||||||||
38,955 | Stockmann Oyj AB Class A Rights, Expires 10/02/09 * | 27,923 | |||||||||||||
TOTAL RIGHTS AND WARRANTS (COST $20,067) | 27,923 | ||||||||||||||
SHORT-TERM INVESTMENTS — 1.4% | |||||||||||||||
EUR | 184,071 | Allied Irish Bank Time Deposit, 0.06%, due 09/01/09 | 263,884 | ||||||||||||
CAD | 492,854 | Bank of America Time Deposit, 0.04%, due 09/01/09 | 450,198 | ||||||||||||
USD | 61,633 | Bank of Ireland Time Deposit, 0.03%, due 09/01/09 | 61,633 | ||||||||||||
USD | 25,000,000 | BNP Paribas Time Deposit, 0.18%, due 09/01/09 | 25,000,000 | ||||||||||||
CHF | 16,536 | Brown Brothers Harriman Time Deposit, 0.02%, due 09/01/09 | 15,616 | ||||||||||||
DKK | 48,084 | Brown Brothers Harriman Time Deposit, 0.30%, due 09/01/09 | 9,261 | ||||||||||||
HKD | 77,509 | Brown Brothers Harriman Time Deposit, 0.01%, due 09/01/09 | 10,001 | ||||||||||||
NOK | 61,122 | Brown Brothers Harriman Time Deposit, 0.35%, due 09/01/09 | 10,157 | ||||||||||||
NZD | 14,876 | Brown Brothers Harriman Time Deposit, 1.50%, due 09/01/09 | 10,209 | ||||||||||||
SEK | 72,237 | Brown Brothers Harriman Time Deposit, 0.01%, due 09/01/09 | 10,148 | ||||||||||||
AUD | 1,190,803 | Deutsche Bank Time Deposit, 2.17%, due 09/01/09 | 1,006,467 | ||||||||||||
JPY | 45,644,480 | HSBC Bank (Hong Kong) Time Deposit, 0.01%, due 09/01/09 | 490,537 | ||||||||||||
SGD | 681,511 | JP Morgan Chase Time Deposit, 0.01%, due 09/01/09 | 472,960 | ||||||||||||
USD | 21,300,000 | Royal Bank of Canada Time Deposit, 0.15%, due 09/01/09 | 21,300,000 | ||||||||||||
USD | 25,000,000 | Societe Generale Time Deposit, 0.13%, due 09/01/09 | 25,000,000 | ||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $74,111,071) | 74,111,071 | ||||||||||||||
TOTAL INVESTMENTS — 98.6% (Cost $5,772,572,158) | 5,249,062,609 | ||||||||||||||
Other Assets and Liabilities (net) — 1.4% | 73,590,317 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 5,322,652,926 |
See accompanying notes to the financial statements.
18
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys † | |||||||||||||||||||
10/23/09 | EUR | 26,566,706 | $ | 38,086,883 | $ | (229,479 | ) | ||||||||||||
10/23/09 | EUR | 59,464,897 | 85,250,788 | 1,354,262 | |||||||||||||||
10/23/09 | SEK | 162,312,985 | 22,806,627 | 479,018 | |||||||||||||||
10/23/09 | SEK | 162,312,985 | 22,806,627 | 407,677 | |||||||||||||||
10/23/09 | SEK | 162,312,985 | 22,806,627 | 486,513 | |||||||||||||||
10/23/09 | SEK | 162,312,985 | 22,806,627 | 351,729 | |||||||||||||||
10/23/09 | SEK | 162,312,985 | 22,806,627 | 463,931 | |||||||||||||||
10/23/09 | SEK | 162,312,985 | 22,806,627 | 407,197 | |||||||||||||||
10/23/09 | SEK | 162,312,985 | 22,806,627 | 471,187 | |||||||||||||||
$ | 282,984,060 | $ | 4,192,035 | ||||||||||||||||
Sales # | |||||||||||||||||||
10/23/09 | AUD | 40,914,400 | $ | 34,439,528 | $ | (220,526 | ) | ||||||||||||
10/23/09 | CAD | 19,901,749 | 18,180,842 | (201,449 | ) | ||||||||||||||
10/23/09 | CAD | 19,901,749 | 18,180,842 | (193,666 | ) | ||||||||||||||
10/23/09 | CAD | 19,901,749 | 18,180,841 | (236,465 | ) | ||||||||||||||
10/23/09 | CAD | 19,901,749 | 18,180,841 | (208,382 | ) | ||||||||||||||
10/23/09 | SEK | 84,516,579 | 11,875,440 | (63,530 | ) | ||||||||||||||
10/23/09 | SGD | 36,245,572 | 25,141,693 | (158,531 | ) | ||||||||||||||
10/23/09 | SGD | 22,337,354 | 15,494,276 | 72,367 | |||||||||||||||
10/23/09 | SGD | 36,245,572 | 25,141,693 | (174,535 | ) | ||||||||||||||
$ | 184,815,996 | $ | (1,384,717 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
19
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
1,576 | CAC 40 | September 2009 | $ | 82,784,599 | $ | 5,607,494 | |||||||||||||
418 | DAX | September 2009 | 82,061,933 | 8,899,879 | |||||||||||||||
255 | FTSE 100 | September 2009 | 20,271,187 | 2,883,110 | |||||||||||||||
898 | FTSE/MIB | September 2009 | 144,934,260 | 19,728,037 | |||||||||||||||
174 | MSCI Singapore | September 2009 | 7,564,498 | (86,454 | ) | ||||||||||||||
$ | 337,616,477 | $ | 37,032,066 | ||||||||||||||||
Sales | |||||||||||||||||||
551 | Hang Seng | September 2009 | $ | 69,781,218 | $ | 2,877,577 | |||||||||||||
327 | IBEX 35 | September 2009 | 53,362,109 | (3,779,089 | ) | ||||||||||||||
1,055 | S&P/TSX 60 | September 2009 | 125,626,673 | (6,013,901 | ) | ||||||||||||||
41 | SPI 200 | September 2009 | 3,869,391 | (419,940 | ) | ||||||||||||||
16 | TOPIX | September 2009 | 1,651,114 | 6,489 | |||||||||||||||
$ | 254,290,505 | $ | (7,328,864 | ) |
As of August 31, 2009, for the futures contracts held, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
ADR - American Depositary Receipt
REIT - Real Estate Investment Trust
* Non-income producing security.
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krone EUR - Euro 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.
20
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $5,772,572,158) (Note 2) | $ | 5,249,062,609 | |||||
Foreign currency, at value (cost $7,884) (Note 2) | 7,906 | ||||||
Receivable for investments sold | 816,960 | ||||||
Receivable for Fund shares sold | 8,617,814 | ||||||
Dividends and interest receivable | 12,868,089 | ||||||
Foreign taxes receivable | 3,492,374 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 4,493,881 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 65,608,727 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 362,324 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 161,603 | ||||||
Total assets | 5,345,492,287 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 864,912 | ||||||
Payable for Fund shares repurchased | 16,300,602 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 2,227,488 | ||||||
Shareholder service fee | 564,248 | ||||||
Administration fee – Class M | 2,268 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 9,691 | ||||||
Payable for 12b-1 fee – Class M | 5,398 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 1,686,563 | ||||||
Miscellaneous payable | 320,432 | ||||||
Accrued expenses | 857,759 | ||||||
Total liabilities | 22,839,361 | ||||||
Net assets | $ | 5,322,652,926 |
See accompanying notes to the financial statements.
21
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 6,896,633,036 | |||||
Accumulated undistributed net investment income | 90,606,864 | ||||||
Accumulated net realized loss | (1,173,843,511 | ) | |||||
Net unrealized depreciation | (490,743,463 | ) | |||||
$ | 5,322,652,926 | ||||||
Net assets attributable to: | |||||||
Class II shares | $ | 519,235,189 | |||||
Class III shares | $ | 2,125,802,472 | |||||
Class IV shares | $ | 2,663,863,298 | |||||
Class M shares | $ | 13,751,967 | |||||
Shares outstanding: | |||||||
Class II | 25,513,966 | ||||||
Class III | 103,316,671 | ||||||
Class IV | 129,507,624 | ||||||
Class M | 677,726 | ||||||
Net asset value per share: | |||||||
Class II | $ | 20.35 | |||||
Class III | $ | 20.58 | |||||
Class IV | $ | 20.57 | |||||
Class M | $ | 20.29 |
See accompanying notes to the financial statements.
22
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $9,498,606) | $ | 93,943,049 | |||||
Interest | 4,283 | ||||||
Total investment income | 93,947,332 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 11,785,226 | ||||||
Shareholder service fee – Class II (Note 3) | 526,410 | ||||||
Shareholder service fee – Class III (Note 3) | 1,386,746 | ||||||
Shareholder service fee – Class IV (Note 3) | 1,068,815 | ||||||
12b-1 fee – Class M (Note 3) | 14,242 | ||||||
Administration fee – Class M (Note 3) | 11,396 | ||||||
Custodian and fund accounting agent fees | 913,114 | ||||||
Legal fees | 90,988 | ||||||
Trustees fees and related expenses (Note 3) | 45,855 | ||||||
Audit and tax fees | 45,448 | ||||||
Transfer agent fees | 36,616 | ||||||
Registration fees | 19,780 | ||||||
Miscellaneous | 61,088 | ||||||
Total expenses | 16,005,724 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (1,143,758 | ) | |||||
Expense reductions (Note 2) | (1,194 | ) | |||||
Net expenses | 14,860,772 | ||||||
Net investment income (loss) | 79,086,560 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (650,782,604 | ) | |||||
Closed futures contracts | (41,567,177 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (4,265,771 | ) | |||||
Net realized gain (loss) | (696,615,552 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 2,363,325,341 | ||||||
Open futures contracts | 71,834,816 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 16,069,853 | ||||||
Net unrealized gain (loss) | 2,451,230,010 | ||||||
Net realized and unrealized gain (loss) | 1,754,614,458 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 1,833,701,018 |
See accompanying notes to the financial statements.
23
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 79,086,560 | $ | 208,746,121 | |||||||
Net realized gain (loss) | (696,615,552 | ) | (435,831,574 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 2,451,230,010 | (3,338,411,645 | ) | ||||||||
Net increase (decrease) in net assets from operations | 1,833,701,018 | (3,565,497,098 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class II | (6,435,941 | ) | (16,802,472 | ) | |||||||
Class III | (25,508,052 | ) | (92,401,886 | ) | |||||||
Class IV | (31,568,603 | ) | (145,544,379 | ) | |||||||
Class M | (154,476 | ) | (578,220 | ) | |||||||
Total distributions from net investment income | (63,667,072 | ) | (255,326,957 | ) | |||||||
Net realized gains | |||||||||||
Class II | — | (26,461,564 | ) | ||||||||
Class III | — | (143,314,754 | ) | ||||||||
Class IV | — | (230,830,432 | ) | ||||||||
Class M | — | (1,002,702 | ) | ||||||||
Total distributions from net realized gains | — | (401,609,452 | ) | ||||||||
(63,667,072 | ) | (656,936,409 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class II | (56,520,496 | ) | 166,533,198 | ||||||||
Class III | (54,018,869 | ) | 398,098,987 | ||||||||
Class IV | (128,434,114 | ) | 172,499,767 | ||||||||
Class M | 577,080 | 353,743 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | (238,396,399 | ) | 737,485,695 | ||||||||
Total increase (decrease) in net assets | 1,531,637,547 | (3,484,947,812 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 3,791,015,379 | 7,275,963,191 | |||||||||
End of period (including accumulated undistributed net investment income of $90,606,864 and $75,187,376, respectively) | $ | 5,322,652,926 | $ | 3,791,015,379 |
See accompanying notes to the financial statements.
24
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 13.86 | $ | 29.69 | $ | 34.99 | $ | 32.35 | $ | 29.04 | $ | 24.18 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.29 | 0.79 | 0.93 | 0.79 | 0.65 | 0.49 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 6.44 | (14.01 | ) | (0.86 | ) | 5.60 | 4.45 | 5.07 | |||||||||||||||||||
Total from investment operations | 6.73 | (13.22 | ) | 0.07 | 6.39 | 5.10 | 5.56 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.24 | ) | (0.99 | ) | (0.83 | ) | (0.54 | ) | (0.36 | ) | (0.66 | ) | |||||||||||||||
From net realized gains | — | (1.62 | ) | (4.54 | ) | (3.21 | ) | (1.43 | ) | (0.04 | ) | ||||||||||||||||
Total distributions | (0.24 | ) | (2.61 | ) | (5.37 | ) | (3.75 | ) | (1.79 | ) | (0.70 | ) | |||||||||||||||
Net asset value, end of period | $ | 20.35 | $ | 13.86 | $ | 29.69 | $ | 34.99 | $ | 32.35 | $ | 29.04 | |||||||||||||||
Total Return(a) | 48.79 | %** | (48.04 | )% | (1.11 | )% | 20.46 | % | 18.16 | % | 23.17 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 519,235 | $ | 394,070 | $ | 510,006 | $ | 564,440 | $ | 567,313 | $ | 231,695 | |||||||||||||||
Net expenses to average daily net assets | 0.72 | %(b)* | 0.74 | %(c) | 0.76 | %(c) | 0.76 | % | 0.76 | % | 0.76 | % | |||||||||||||||
Net investment income to average daily net assets | 3.32 | %* | 3.41 | % | 2.59 | % | 2.32 | % | 2.16 | % | 1.88 | % | |||||||||||||||
Portfolio turnover rate | 21 | %** | 53 | % | 47 | % | 36 | % | 38 | % | 46 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.05 | % | 0.05 | % | 0.04 | % | 0.06 | % | 0.07 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
25
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.00 | $ | 29.97 | $ | 35.28 | $ | 32.59 | $ | 29.23 | $ | 24.32 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.29 | 0.79 | 0.94 | 0.81 | 0.72 | 0.59 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 6.53 | (14.13 | ) | (0.86 | ) | 5.66 | 4.44 | 5.02 | |||||||||||||||||||
Total from investment operations | 6.82 | (13.34 | ) | 0.08 | 6.47 | 5.16 | 5.61 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.24 | ) | (1.01 | ) | (0.85 | ) | (0.57 | ) | (0.37 | ) | (0.66 | ) | |||||||||||||||
From net realized gains | — | (1.62 | ) | (4.54 | ) | (3.21 | ) | (1.43 | ) | (0.04 | ) | ||||||||||||||||
Total distributions | (0.24 | ) | (2.63 | ) | (5.39 | ) | (3.78 | ) | (1.80 | ) | (0.70 | ) | |||||||||||||||
Net asset value, end of period | $ | 20.58 | $ | 14.00 | $ | 29.97 | $ | 35.28 | $ | 32.59 | $ | 29.23 | |||||||||||||||
Total Return(a) | 48.95 | %** | (48.01 | )% | (1.06 | )% | 20.54 | % | 18.26 | % | 23.28 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 2,125,802 | $ | 1,487,839 | $ | 2,615,878 | $ | 2,703,050 | $ | 2,795,610 | $ | 1,804,485 | |||||||||||||||
Net expenses to average daily net assets | 0.65 | %(b)* | 0.67 | %(c) | 0.69 | %(c) | 0.69 | % | 0.69 | % | 0.69 | % | |||||||||||||||
Net investment income to average daily net assets | 3.30 | %* | 3.38 | % | 2.61 | % | 2.36 | % | 2.39 | % | 2.30 | % | |||||||||||||||
Portfolio turnover rate | 21 | %** | 53 | % | 47 | % | 36 | % | 38 | % | 46 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.05 | % | 0.05 | % | 0.04 | % | 0.06 | % | 0.07 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
26
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.00 | $ | 29.96 | $ | 35.26 | $ | 32.58 | $ | 29.22 | $ | 24.31 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.30 | 0.82 | 0.96 | 0.80 | 0.74 | 0.54 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 6.51 | (14.14 | ) | (0.85 | ) | 5.68 | 4.43 | 5.09 | |||||||||||||||||||
Total from investment operations | 6.81 | (13.32 | ) | 0.11 | 6.48 | 5.17 | 5.63 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.24 | ) | (1.02 | ) | (0.87 | ) | (0.59 | ) | (0.38 | ) | (0.68 | ) | |||||||||||||||
From net realized gains | — | (1.62 | ) | (4.54 | ) | (3.21 | ) | (1.43 | ) | (0.04 | ) | ||||||||||||||||
Total distributions | (0.24 | ) | (2.64 | ) | (5.41 | ) | (3.80 | ) | (1.81 | ) | (0.72 | ) | |||||||||||||||
Net asset value, end of period | $ | 20.57 | $ | 14.00 | $ | 29.96 | $ | 35.26 | $ | 32.58 | $ | 29.22 | |||||||||||||||
Total Return(a) | 48.89 | %** | (47.95 | )% | (0.98 | )% | 20.61 | % | 18.32 | % | 23.37 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 2,663,863 | $ | 1,900,168 | $ | 4,131,392 | $ | 4,566,106 | $ | 3,150,741 | $ | 2,193,988 | |||||||||||||||
Net expenses to average daily net assets | 0.59 | %(b)* | 0.61 | %(c) | 0.63 | %(c) | 0.63 | % | 0.63 | % | 0.63 | % | |||||||||||||||
Net investment income to average daily net assets | 3.40 | %* | 3.47 | % | 2.67 | % | 2.32 | % | 2.45 | % | 2.06 | % | |||||||||||||||
Portfolio turnover rate | 21 | %** | 53 | % | 47 | % | 36 | % | 38 | % | 46 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.05 | % | 0.05 | % | 0.04 | % | 0.06 | % | 0.07 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
27
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 13.83 | $ | 29.60 | $ | 34.93 | $ | 32.28 | $ | 28.98 | $ | 24.15 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.26 | 0.73 | 0.79 | 0.68 | 0.61 | 0.44 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 6.43 | (13.95 | ) | (0.81 | ) | 5.62 | 4.41 | 5.04 | |||||||||||||||||||
Total from investment operations | 6.69 | (13.22 | ) | (0.02 | ) | 6.30 | 5.02 | 5.48 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.23 | ) | (0.93 | ) | (0.77 | ) | (0.44 | ) | (0.29 | ) | (0.61 | ) | |||||||||||||||
From net realized gains | — | (1.62 | ) | (4.54 | ) | (3.21 | ) | (1.43 | ) | (0.04 | ) | ||||||||||||||||
Total distributions | (0.23 | ) | (2.55 | ) | (5.31 | ) | (3.65 | ) | (1.72 | ) | (0.65 | ) | |||||||||||||||
Net asset value, end of period | $ | 20.29 | $ | 13.83 | $ | 29.60 | $ | 34.93 | $ | 32.28 | $ | 28.98 | |||||||||||||||
Total Return(a) | 48.62 | %** | (48.14 | )% | (1.36 | )% | 20.18 | % | 17.92 | % | 22.88 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 13,752 | $ | 8,938 | $ | 18,687 | $ | 17,371 | $ | 29,984 | $ | 18,347 | |||||||||||||||
Net expenses to average daily net assets | 0.95 | %(b)* | 0.97 | %(c) | 0.99 | %(c) | 0.99 | % | 0.99 | % | 0.99 | % | |||||||||||||||
Net investment income to average daily net assets | 2.98 | %* | 3.13 | % | 2.22 | % | 2.00 | % | 2.07 | % | 1.72 | % | |||||||||||||||
Portfolio turnover rate | 21 | %** | 53 | % | 47 | % | 36 | % | 38 | % | 46 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.05 | % | 0.05 | % | 0.04 | % | 0.06 | % | 0.07 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
28
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO International Intrinsic Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 its benchmark, the MSCI EAFE Value Index (Europe, Australia, and Far East). The Fund typically makes equity investments in companies tied economically to countries other than the U.S. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the counter derivatives, including options, futures, and swap contracts. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
Throughout the period ended August 31, 2009, 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 they bear.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for
29
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 93.86% of the net assets of the Fund were valued using fair value prices based on models used by a third party vendor and are classified as using Level 2 inputs in the table below.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation or quoted prices for similar securities.
Level 3 – Valuations based on inputs that are unobservable and significant.
30
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | — | $ | 169,304,782 | $ | — | $ | 169,304,782 | |||||||||||
Austria | — | 5,929,656 | — | 5,929,656 | |||||||||||||||
Belgium | — | 78,678,384 | — | 78,678,384 | |||||||||||||||
Canada | 154,160,758 | — | — | 154,160,758 | |||||||||||||||
Denmark | — | 23,776,430 | — | 23,776,430 | |||||||||||||||
Finland | — | 45,144,867 | — | 45,144,867 | |||||||||||||||
France | 24,473,529 | 548,150,358 | — | 572,623,887 | |||||||||||||||
Germany | — | 237,840,935 | — | 237,840,935 | |||||||||||||||
Greece | — | 49,777,967 | — | 49,777,967 | |||||||||||||||
Hong Kong | — | 82,906,612 | — | 82,906,612 | |||||||||||||||
Ireland | — | 28,820,923 | — | 28,820,923 | |||||||||||||||
Italy | 194,600 | 273,347,401 | — | 273,542,001 | |||||||||||||||
Japan | — | 1,459,470,048 | — | 1,459,470,048 | |||||||||||||||
Malta | — | 0 | * | — | 0 | ||||||||||||||
Netherlands | — | 116,412,197 | — | 116,412,197 | |||||||||||||||
New Zealand | — | 23,965,245 | — | 23,965,245 | |||||||||||||||
Norway | — | 11,711,281 | — | 11,711,281 | |||||||||||||||
Portugal | — | 5,929,260 | — | 5,929,260 | |||||||||||||||
Singapore | — | 94,061,525 | — | 94,061,525 | |||||||||||||||
Spain | — | 151,437,043 | — | 151,437,043 | |||||||||||||||
Sweden | — | 134,376,148 | — | 134,376,148 | |||||||||||||||
Switzerland | — | 308,561,929 | — | 308,561,929 | |||||||||||||||
United Kingdom | — | 1,146,434,434 | — | 1,146,434,434 | |||||||||||||||
TOTAL COMMON STOCKS | 178,828,887 | 4,996,037,425 | — | 5,174,866,312 | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Germany | — | 57,303 | — | 57,303 | |||||||||||||||
TOTAL PREFERRED STOCKS | — | 57,303 | — | 57,303 |
31
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Rights and Warrants | |||||||||||||||||||
Finland | $ | — | $ | 27,923 | $ | — | $ | 27,923 | |||||||||||
Short-Term Investments | 74,111,071 | — | — | 74,111,071 | |||||||||||||||
Total Investments | 252,939,958 | 4,996,122,651 | — | 5,249,062,609 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | — | 4,493,881 | — | 4,493,881 | |||||||||||||||
Futures Contracts | — | 40,002,586 | — | 40,002,586 | |||||||||||||||
Total | $ | 252,939,958 | $ | 5,040,619,118 | $ | — | $ | 5,293,559,076 |
* Represents the interest in securities that have no value at August 31, 2009.
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | $ | — | $ | (1,686,563 | ) | $ | — | $ | (1,686,563 | ) | |||||||||
Futures Contracts | (6,013,901 | ) | (4,285,483 | ) | — | (10,299,384 | ) | ||||||||||||
Total | $ | (6,013,901 | ) | $ | (5,972,046 | ) | $ | — | $ | (11,985,947 | ) |
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included
32
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. 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. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because many foreign exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign futures on those exchanges do not reflect events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures using fair value prices, which are based on
33
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
adjustments to closing prices supplied by a third party vendor based on that vendor's proprietary models. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
34
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level
35
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. Rights and warrants held by the Fund 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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no
36
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 gain, 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.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $285,032,634.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (154,259,096 | ) | ||||
Total | $ | (154,259,096 | ) |
37
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 5,843,273,238 | $ | 366,440,303 | $ | (960,650,932 | ) | $ | (594,210,629 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's operations.
Brown Brothers Harriman & Co. ("BBH") serves as custodian and fund accounting agent of the Fund. State Street Bank and Trust Company ("State Street") serves as transfer agent of the Fund. BBH and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
38
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Market Risk — Value Securities — The Fund purchases some equity securities at prices below what the Manager believes to be their fundamental value. The Fund bears the risk that the price of these securities may not increase to what the Manager believes to be their fundamental value or that the Manager may have overestimated their fundamental value.
Other principal risks of an investment in the Fund include Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Credit and Counterparty Risk (risk of default of a derivatives counterparty or borrower of the Fund's securities), Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with s maller market capitalizations), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis ), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected).
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133
39
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain
40
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
41
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | 27,923 | $ | — | $ | 27,923 | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | 40,002,586 | — | 40,002,586 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 4,493,881 | — | — | — | 4,493,881 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | 4,493,881 | $ | — | $ | 40,030,509 | $ | — | $ | 44,524,390 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | (10,299,384 | ) | — | (10,299,384 | ) | |||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | (1,686,563 | ) | — | — | — | (1,686,563 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | (1,686,563 | ) | $ | — | $ | (10,299,384 | ) | $ | — | $ | (11,985,947 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
42
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (17,516,154 | ) | $ | — | $ | (17,516,154 | ) | |||||||||||||
Futures contracts | — | — | — | (41,567,177 | ) | — | (41,567,177 | ) | |||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | (4,005,019 | ) | — | — | — | (4,005,019 | ) | |||||||||||||||||||
Total | $ | — | $ | (4,005,019 | ) | $ | — | $ | (59,083,331 | ) | $ | — | $ | (63,088,350 | ) | ||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | 705,803 | $ | — | $ | 705,803 | |||||||||||||||
Futures contracts | — | — | — | 71,834,816 | — | 71,834,816 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 15,573,254 | — | — | — | 15,573,254 | |||||||||||||||||||||
Total | $ | — | $ | 15,573,254 | $ | — | $ | 72,540,619 | $ | — | $ | 88,113,873 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Forwards | Futures | Rights/Warrants | |||||||||||||
Average notional amount outstanding | $ | 1,125,464,344 | $ | 570,374,687 | $ | 2,254,162 | |||||||||
Highest notional amount outstanding | 1,868,282,654 | 665,132,888 | 10,077,002 | ||||||||||||
Lowest notional amount outstanding | 467,800,056 | 430,259,173 | — |
3. Fees and other transactions with affiliates
GMO receives a management fee for investment management services provided to the Fund. That fee is 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
43
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 0.22% for Class II shares, 0.15% for Class III shares, and 0.09% for Class IV shares.
Holders of Class M shares of the Fund pay GMO an administration fee for support services provided to Class M shareholders. That fee is paid monthly at the annual rate of 0.20% of average daily net assets of Class M shares. Pursuant to a Rule 12b-1 distribution plan adopted by the Fund, holders of Class M shares of the Fund may pay a fee, at the annual rate of up to 1.00% of average daily net assets of Class M shares for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or for the provision of services to Class M shareholders. The Trustees currently limit payments on Class M shares to 0.25% of the Fund's average daily net assets of Class M shares.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.50% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, administration fees, distribution (12b-1) fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an inve stment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.50% of the Fund's average daily 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's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $36,563 and $21,252, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
44
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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, 2009 aggregated $957,707,175 and $1,099,984,958, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, the Fund had no shareholders who individually held more than 10% of the Fund's outstanding shares.
As of August 31, 2009, 0.46% shares of the Fund were held by senior management of the Manager and GMO Trust officers, and 53.78% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class II: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,291,819 | $ | 19,388,771 | 12,342,982 | $ | 192,225,431 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 329,508 | 5,917,970 | 1,660,673 | 38,959,612 | |||||||||||||||
Shares repurchased | (4,544,559 | ) | (81,827,237 | ) | (2,745,119 | ) | (64,651,845 | ) | |||||||||||
Net increase (decrease) | (2,923,232 | ) | $ | (56,520,496 | ) | 11,258,536 | $ | 166,533,198 |
45
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 7,061,119 | $ | 126,896,595 | 34,874,353 | $ | 648,206,780 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,166,629 | 21,185,985 | 9,415,098 | 223,954,309 | |||||||||||||||
Shares repurchased | (11,154,050 | ) | (202,101,449 | ) | (25,321,014 | ) | (474,062,102 | ) | |||||||||||
Net increase (decrease) | (2,926,302 | ) | $ | (54,018,869 | ) | 18,968,437 | $ | 398,098,987 | |||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 28,440,803 | $ | 432,851,160 | 50,166,036 | $ | 1,080,197,863 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,561,753 | 28,345,811 | 14,525,469 | 347,382,151 | |||||||||||||||
Shares repurchased | (36,262,479 | ) | (589,631,085 | ) | (66,824,488 | ) | (1,255,080,247 | ) | |||||||||||
Net increase (decrease) | (6,259,923 | ) | $ | (128,434,114 | ) | (2,132,983 | ) | $ | 172,499,767 | ||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 74,413 | $ | 1,261,177 | 124,606 | $ | 2,785,247 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 8,625 | 154,476 | 67,005 | 1,580,922 | |||||||||||||||
Shares repurchased | (51,700 | ) | (838,573 | ) | (176,478 | ) | (4,012,426 | ) | |||||||||||
Net increase (decrease) | 31,338 | $ | 577,080 | 15,133 | $ | 353,743 |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
46
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In
47
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, 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 to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to separate account clients and the impact on the Manager of, and expenses and risks associated with, the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and chan ges in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 facto rs, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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
48
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
49
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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 (12b-1) and/or administration 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, 2009 through August 31, 2009.
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 $35,000,000 account value divided by $1,000 = 35,000), 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.
50
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 2009 (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 | 0.72 | % | $ | 1,000.00 | $ | 1,487.90 | $ | 4.52 | |||||||||||
2) Hypothetical | 0.72 | % | $ | 1,000.00 | $ | 1,021.58 | $ | 3.67 | |||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.65 | % | $ | 1,000.00 | $ | 1,489.50 | $ | 4.08 | |||||||||||
2) Hypothetical | 0.65 | % | $ | 1,000.00 | $ | 1,021.93 | $ | 3.31 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.59 | % | $ | 1,000.00 | $ | 1,488.90 | $ | 3.70 | |||||||||||
2) Hypothetical | 0.59 | % | $ | 1,000.00 | $ | 1,022.23 | $ | 3.01 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 0.95 | % | $ | 1,000.00 | $ | 1,486.20 | $ | 5.95 | |||||||||||
2) Hypothetical | 0.95 | % | $ | 1,000.00 | $ | 1,020.42 | $ | 4.84 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
51
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 86.6 | % | |||||
Short-Term Investments | 19.9 | ||||||
Options Purchased | 2.1 | ||||||
Preferred Stocks | 0.3 | ||||||
Loan Participations | 0.2 | ||||||
Loan Assignments | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures | (0.3 | ) | |||||
Written Options | (0.7 | ) | |||||
Swaps | (1.8 | ) | |||||
Reverse Repurchase Agreements | (2.4 | ) | |||||
Other | (4.0 | ) | |||||
100.0 | % | ||||||
Country /Region Summary** | % of Investments | ||||||
United States | 101.1 | % | |||||
United Kingdom | 5.1 | ||||||
Emerging*** | 4.8 | ||||||
Euro Region**** | 4.1 | ||||||
Australia | 1.8 | ||||||
Canada | 1.5 | ||||||
Sweden | 0.5 | ||||||
Japan | (18.9 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts. The table is based on duration-adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative contracts. Duration is based on the Manager's models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and negative) are factored into the duration-adjusted exposure using the reference security and applying the same methodology to that security.
*** The "Emerging" exposure is associated with investments in the GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Uruguay, Turkey and Indonesia., Additional information about the fund's emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
**** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
1
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 28.6% | |||||||||||||||
Albania — 1.6% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 14,281,227 | Republic of Albania Par Bond, Zero Coupon, due 08/31/25 (a) | 4,891,320 | ||||||||||||
Australia — 0.2% | |||||||||||||||
Asset-Backed Securities | |||||||||||||||
USD | 292,977 | Crusade Global Trust, Series 07-1, Class A1, 3 mo. LIBOR + .06%, 0.57%, due 04/19/38 | 266,064 | ||||||||||||
USD | 393,622 | Medallion Trust, Series 05-1G, Class A1, 3 mo. LIBOR + .08%, 0.54%, due 05/10/36 | 370,080 | ||||||||||||
Total Australia | 636,144 | ||||||||||||||
United Kingdom — 0.4% | |||||||||||||||
Asset-Backed Securities | |||||||||||||||
USD | 300,000 | Aire Valley Mortgages, Series 07-1A, Class 1A2, 144A, 3 mo. LIBOR + .09%, 0.70%, due 03/20/30 | 150,000 | ||||||||||||
USD | 700,000 | Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.61%, due 01/13/39 | 614,469 | ||||||||||||
USD | 50,125 | Granite Master Issuer Plc, Series 06-2, Class A4, 1 mo. LIBOR + .04%, 0.31%, due 12/20/54 | 39,097 | ||||||||||||
USD | 400,000 | Pendeford Master Issuer Plc, Series 07-1A, Class 3A, 144A, 3 mo. LIBOR + .10%, 0.56%, due 02/12/16 | 376,000 | ||||||||||||
USD | 300,000 | Permanent Master Issuer Plc, Series 07-1, Class 4A, 3 mo. LIBOR + .08%, 0.59%, due 10/15/33 | 262,668 | ||||||||||||
Total United Kingdom | 1,442,234 | ||||||||||||||
United States — 26.4% | |||||||||||||||
Asset-Backed Securities — 9.6% | |||||||||||||||
USD | 306,738 | Alliance Bancorp Trust, Series 07-S1, Class A1, 144A, 1 mo. LIBOR + .20%, 0.47%, due 05/25/37 | 37,115 | ||||||||||||
USD | 400,000 | AmeriCredit Automobile Receivables Trust, Series 07-AX, Class A4, XL, 1 mo. LIBOR + .04%, 0.32%, due 10/06/13 | 384,120 | ||||||||||||
USD | 1,200,000 | Argent Securities, Inc., Series 06-M1, Class A2C, 1 mo. LIBOR + .15%, 0.42%, due 07/25/36 | 283,500 |
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, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Asset-Backed Securities — continued | |||||||||||||||
USD | 154,190 | Argent Securities, Inc., Series 06-M2, Class A2B, 1 mo. LIBOR + .11%, 0.38%, due 09/25/36 | 92,514 | ||||||||||||
USD | 1,000,000 | Argent Securities, Inc., Series 06-W5, Class A2C, 1 mo. LIBOR + .15%, 0.42%, due 06/25/36 | 332,031 | ||||||||||||
USD | 178,078 | Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, 1 mo. LIBOR + .39%, 0.66%, due 01/25/36 | 115,751 | ||||||||||||
USD | 39,013 | BMW Vehicle Lease Trust, Series 07-1, Class A3B, 1 mo. LIBOR + .24%, 0.51%, due 08/15/13 | 38,991 | ||||||||||||
USD | 300,000 | Capital Auto Receivable Asset Trust, Series 07-2, Class A4B, 1 mo. LIBOR + .40%, 0.67%, due 02/18/14 | 297,900 | ||||||||||||
USD | 500,000 | Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.52%, due 09/15/17 | 461,945 | ||||||||||||
USD | 250,000 | Citibank OMNI Master Trust, Series 07-A9A, Class A9, 144A, 1 mo. LIBOR + 1.10%, 1.37%, due 12/23/13 | 249,000 | ||||||||||||
USD | 300,000 | College Loan Corp. Trust, Series 07-2, Class A1, 3 mo. LIBOR + .25%, 0.75%, due 01/25/24 | 298,969 | ||||||||||||
USD | 856,802 | Crest Exeter Street Solar, Series 04-1A, Class A1, 144A, 3 mo. LIBOR + .35%, 0.95%, due 06/28/19 | 514,081 | ||||||||||||
USD | 300,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 1.85%, 2.13%, due 11/10/14 | 288,750 | ||||||||||||
USD | 13,414 | Daimler Chrysler Master Owner Trust, Series 06-A, Class A, 1 mo. LIBOR + .03%, 0.30%, due 11/15/11 | 13,351 | ||||||||||||
USD | 800,000 | First Franklin Mortgage Loan Asset Backed Certificates, Series 06-FF5, Class 2A3, 1 mo. LIBOR + .16%, 0.43%, due 04/25/36 | 324,000 | ||||||||||||
USD | 15,000,000 | Federal National Mortgage Association, 30 Yr. TBA, Pool #6331, 4.50%, due 04/01/38 | 15,070,312 | ||||||||||||
USD | 500,000 | Ford Credit Auto Owner Trust, Series 06-C, Class A4B, 1 mo. LIBOR + .04%, 0.31%, due 02/15/12 | 496,665 | ||||||||||||
USD | 500,000 | Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.52%, due 06/15/13 | 465,000 | ||||||||||||
USD | 100,000 | Fremont Home Loan Trust, Series 06-B, Class 2A3, 1 mo. LIBOR + .16%, 0.43%, due 08/25/36 | 28,600 | ||||||||||||
USD | 479,654 | Fremont Home Loan Trust, Series 06-A, Class 1A2, 1 mo. LIBOR + .20%, 0.46%, due 05/25/36 | 244,024 | ||||||||||||
USD | 918,459 | GE Business Loan Trust, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .24%, 0.51%, due 11/15/33 | 569,444 |
See accompanying notes to the financial statements.
3
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Asset-Backed Securities — continued | |||||||||||||||
USD | 400,000 | GE Capital Credit Card Master Note Trust, Series 07-3, Class A1, 1 mo. LIBOR + .01%, 0.28%, due 06/15/13 | 395,200 | ||||||||||||
USD | 500,000 | GE Dealer Floorplan Master Trust, Series 06-4, Class A, 1 mo. LIBOR + .01%, 0.28%, due 10/20/11 | 498,540 | ||||||||||||
USD | 15,191 | GreenPoint Mortgage Funding Trust, Series 05-HE4, Class 2A3C, 1 mo. LIBOR + .25%, 0.52%, due 07/25/30 | 13,133 | ||||||||||||
USD | 800,000 | GS Mortgage Securities Corp., Series 07-EOP, Class A2, 144A, 1 mo. LIBOR + .13%, 0.41%, due 03/06/20 | 672,000 | ||||||||||||
USD | 600,000 | Household Credit Card Master Note Trust I, Series 07-2, Class A, 1 mo. LIBOR + .55%, 0.82%, due 07/15/13 | 588,000 | ||||||||||||
USD | 369,955 | Lehman Brothers Floating Rate Commercial, Series 06-LLFA, Class A1, 144A, 1 mo. LIBOR + .08%, 0.35%, due 09/15/21 | 316,312 | ||||||||||||
USD | 275,590 | Lehman Brothers Small Balance Commercial, Series 07-3A, Class 1A1, 144A, 1 mo. LIBOR + .65%, 0.92%, due 10/25/37 | 239,763 | ||||||||||||
USD | 200,000 | Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.42%, due 03/25/36 | 70,842 | ||||||||||||
USD | 700,000 | Master Asset-Backed Securities Trust, Series 06-HE2, Class A3, 1 mo. LIBOR + .15%, 0.42%, due 06/25/36 | 203,686 | ||||||||||||
USD | 1,000,000 | Morgan Stanley ACES SPC, Series 05-2A, Class A, 144A, 3 mo. LIBOR + .45%, 1.06%, due 03/20/10 | 909,000 | ||||||||||||
USD | 500,000 | Morgan Stanley Capital, Inc., Series 07-HE4, Class A2C, 1 mo. LIBOR + .23%, 0.50%, due 02/25/37 | 150,000 | ||||||||||||
USD | 300,000 | National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.07%, due 05/15/13 | 291,000 | ||||||||||||
USD | 312,737 | National Collegiate Student Loan Trust, Series 06-1, Class A2, 1 mo. LIBOR + .14%, 0.41%, due 08/25/23 | 289,285 | ||||||||||||
USD | 300,000 | Nissan Auto Lease Trust, Series 08-A, Class A3B, 1 mo. LIBOR + 2.20%, 2.47%, due 07/15/11 | 298,320 | ||||||||||||
USD | 200,000 | Nissan Master Owner Trust Receivables, Series 07-A, Class A, 1 mo. LIBOR, 0.27%, due 05/15/12 | 191,000 | ||||||||||||
USD | 259,544 | Residential Asset Securities Corp., Series 07-KS3, Class AI1, 1 mo. LIBOR + .11%, 0.38%, due 04/25/37 | 237,623 | ||||||||||||
USD | 105,452 | Residential Funding Mortgage Securities II, Series 03-HS1, Class AII, FGIC, 1 mo. LIBOR + .29%, 0.56%, due 12/25/32 | 45,872 | ||||||||||||
USD | 392,863 | Santander Drive Auto Receivables Trust, Series 07-1, Class A4, FGIC, 1 mo. LIBOR + .05%, 0.32%, due 09/15/14 | 367,885 | ||||||||||||
USD | 154,943 | SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, 1 mo. LIBOR + .19%, 0.46%, due 11/25/35 | 74,149 |
See accompanying notes to the financial statements.
4
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value / Shares | Description | Value ($) | |||||||||||||
Asset-Backed Securities — continued | |||||||||||||||
USD | 554,899 | Sierra Receivables Funding Co., Series 06-1A, Class A2, 144A, MBIA, 1 mo. LIBOR + .15%, 0.42%, due 05/20/18 | 455,149 | ||||||||||||
USD | 514,539 | SLM Student Loan Trust, Series 07-A, Class A1, 3 mo. LIBOR + .03%, 0.66%, due 09/15/22 | 468,230 | ||||||||||||
USD | 87,218 | Structured Asset Securities Corp., Series 05-S6, Class A2, 1 mo. LIBOR + .29%, 0.56%, due 11/25/35 | 18,316 | ||||||||||||
USD | 400,000 | Swift Master Auto Receivables Trust, Series 07-1, Class A, 1 mo. LIBOR + .10%, 0.37%, due 06/15/12 | 372,000 | ||||||||||||
USD | 400,000 | Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.48%, due 07/14/14 | 364,000 | ||||||||||||
USD | 500,000 | Truck Retail Installment Paper Corp., Series 05-1A, Class A, 144A, 1 mo. LIBOR + .27%, 0.54%, due 12/15/16 | 431,301 | ||||||||||||
USD | 800,000 | Wachovia Auto Owner Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.15%, 1.42%, due 03/20/14 | 798,968 | ||||||||||||
USD | 400,000 | World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, 1 mo. LIBOR + .13%, 0.40%, due 02/15/17 | 360,376 | ||||||||||||
29,726,013 | |||||||||||||||
U.S. Government — 16.8% | |||||||||||||||
USD | 22,992,448 | U.S. Treasury Inflation Indexed Bond, 0.88%, due 04/15/10 (b)(c) | 22,956,534 | ||||||||||||
USD | 10,100,000 | U.S. Treasury Receipts, 0.00%, due 02/15/10 * (d) | 10,051,862 | ||||||||||||
USD | 10,100,000 | U.S. Treasury Receipts, 0.00%, due 02/15/12 * (d) | 9,571,240 | ||||||||||||
USD | 10,100,000 | U.S. Treasury Receipts, 0.00%, due 08/15/12 * (d) | 9,382,232 | ||||||||||||
51,961,868 | |||||||||||||||
Total United States | 81,687,881 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $87,602,888) | 88,657,579 | ||||||||||||||
PREFERRED STOCKS — 0.3% | |||||||||||||||
United States — 0.3% | |||||||||||||||
10,000 | Home Ownership Funding 2 Preferred 144A, 1.00% (d) | 900,000 | |||||||||||||
TOTAL PREFERRED STOCKS (COST $2,138,851) | 900,000 |
See accompanying notes to the financial statements.
5
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 75.4% | |||||||||||||||
United States — 75.4% | |||||||||||||||
Affiliated Issuers | |||||||||||||||
1,554,673 | GMO Emerging Country Debt Fund, Class III | 11,970,985 | |||||||||||||
7,417,054 | GMO Short-Duration Collateral Fund | 119,043,719 | |||||||||||||
93,858 | GMO Special Purpose Holding Fund (e) | 59,131 | |||||||||||||
2,030,733 | GMO U.S. Treasury Fund | 50,788,640 | |||||||||||||
2,670,704 | GMO World Opportunity Overlay Fund | 51,704,822 | |||||||||||||
Total United States | 233,567,297 | ||||||||||||||
TOTAL MUTUAL FUNDS (COST $268,915,934) | 233,567,297 | ||||||||||||||
SHORT-TERM INVESTMENTS — 1.7% | |||||||||||||||
Money Market Funds — 1.7% | |||||||||||||||
5,204,902 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 5,204,902 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $5,204,902) | 5,204,902 | ||||||||||||||
TOTAL INVESTMENTS — 106.0% (Cost $363,862,575) | 328,329,778 | ||||||||||||||
Other Assets and Liabilities (net) — (6.0%) | (18,565,935 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 309,763,843 |
See accompanying notes to the financial statements.
6
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
17 | Australian Government Bond 10 Yr. | September 2009 | $ | 1,500,090 | $ | 9,716 | |||||||||||||
29 | Australian Government Bond 3 Yr. | September 2009 | 2,510,125 | (22,390 | ) | ||||||||||||||
25 | Canadian Government Bond 10 Yr. | December 2009 | 2,743,000 | 10,614 | |||||||||||||||
2 | Euro BOBL | September 2009 | 333,764 | 1,085 | |||||||||||||||
4 | Euro Bund | September 2009 | 703,921 | 7,050 | |||||||||||||||
26 | U.S. Treasury Bond (CBT) | December 2009 | 3,113,500 | 16,781 | |||||||||||||||
20 | U.S. Treasury Note 2 Yr. (CBT) | December 2009 | 4,326,875 | 9,642 | |||||||||||||||
16 | U.S. Treasury Note 5 Yr. (CBT) | December 2009 | 1,844,000 | 7,967 | |||||||||||||||
36 | UK Gilt Long Bond | December 2009 | 6,951,553 | 19,774 | |||||||||||||||
$ | 24,026,828 | $ | 60,239 | ||||||||||||||||
Sales | |||||||||||||||||||
36 | Japanese Government Bond 10 Yr. (TSE) | September 2009 | $ | 53,993,161 | $ | (1,004,961 | ) | ||||||||||||
13 | U.S. Treasury Note 10 Yr. (CBT) | December 2009 | 1,523,844 | (8,773 | ) | ||||||||||||||
$ | 55,517,005 | $ | (1,013,734 | ) |
See accompanying notes to the financial statements.
7
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)u | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
2,000,000 | USD | 6/20/2011 | Barclays | Receive | 0.30 | % | 4.16 | % | Prologis | 2,000,000 | USD | $ | (131,216 | ) | |||||||||||||||||||||||||||||
Bank PLC | |||||||||||||||||||||||||||||||||||||||||||
2,000,000 | USD | 6/20/2011 | UBS AG | Receive | 0.26 | % | 2.04 | % | ERP Operating LP | 2,000,000 | USD | (61,611 | ) | ||||||||||||||||||||||||||||||
2,000,000 | USD | 12/20/2013 | Barclays Bank PLC | Receive | 0.25 | % | 11.08 | % | SLM Corp. | 2,000,000 | USD | (611,331 | ) | ||||||||||||||||||||||||||||||
2,000,000 | USD | 12/20/2013 | UBS AG | Receive | 0.34 | % | 48.25 | % | CIT | 2,000,000 | USD | (1,001,611 | ) | ||||||||||||||||||||||||||||||
$ | (1,805,769 | ) | |||||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
u Receive - Fund receives premium and sells credit protection.
(Pay) - Fund pays premium and buys credit protection.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2009, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider (i.e. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to make as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
15,680,000 | USD | 8/31/2025 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | $ | (3,603,690 | ) | |||||||||||||||||||||
$ | (3,603,690 | ) | |||||||||||||||||||||||||||||
Accretion since inception for zero coupon interest rate swaps | $ | 2,071,736 |
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
See accompanying notes to the financial statements.
8
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
250,000,000 | USD | 8/19/2011 | Morgan Stanley | 3 month | Barclays Capital | ||||||||||||||||||||||
LIBOR - 0.01% | Aggregate Total | ||||||||||||||||||||||||||
Return Index (c) | $ | 1,569,622 | |||||||||||||||||||||||||
$ | 1,569,622 | ||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
As of August 31, 2009, for the futures and/or swap contracts held, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
144A - Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
BOBL - Bundesobligationen
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.
TBA - To Be Announced - Delayed Delivery Security
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at August 31, 2009, which are subject to change based on the terms of the security.
* Non-income producing security.
(a) Security is backed by the U.S. Government.
(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) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic.
(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).
(e) Underlying investment represents interests in defaulted securities.
Currency Abbreviations:
USD - United States Dollar
See accompanying notes to the financial statements.
9
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $94,946,641) (Note 2) | $ | 94,762,481 | |||||
Investments in affiliated issuers, at value (cost $268,915,934) (Notes 2 and 8) | 233,567,297 | ||||||
Dividends and interest receivable | 97,387 | ||||||
Receivable from broker for closed futures contracts | 31,658 | ||||||
Interest receivable for open swap contracts | 1,008,165 | ||||||
Receivable for open swap contracts (Note 2) | 1,569,622 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 13,170 | ||||||
Total assets | 331,049,780 | ||||||
Liabilities: | |||||||
Payable for investments purchased (Note 2): | |||||||
Regular delivery | 10,510 | ||||||
Delayed delivery | 14,706,250 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 64,810 | ||||||
Shareholder service fee | 28,218 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 640 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 46,381 | ||||||
Payable for open swap contracts (Note 2) | 5,409,459 | ||||||
Miscellaneous payable | 854,313 | ||||||
Accrued expenses | 165,356 | ||||||
Total liabilities | 21,285,937 | ||||||
Net assets | $ | 309,763,843 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 514,970,212 | |||||
Distributions in excess of net investment income | (11,533,718 | ) | |||||
Accumulated net realized loss | (155,424,548 | ) | |||||
Net unrealized depreciation | (38,248,103 | ) | |||||
$ | 309,763,843 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 52,756,031 | |||||
Class IV shares | $ | 257,007,812 | |||||
Shares outstanding: | |||||||
Class III | 7,891,727 | ||||||
Class IV | 38,388,006 | ||||||
Net asset value per share: | |||||||
Class III | $ | 6.68 | |||||
Class IV | $ | 6.70 |
See accompanying notes to the financial statements.
10
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Interest | $ | 2,303,669 | |||||
Dividends from affiliated issuers (Note 8) | 1,239,202 | ||||||
Dividends | 7,141 | ||||||
Total investment income | 3,550,012 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 377,127 | ||||||
Shareholder service fee – Class III (Note 3) | 43,789 | ||||||
Shareholder service fee – Class IV (Note 3) | 121,658 | ||||||
Custodian, fund accounting agent and transfer agent fees | 60,536 | ||||||
Audit and tax fees | 40,664 | ||||||
Legal fees | 11,316 | ||||||
Trustees fees and related expenses (Note 3) | 2,860 | ||||||
Registration fees | 1,380 | ||||||
Miscellaneous | 2,208 | ||||||
Total expenses | 661,538 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (109,296 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (21,507 | ) | |||||
Shareholder service fee waived (Note 3) | (7,935 | ) | |||||
Net expenses | 522,800 | ||||||
Net investment income (loss) | 3,027,212 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (244,889 | ) | |||||
Investments in affiliated issuers | (6,059,636 | ) | |||||
Closed futures contracts | (421,549 | ) | |||||
Closed swap contracts | 8,627,017 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (1,887 | ) | |||||
Net realized gain (loss) | 1,899,056 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 293,527 | ||||||
Investments in affiliated issuers | 33,227,705 | ||||||
Open futures contracts | (661,997 | ) | |||||
Open swap contracts | 5,573,278 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 6,290 | ||||||
Net unrealized gain (loss) | 38,438,803 | ||||||
Net realized and unrealized gain (loss) | 40,337,859 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 43,365,071 |
See accompanying notes to the financial statements.
11
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 3,027,212 | $ | 14,734,532 | |||||||
Net realized gain (loss) | 1,899,056 | (109,276,285 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 38,438,803 | (22,269,265 | ) | ||||||||
Net increase (decrease) in net assets from operations | 43,365,071 | (116,811,018 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (2,794,998 | ) | (16,448,556 | ) | |||||||
Class IV | (12,405,003 | ) | (65,811,675 | ) | |||||||
Total distributions from net investment income | (15,200,001 | ) | (82,260,231 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | (26,313,974 | ) | (14,545,995 | ) | |||||||
Class IV | 242,065 | (622,725,935 | ) | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (26,071,909 | ) | (637,271,930 | ) | |||||||
Redemption fees (Notes 2 and 7): | |||||||||||
Class III | 457 | 109,302 | |||||||||
Class IV | 91,837 | 514,084 | |||||||||
Increase in net assets resulting from redemption fees | 92,294 | 623,386 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (25,979,615 | ) | (636,648,544 | ) | |||||||
Total increase (decrease) in net assets | 2,185,455 | (835,719,793 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 307,578,388 | 1,143,298,181 | |||||||||
End of period (including distributions in excess of net investment income of $11,533,718 and accumulated undistributed net investment income of $639,071, respectively) | $ | 309,763,843 | $ | 307,578,388 |
See accompanying notes to the financial statements.
12
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.08 | $ | 9.42 | $ | 10.49 | $ | 10.32 | $ | 10.35 | $ | 10.40 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.07 | 0.27 | 0.37 | 0.43 | 0.15 | 0.18 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.86 | (2.08 | ) | (0.63 | ) | 0.27 | 0.17 | 0.24 | |||||||||||||||||||
Total from investment operations | 0.93 | (1.81 | ) | (0.26 | ) | 0.70 | 0.32 | 0.42 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.33 | ) | (1.53 | ) | (0.81 | ) | (0.53 | ) | (0.35 | ) | (0.25 | ) | |||||||||||||||
From net realized gains | — | — | — | — | — | (0.22 | ) | ||||||||||||||||||||
Total distributions | (0.33 | ) | (1.53 | ) | (0.81 | ) | (0.53 | ) | (0.35 | ) | (0.47 | ) | |||||||||||||||
Net asset value, end of period | $ | 6.68 | $ | 6.08 | $ | 9.42 | $ | 10.49 | $ | 10.32 | $ | 10.35 | |||||||||||||||
Total Return(b) | 15.57 | %** | (20.12 | )% | (2.56 | )% | 6.85 | % | 3.10 | % | 4.01 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 52,756 | $ | 73,730 | $ | 125,506 | $ | 187,045 | $ | 148,476 | $ | 1,216,251 | |||||||||||||||
Net expenses to average daily net assets(c) | 0.39 | %* | 0.39 | %(d) | 0.39 | %(d) | 0.39 | % | 0.39 | % | 0.39 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 2.06 | %* | 3.20 | % | 3.70 | % | 4.11 | % | 1.40 | % | 1.77 | % | |||||||||||||||
Portfolio turnover rate | 8 | %** | 22 | % | 44 | % | 72 | % | 62 | % | 108 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.09 | %* | 0.08 | % | 0.06 | % | 0.06 | % | 0.06 | % | 0.07 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (e) | $ | 0.01 | — | — | — | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds 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 and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(d) The net expense ratio does not include the effect of expense reductions.
(e) 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.
13
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 6.09 | $ | 9.44 | $ | 10.50 | $ | 10.33 | $ | 10.46 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(b)† | 0.06 | 0.17 | 0.36 | 0.45 | 0.23 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.88 | (1.99 | ) | (0.61 | ) | 0.26 | (0.01 | )(c) | |||||||||||||||
Total from investment operations | 0.94 | (1.82 | ) | (0.25 | ) | 0.71 | 0.22 | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.33 | ) | (1.53 | ) | (0.81 | ) | (0.54 | ) | (0.35 | ) | |||||||||||||
Total distributions | (0.33 | ) | (1.53 | ) | (0.81 | ) | (0.54 | ) | (0.35 | ) | |||||||||||||
Net asset value, end of period | $ | 6.70 | $ | 6.09 | $ | 9.44 | $ | 10.50 | $ | 10.33 | |||||||||||||
Total Return(d) | 15.77 | %** | (20.23 | )% | (2.42 | )% | 6.90 | % | 2.06 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 257,008 | $ | 233,848 | $ | 1,017,792 | $ | 2,182,618 | $ | 2,618,011 | |||||||||||||
Net expenses to average daily net assets(e) | 0.34 | %* | 0.34 | %(f) | 0.34 | %(f) | 0.34 | % | 0.34 | %* | |||||||||||||
Net investment income to average daily net assets(b) | 1.99 | %* | 1.89 | % | 3.60 | % | 4.33 | % | 2.16 | %(g) | |||||||||||||
Portfolio turnover rate | 8 | %** | 22 | % | 44 | % | 72 | % | 62 | %†† | |||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.09 | %* | 0.08 | % | 0.06 | % | 0.06 | % | 0.07 | %* | |||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (h) | $ | 0.01 | — | — | — |
(a) Period from July 26, 2005 (commencement of operations) through February 28, 2006.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) 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.
(d) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(f) The net expense ratio does not include the effect of expense reductions.
(g) 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.
(h) 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 year ended February 28, 2006.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
14
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Core Plus Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the Barclays Capital U.S. Aggregate Index (formerly Lehman Brothers U.S. Aggregate Index). The Fund typically invests in bonds included in the Barclays Capital U.S. Aggregate Index and in securities and instruments with similar characteristics. The Fund seeks additional returns by seeking to exploit differences in global interest rates, sectors, and credit, currency, and emerging country debt markets. The Fund may implement its strategies: (i) synthetically by using exchange-traded and over-the-counter ("OTC") derivatives and investing in other series of the Trust and/or (ii) directly by purchasing bonds denominated in various currencies. The Fund has historically gained its investment exposure primarily through the use of derivatives and investments in other series of the Trust. The Fund has substantial holdings of GMO Short-Duration Collateral Fund ("SDCF") (a Fun d that invests primarily in asset-backed securities) and GMO World Opportunity Overlay Fund ("Overlay Fund") (a Fund that invests in asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Under normal circumstances, the Fund invests (directly and indirectly through other series of the Trust) at least 80% of its assets in bonds. For these purposes, the term "bonds" includes (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by using a futures contract, swap contract, currency forward or option. To implement its investment strategies, the Fund may invest in or hold: investment-grade bonds denominated in various currencies, including foreign and U.S. government securities and asset-backed securities issued by foreign governments and U.S. government agencies (including securities neither guaranteed nor insured by the U.S. government) , corporate bonds, and mortgage-backed and other asset-backed securities issued by private issuers; derivatives, including without limitation, futures contracts, currency options, currency forwards, credit default swaps and other swap contracts (to gain exposure to the global interest rate, credit, and currency markets); shares of SDCF (to gain exposure to asset-backed securities); shares of Overlay Fund (to attempt to exploit misvaluations in world interest rates, currencies, and credit markets); shares of GMO Emerging Country Debt Fund ("ECDF") (to gain exposure to sovereign debt of emerging countries); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). Because of the deterioration in credit markets that became acute in 2008, the Fund through its investment in SDCF and Overlay Fund currently holds and may continue to hold material positions of below investment grade securities. This is in addition to the Fund's emerging country debt investments. The Fund also may invest in unaffiliat ed money market funds.
Throughout the year ended August 31, 2009, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder service fee.
15
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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). As of August 31, 2009, shares of SDCF, Overlay Fund and GMO Special Purpose Holding Fund ("SPHF") were not publicly available for direct purchase.
From prior to March 1, 2009 through July 12, 2009, the Fund had a policy to effect redemptions of its shares in-kind above de minimis levels. The Fund had established de minimis amounts below which redemptions would be honored for cash. Beginning July 13, 2009, the Fund had a policy to pay redemption requests with cash (less a redemption fee).
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
As of August 31, 2009, a significant portion of the Fund's dividends received from other GMO funds is expected to be a return of capital for U.S. federal income tax purposes. Accordingly, "dividends from affiliated issuers" reported in the Statement of Operations has been reduced by the portion estimated to be a return of capital as of August 31, 2009. The estimated return of capital is $25,374,880. In addition, all applicable related income disclosures throughout this Semiannual Report have been adjusted by the estimated return of capital. The dividends from affiliated issuers are subject to change and will not be finalized until February 28, 2010, the Fund's upcoming fiscal year-end. Finally, in early 2010, applicable shareholders will receive Form 1099-DIV that will indicate the appropriate tax character of all distributions paid by the Fund in 2009.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to
16
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by the Fund, those alternative sources would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fu nd. As of August 31, 2009, the total value of securities held directly and indirectly that were fair valued or for which no alternative pricing source was available represented 24.73% of the net assets of the Fund.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund also utilized third party valuation services (which use industry standard models and inputs from pricing vendors) to value credit default swaps. The Fund valued certain debt securities and preferred stocks using a specified spread above the LIBOR Rate or U.S. Treasury yield.
17
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Asset-Backed Securities | $ | — | $ | 1,382,284 | $ | 30,422,107 | $ | 31,804,391 | |||||||||||
Foreign Government Obligations | — | 4,891,320 | — | 4,891,320 | |||||||||||||||
U.S. Government | — | 22,956,534 | 29,005,334 | 51,961,868 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 29,230,138 | 59,427,441 | 88,657,579 | |||||||||||||||
Preferred Stocks | — | — | 900,000 | 900,000 | |||||||||||||||
Mutual Funds | 62,759,625 | 170,807,672 | — | 233,567,297 | |||||||||||||||
Short-Term Investments | — | 5,204,902 | — | 5,204,902 | |||||||||||||||
Total Investments | 62,759,625 | 205,242,712 | 60,327,441 | 328,329,778 | |||||||||||||||
Derivatives | |||||||||||||||||||
Futures Contracts | 82,629 | — | — | 82,629 | |||||||||||||||
Swap Agreements | — | 1,569,622 | — | 1,569,622 | |||||||||||||||
Total | $ | 62,842,254 | $ | 206,812,334 | $ | 60,327,441 | $ | 329,982,029 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Futures Contracts | $ | (1,036,124 | ) | $ | — | $ | — | $ | (1,036,124 | ) | |||||||||
Swap Agreements | — | (3,603,690 | ) | (1,805,769 | ) | (5,409,459 | ) | ||||||||||||
Total | $ | (1,036,124 | ) | $ | (3,603,690 | ) | $ | (1,805,769 | ) | $ | (6,445,583 | ) |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in
18
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
securities and other financial instruments using Level 3 inputs were 64.52% and (0.70)% of total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||
Asset-Backed Securities | $ | 18,048,446 | $ | 11,178,985 | $ | 278,593 | $ | 106,508 | $ | 2,191,859 | $ | (1,382,284 | ) | $ | 30,422,107 | ||||||||||||||||
Foreign Government Obligations | 7,114,707 | (593,320 | ) | 164,760 | 94,910 | (1,889,737 | ) | (4,891,320 | ) | — | |||||||||||||||||||||
U.S. Government | 28,721,524 | (194,112 | ) | 883,023 | 238 | (405,339 | ) | — | 29,005,334 | ||||||||||||||||||||||
Total Debt Obligations | 53,884,677 | 10,391,553 | 1,326,376 | 201,656 | (103,217 | ) | (6,273,604 | ) | 59,427,441 | ||||||||||||||||||||||
Preferred Stocks | 900,000 | — | — | — | — | — | 900,000 | ||||||||||||||||||||||||
Swap Agreements | (2,225,744 | ) | (41,615 | ) | — | 41,615 | 419,975 | — | (1,805,769 | ) | |||||||||||||||||||||
Mutual Funds | 68,517 | — | — | — | (9,386 | ) | (59,131 | ) | — | ||||||||||||||||||||||
Total | $ | 52,627,450 | $ | 10,349,938 | $ | 1,326,376 | $ | 243,271 | $ | 307,372 | $ | (6,332,735 | ) | $ | 58,521,672 |
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The
19
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying
20
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts outstanding at the end of the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with
21
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exposure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly
22
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at a later date at a fixed price. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which can cause the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
Delayed delivery securities
The Fund may enter into firm commitments and similar agreements with banks or broker-dealers for the purchase or sale of securities at an agreed-upon price on a specified future date. For example, when the Fund invests in fixed-income securities it may enter into a firm commitment agreement if the Manager anticipates a decline in interest rates and believes it is able to obtain a more advantageous future yield by committing currently to purchase securities to be issued later. The Fund generally does not earn income on the securities it has committed to purchase until after delivery. The Fund may take delivery of the securities or, if deemed advisable as a matter of investment strategy, may sell the securities before the settlement date. When payment is due on when-issued or delayed-delivery securities, the Fund makes payment from then-available cash flow or the sale of securities, or from the sale of the when-issued or delayed-d elivery securities themselves (which may have a value greater or less than what the Fund paid for them).
23
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, if any, at least annually. The Fund is permitted to, and will from time to time, declare and pay distributions from net investment income, if any, more frequently (e.g., monthly). 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $16,579,574.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Such losses expire as follows:
2/28/2014 | $ | (34,693,380 | ) | ||||
2/28/2015 | (2,795,728 | ) | |||||
2/29/2016 | (33,008,915 | ) | |||||
2/28/2017 | (59,218,431 | ) | |||||
Total | $ | (129,716,454 | ) |
Utilization of the capital loss carryforwards, post-October capital losses and future losses, if any, realized subsequent to February 28, 2009, could be subject to limitations imposed by the Code related to share ownership activity.
24
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 380,775,063 | $ | 3,393,819 | $ | (55,839,104 | ) | $ | (52,445,285 | ) |
For the period ended August 31, 2009, the Fund had net realized losses attributed to redemption in-kind transactions of $6,127,856.
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 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 incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily
25
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
From prior to March 1, 2009 through August 2, 2009, the fee on cash redemptions was 2.00% of the amount redeemed. From August 3, 2009 through August 31, 2009, the fee on cash redemptions was 1.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relat ing to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. Many of these risks are more pronounced as a result of current global economic conditions that began to unfold in 2008. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to an OTC derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. This risk is particularly pronounced for
26
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the Fund because it typically uses OTC derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. The Fund may be required to sell certain less liquid securities at distressed prices or meet redemption requests in-kind. Recent changes in credit markets have reduced the liquidity of all types of fixed income securities, including in particular the asset-backed securities held by the Fund through SDCF and Overlay Fund.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected.
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Leveraging Risk (increased risks from use of reverse repurchase agreeme nts and other derivatives and securities lending), Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies), Focused Investment Risk (increased risk from the Fund's focus on investments in countries, regions, or sectors with high positive correlations to one another), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. Certain of the above-referenced risks will be more pronounced for the Fund as a result of its investment in ECDF. For more information about reverse repurchase agreements and other derivatives, please refer to the descriptions of financial instruments (e.g. reverse repurchase agreements, swaps, futures and other types of derivative contracts) in Note 2 above as well as the discussion of the Fund's use of derivatives below.
The Fund's investments in many countries and credit default swaps it has written expose the Fund to a significant risk of loss. The Fund's financial position could be adversely affected (depending on whether the Fund sold or bought the credit protection) in the event of a default by any of these countries on obligations held by the Fund, obligations referenced in those credit default swaps or obligations issued by them generally.
The Fund invests (including through investment in underlying funds) in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages,
27
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of underlying assets or other support available to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, i f any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities generally. These events reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not continue or that they will not deteriorate further. Also, government actions and proposals affecting the terms of underl ying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
The Fund uses its cash balance to meet its collateral obligations and for other purposes. There is no assurance that the Fund's cash balance will be sufficient to meet those obligations. If it is not, the Fund would be required to liquidate portfolio positions. To manage the Fund's cash collateral needs, the Manager reserves the right to reduce or eliminate the Fund's derivative exposures. A reduction in those exposures may cause the performance of the Fund to track its benchmark less closely and make the Fund's performance more dependent on the performance of the asset-backed securities it holds directly or indirectly.
28
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Among other trading agreements, the Fund is party to International Swaps and Derivatives Association, Inc. Master Agreements ("ISDA Agreements") with select counterparties that generally govern over-the-counter derivative transactions entered into by the Fund. The ISDA Master Agreements typically include representations and warranties as well as contractual terms related to collateral, events of default, termination events, and other provisions. Termination events include the decline in the net assets of the Fund below a certain level over a specified period of time and entitle a counterparty to elect to terminate early with respect to some or all the transactions under the ISDA Agreement with that counterparty. Such an election by one or more of the counterparties could have a material adverse impact on the Fund's operations. Due to declines in the net assets of the Fund prior to August 31, 2009, one or more counterparties are entitled to terminate early but none has taken such action.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund uses derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund uses derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps (including credit default swaps) or other derivatives on an index, a single security or a basket of securities to gain investment exposures. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. For example, the Fund may use credit default swaps to take an active short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may attempt to alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed vs. variable and shorter duration vs. longer duration. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
29
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
30
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | 82,629 | — | — | — | — | 82,629 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | 1,569,622 | — | — | — | — | 1,569,622 | |||||||||||||||||||||
Total | $ | 1,652,251 | — | — | — | — | $ | 1,652,251 | |||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | (1,036,124 | ) | — | — | — | — | (1,036,124 | ) | |||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | (3,603,690 | ) | — | (1,805,769 | ) | — | — | (5,409,459 | ) | ||||||||||||||||||
Total | $ | (4,639,814 | ) | $ | — | $ | (1,805,769 | ) | $ | — | $ | — | $ | (6,445,583 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
31
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | (421,549 | ) | — | — | — | — | (421,549 | ) | |||||||||||||||||||
Swap contracts | 8,585,402 | — | 41,615 | — | — | 8,627,017 | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | 8,163,853 | $ | — | $ | 41,615 | $ | — | $ | — | $ | 8,205,468 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | (661,997 | ) | — | — | — | — | (661,997 | ) | |||||||||||||||||||
Swap contracts | 5,153,303 | — | 419,975 | — | — | 5,573,278 | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | 4,491,306 | $ | — | $ | 419,975 | $ | — | $ | — | $ | 4,911,281 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Futures | Swaps | ||||||||||
Average notional amount outstanding | $ | 72,857,483 | $ | 298,894,286 | |||||||
Highest notional amount outstanding | 92,875,111 | 308,980,000 | |||||||||
Lowest notional amount outstanding | 25,321,719 | 273,680,000 |
Other matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the period ended
32
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
August 31, 2009, the Fund received no distributions through SPHF in connection with settlement agreements related to that litigation.
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 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 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's shareholder service fee.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.25% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 to the extent that the sum of (a) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses); (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in ECDF (excluding ECDF's Excluded Fund Fees and Expenses); and (c) the amount of fees and expenses incurred indirectly (through investment in other underlying funds) by the Fund through its (direct or indirect) investment in GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.25% of the Fund's average daily net assets, subject to a maximum total reimbursement to such Fund equ al to 0.25% of the Fund's average daily net assets.
33
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 | ||||||||||||
0.026 | % | 0.005 | % | 0.009 | % | 0.040 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $2,492 and $1,472, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
4. Purchases and sales of securities
For the period ended August 31, 2009, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 29,626,563 | $ | 14,761,914 | |||||||
Investments (non-U.S. Government securities) | 58,853,309 | 10,366,031 |
Proceeds from sales of securities for in-kind transactions for the period ended August 31, 2009 were $18,536,561.
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
34
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2009, 89.58% of the outstanding shares of the Fund were held by five shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 0.02% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 44.53% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,879 | $ | 11,529 | 4,083 | $ | 29,086 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 79,441 | 506,587 | 2,426,853 | 16,389,522 | |||||||||||||||
Shares repurchased | (4,313,749 | ) | (26,832,090 | ) | (3,624,307 | ) | (30,964,603 | ) | |||||||||||
Redemption fees | — | 457 | — | 109,302 | |||||||||||||||
Net increase (decrease) | (4,232,429 | ) | $ | (26,313,517 | ) | (1,193,371 | ) | $ | (14,436,693 | ) | |||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 735,754 | $ | 4,833,902 | 564,334 | $ | 5,000,000 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 9,197,631 | 65,811,675 | |||||||||||||||
Shares repurchased | (726,753 | ) | (4,591,837 | ) | (79,246,156 | ) | (693,537,610 | ) | |||||||||||
Redemption fees | — | 91,837 | — | 514,084 | |||||||||||||||
Net increase (decrease) | 9,001 | $ | 333,902 | (69,484,191 | ) | $ | (622,211,851 | ) |
35
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 | $ | 9,619,580 | $ | 183,854 | $ | 717,356 | $ | 183,854 | $ | — | $ | 11,970,985 | |||||||||||||||
GMO Short-Duration Collateral Fund | 136,464,740 | — | 9,109,208 | 985,893 | — | 119,043,719 | |||||||||||||||||||||
GMO Special Purpose Holding Fund | 68,517 | — | — | — | — | 59,131 | |||||||||||||||||||||
GMO U.S. Treasury Fund | — | 58,669,455 | 7,900,000 | 69,455 | — | 50,788,640 | |||||||||||||||||||||
GMO World Opportunity Overlay Fund | 52,729,622 | — | 3,756,694 | — | — | 51,704,822 | o | ||||||||||||||||||||
Totals | $ | 198,882,459 | $ | 58,853,309 | $ | 21,483,258 | $ | 1,239,202 | $ | — | $ | 233,567,297 |
o The Fund received return of capital distributions in the amount of $4,478,401.
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. On September 14, 2009, the Fund's redemption fee was eliminated.
36
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those p ersonnel 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 third-party data services
37
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the M anager effectively reimburses the Fund for advisory fees, shareholder fees and most other expenses of the underlying funds 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
38
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
39
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including 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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.43 | % | $ | 1,000.00 | $ | 1,155.70 | $ | 2.34 | |||||||||||
2) Hypothetical | 0.43 | % | $ | 1,000.00 | $ | 1,023.04 | $ | 2.19 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.38 | % | $ | 1,000.00 | $ | 1,157.70 | $ | 2.07 | |||||||||||
2) Hypothetical | 0.38 | % | $ | 1,000.00 | $ | 1,023.29 | $ | 1.94 |
* Expenses are calculated using each Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
40
GMO Global Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Global Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 92.0 | % | |||||
Short-Term Investments | 8.7 | ||||||
Options Purchased | 2.3 | ||||||
Futures | 0.8 | ||||||
Forward Currency Contracts | 0.3 | ||||||
Loan Participations | 0.2 | ||||||
Loan Assignments | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Swaps | (0.5 | ) | |||||
Written Options | (0.7 | ) | |||||
Reverse Repurchase Agreements | (2.5 | ) | |||||
Other | (0.7 | ) | |||||
100.0 | % | ||||||
Country/Region Summary** | % of Investments | ||||||
Euro Region*** | 40.6 | % | |||||
United States | 21.9 | ||||||
Japan | 14.7 | ||||||
United Kingdom | 12.0 | ||||||
Emerging**** | 4.6 | ||||||
Canada | 3.4 | ||||||
Australia | 2.3 | ||||||
Sweden | 0.5 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts. The table is based on duration-adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative contracts. Duration is based on the Manager's models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and negative) are factored into the duration-adjusted exposure using the reference security and applying the same methodology to that security.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
**** The "Emerging" exposure is associated with investments in the GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Uruguay, Turkey, and Indonesia. Additional information about the fund's emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
1
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 17.4% | |||||||||||||||
Canada — 0.7% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
CAD | 1,500,000 | Government of Canada, 8.00%, due 06/01/23 | 1,976,109 | ||||||||||||
France — 2.6% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
EUR | 5,000,000 | Government of France, 4.00%, due 10/25/38 | 7,038,972 | ||||||||||||
Germany — 2.9% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
EUR | 5,000,000 | Republic of Deutschland, 4.75%, due 07/04/34 (a) | 7,907,734 | ||||||||||||
Japan — 2.8% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
JPY | 700,000,000 | Japan Government Twenty Year Bond, 2.20%, due 06/20/26 | 7,800,204 | ||||||||||||
United Kingdom — 2.5% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
GBP | 4,000,000 | U.K. Treasury Gilt, 4.25%, due 12/07/27 | 6,810,046 | ||||||||||||
United States — 5.9% | |||||||||||||||
U.S. Government | |||||||||||||||
USD | 7,284,736 | U.S. Treasury Inflation Indexed Bond, 0.88%, due 04/15/10 (a) (b) | 7,273,357 | ||||||||||||
USD | 15,000,000 | U.S. Treasury Principal Strip Bond, due 11/15/21 | 8,980,965 | ||||||||||||
Total United States | 16,254,322 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $48,137,470) | 47,787,387 |
See accompanying notes to the financial statements.
2
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 79.7% | |||||||||||||||
United States — 79.7% | |||||||||||||||
Affiliated Issuers | |||||||||||||||
1,345,355 | GMO Emerging Country Debt Fund, Class III | 10,359,235 | |||||||||||||
9,323,457 | GMO Short-Duration Collateral Fund | 149,641,482 | |||||||||||||
45,838 | GMO Special Purpose Holding Fund (c) | 28,878 | |||||||||||||
432,545 | GMO U.S. Treasury Fund | 10,817,950 | |||||||||||||
2,522,448 | GMO World Opportunity Overlay Fund | 48,834,585 | |||||||||||||
Total United States | 219,682,130 | ||||||||||||||
TOTAL MUTUAL FUNDS (COST $265,742,457) | 219,682,130 | ||||||||||||||
SHORT-TERM INVESTMENTS — 2.8% | |||||||||||||||
Money Market Funds — 2.8% | |||||||||||||||
7,721,269 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 7,721,269 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $7,721,269) | 7,721,269 | ||||||||||||||
TOTAL INVESTMENTS — 99.9% (Cost $321,601,196) | 275,190,786 | ||||||||||||||
Other Assets and Liabilities (net) — 0.1% | 352,965 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 275,543,751 |
See accompanying notes to the financial statements.
3
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys † | |||||||||||||||||||
9/01/09 | AUD | 800,000 | $ | 676,160 | $ | 52,160 | |||||||||||||
10/20/09 | AUD | 800,000 | 673,605 | 8,805 | |||||||||||||||
9/08/09 | CAD | 2,700,000 | 2,466,364 | 51,337 | |||||||||||||||
10/06/09 | EUR | 50,400,000 | 72,255,728 | (297,088 | ) | ||||||||||||||
9/15/09 | GBP | 4,500,000 | 7,325,547 | (97,203 | ) | ||||||||||||||
10/13/09 | JPY | 5,434,000,000 | 58,415,182 | 1,020,039 | |||||||||||||||
$ | 141,812,586 | $ | 738,050 | ||||||||||||||||
Sales # | |||||||||||||||||||
9/01/09 | AUD | 800,000 | $ | 676,160 | $ | (8,880 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
Forward Cross Currency Contracts
Settlement Date | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||
9/22/09 | EUR | 1,200,000 | SEK | 12,540,000 | $ | 41,392 |
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
34 | Australian Government Bond 3 Yr. | September 2009 | $ | 2,942,905 | $ | (27,432 | ) | ||||||||||||
20 | Australian Government Bond 10 Yr. | September 2009 | 1,764,812 | 9,895 | |||||||||||||||
39 | Canadian Government Bond 10 Yr. | December 2009 | 4,279,080 | 16,557 | |||||||||||||||
162 | Euro BOBL | September 2009 | 27,034,878 | 427,499 | |||||||||||||||
180 | Euro Bund | September 2009 | 31,676,433 | 1,012,798 | |||||||||||||||
14 | Japanese Government Bond 10 Yr. (TSE) | September 2009 | 20,997,340 | 451,191 |
See accompanying notes to the financial statements.
4
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Futures Contracts — continued
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
33 | U.S. Treasury Bond (CBT) | December 2009 | $ | 3,951,750 | $ | 21,299 | |||||||||||||
137 | U.S. Treasury Note 5 Yr. (CBT) | December 2009 | 15,789,250 | 68,216 | |||||||||||||||
104 | U.S. Treasury Note 2 Yr. (CBT) | December 2009 | 22,499,750 | 50,140 | |||||||||||||||
47 | U.S. Treasury Note 10 Yr. (CBT) | December 2009 | 5,509,281 | 31,437 | |||||||||||||||
72 | UK Gilt Long Bond | December 2009 | 13,903,107 | 39,549 | |||||||||||||||
$ | 150,348,586 | $ | 2,101,149 |
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
21,000,000 | USD | 3/20/2014 | Deutsche | (Pay) | 1.70 | % | 0.71 | % | Republic of | N/A | $ | (960,257 | ) | ||||||||||||||||||||||||||||||
Bank AG | Italy | ||||||||||||||||||||||||||||||||||||||||||
15,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.66 | % | 0.77 | % | Republic of Italy | 15,000,000 | USD | 1,109,783 | |||||||||||||||||||||||||||||||
$ | 149,526 | ||||||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
^ Receive - Fund receives premium and sells credit protection.
(Pay) - Fund pays premium and buys credit protection.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2009, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider (i.e. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to make as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
See accompanying notes to the financial statements.
5
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
As of August 31, 2009, for the futures and/or swap contracts held, 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:
BOBL - Bundesobligationen
(a) 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).
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic.
(c) Underlying investment represents interests in defaulted securities.
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
SEK - Swedish Krona
USD - United States Dollar
See accompanying notes to the financial statements.
6
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $55,858,739) (Note 2) | $ | 55,508,656 | |||||
Investments in affiliated issuers, at value (cost $265,742,457) (Notes 2 and 8) | 219,682,130 | ||||||
Dividends and interest receivable | 451,029 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 1,173,733 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 2,601,374 | ||||||
Receivable for open swap contracts (Note 2) | 1,109,783 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 5,704 | ||||||
Total assets | 280,532,409 | ||||||
Liabilities: | |||||||
Foreign currency due to custodian | 41,403 | ||||||
Payable for investments purchased | 1,001,763 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 43,522 | ||||||
Shareholder service fee | 34,360 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 593 | ||||||
Payable to broker for closed futures contracts | 2,409,615 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 403,171 | ||||||
Payable for open swap contracts (Note 2) | 960,257 | ||||||
Accrued expenses | 93,974 | ||||||
Total liabilities | 4,988,658 | ||||||
Net assets | $ | 275,543,751 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 345,837,206 | |||||
Distributions in excess of net investment income | (8,179,596 | ) | |||||
Accumulated net realized loss | (18,702,928 | ) | |||||
Net unrealized depreciation | (43,410,931 | ) | |||||
$ | 275,543,751 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 275,543,751 | |||||
Shares outstanding: | |||||||
Class III | 38,384,728 | ||||||
Net asset value per share: | |||||||
Class III | $ | 7.18 |
See accompanying notes to the financial statements.
7
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 1,388,565 | |||||
Interest | 904,998 | ||||||
Dividends | 2,551 | ||||||
Total investment income | 2,296,114 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 257,615 | ||||||
Shareholder service fee – Class III (Note 3) | 203,380 | ||||||
Custodian, fund accounting agent and transfer agent fees | 62,008 | ||||||
Audit and tax fees | 33,396 | ||||||
Legal fees | 7,360 | ||||||
Trustees fees and related expenses (Note 3) | 2,799 | ||||||
Registration fees | 1,840 | ||||||
Miscellaneous | 2,574 | ||||||
Total expenses | 570,972 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (22,518 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (18,375 | ) | |||||
Shareholder service fee waived (Note 3) | (6,783 | ) | |||||
Net expenses | 523,296 | ||||||
Net investment income (loss) | 1,772,818 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 4,196 | ||||||
Closed futures contracts | (2,783,899 | ) | |||||
Closed swap contracts | (42,600 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 2,555,547 | ||||||
Net realized gain (loss) | (266,756 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 3,500,637 | ||||||
Investments in affiliated issuers | 30,672,441 | ||||||
Open futures contracts | 2,132,200 | ||||||
Open swap contracts | 180,031 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 9,983,521 | ||||||
Net unrealized gain (loss) | 46,468,830 | ||||||
Net realized and unrealized gain (loss) | 46,202,074 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 47,974,892 |
See accompanying notes to the financial statements.
8
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,772,818 | $ | 10,078,365 | |||||||
Net realized gain (loss) | (266,756 | ) | 3,335,224 | ||||||||
Change in net unrealized appreciation (depreciation) | 46,468,830 | (90,848,938 | ) | ||||||||
Net increase (decrease) in net assets from operations | 47,974,892 | (77,435,349 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (9,545,648 | ) | (19,772,881 | ) | |||||||
Return of capital | |||||||||||
Class III | (4,954,352 | ) | — | ||||||||
(14,500,000 | ) | (19,772,881 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (20,058,960 | ) | 20,286,078 | ||||||||
Redemption fees (Notes 2 and 7): | |||||||||||
Class III | 421,557 | 13,923 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (19,637,403 | ) | 20,300,001 | ||||||||
Total increase (decrease) in net assets | 13,837,489 | (76,908,229 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 261,706,262 | 338,614,491 | |||||||||
End of period (including distributions in excess of net investment income of $8,179,596 and $406,766, respectively) | $ | 275,543,751 | $ | 261,706,262 |
See accompanying notes to the financial statements.
9
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.33 | $ | 8.70 | $ | 8.92 | $ | 8.53 | $ | 9.11 | $ | 8.73 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.04 | 0.25 | 0.42 | 0.38 | 0.18 | 0.21 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 1.17 | (2.11 | ) | 0.11 | 0.38 | (0.57 | ) | 0.63 | |||||||||||||||||||
Total from investment operations | 1.21 | (1.86 | ) | 0.53 | 0.76 | (0.39 | ) | 0.84 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.24 | ) | (0.51 | ) | (0.75 | ) | (0.37 | ) | (0.19 | ) | (0.46 | ) | |||||||||||||||
From return of capital | (0.12 | ) | — | — | — | — | — | ||||||||||||||||||||
Total distributions | (0.36 | ) | (0.51 | ) | (0.75 | ) | (0.37 | ) | (0.19 | ) | (0.46 | ) | |||||||||||||||
Net asset value, end of period | $ | 7.18 | $ | 6.33 | $ | 8.70 | $ | 8.92 | $ | 8.53 | $ | 9.11 | |||||||||||||||
Total Return(b) | 19.62 | %** | (22.77 | )% | 6.50 | % | 8.99 | % | (4.33 | )% | 9.52 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 275,544 | $ | 261,706 | $ | 338,614 | $ | 185,321 | $ | 168,324 | $ | 170,750 | |||||||||||||||
Net expenses to average daily net assets(c) | 0.39 | %* | 0.39 | %(d) | 0.38 | %(d) | 0.39 | % | 0.37 | % | 0.33 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 1.31 | %* | 3.24 | % | 4.86 | % | 4.33 | % | 2.12 | % | 2.40 | % | |||||||||||||||
Portfolio turnover rate | 5 | %** | 35 | % | 20 | % | 22 | % | 20 | % | 38 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.04 | %* | 0.03 | % | 0.03 | % | 0.06 | % | 0.07 | % | 0.12 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.00 | (e) | — | — | — | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds 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 and assumes the effect of reinvested distributions. 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 funds (See Note 3).
(d) The net expense ratio does not include the effect of expense reductions.
(e) 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.
10
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Global Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the J.P. Morgan Global Government Bond Index. The Fund typically invests in bonds included in the J.P. Morgan Global Government Bond Index and in securities and instruments with similar characteristics. The Fund seeks additional returns by seeking to exploit differences in global interest rates, sectors, and credit, currency, and emerging country debt markets. The Fund may implement its strategies: (i) synthetically by using exchange-traded and over-the-counter ("OTC") derivatives and investing in other series of the Trust and/or (ii) directly by purchasing bonds denominated in various currencies. The Fund has historically gained its investment exposure primarily through the use of derivatives and investments in other series of the Trust. As a result, the Fund has substantial holdings of GMO Short-Duration Collateral Fund ("SDCF") (a Fund that invests primarily in a sset-backed securities) and GMO World Opportunity Overlay Fund ("Overlay Fund") (a Fund that invests in asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Under normal circumstances, the Fund invests (directly or indirectly through investment in other series of the Trust) at least 80% of its assets in bonds. For these purposes, the term "bonds" includes (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by using a futures contract, swap contract, currency forward or option. To implement its investment strategies, the Fund may invest in or hold: investment-grade bonds denominated in various currencies, including foreign and U.S. government securities and asset-backed securities issued by foreign governments and U.S. government agencies (including securities neither guaranteed nor insured by the U.S. government), corporate bond s, and mortgage-backed and other asset-backed securities issued by private issuers; derivatives, including without limitation, futures contracts, currency options, currency forwards, credit default swaps and other swap contracts (to gain exposure to the global interest rate, credit, and currency markets); shares of SDCF (to gain exposure to asset-backed securities); shares of Overlay Fund (to attempt to exploit misvaluations in world interest rates, currencies, and credit markets); shares of GMO Emerging Country Debt Fund ("ECDF") (to gain exposure to sovereign debt of emerging countries); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). Because of the deterioration in credit markets that became acute in 2008, the Fund through its investment in SDCF and Overlay Fund currently holds and may continue to hold material positions of below investment grade securities. This is in addition to the Fund's emerging country debt investments. The Fund also may invest in unaffiliated money market funds.
11
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 fininacial statements are available, without charge, upon request by calling (617) 346-7646 (collect). As of August 31, 2009, shares of SDCF, GMO Special Purpose Holding Fund ("SPHF") and Overlay Fund were not publicly available for direct purchase.
From March 1, 2009 through July 12, 2009, the Fund had a policy to effect redemptions of its shares in-kind above de minimis levels. The Fund had established de minimis amounts below which redemptions would be honored for cash. Beginning July 13, 2009, the Fund had a policy to pay redemption requests with cash (less redemption fees).
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
As of August 31, 2009, a significant portion of the Fund's dividends received from other GMO funds is expected to be a return of capital for U.S. federal income tax purposes. Accordingly, "dividends from affiliated issuers" reported in the Statement of Operations has been reduced by the portion estimated to be a return of capital as of August 31, 2009. The estimated return of capital is $31,228,246. In addition, all applicable related income disclosures throughout this Semiannual Report have been adjusted by the estimated return of capital. Furthermore, the "distributions to shareholders from return of capital" disclosed in the Statement of Changes in Net Assets and Financial Highlights are also estimates as of August 31, 2009. Both the dividends from affiliated issuers and distributions to shareholders from return of capital are subject to change and will not be finalized until February 28, 2010, the Fund's upcoming fiscal year - -end. Finally, in early 2010, applicable shareholders will receive Form 1099-DIV that will indicate the appropriate tax character of all distributions paid by the Fund in 2009.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost.
12
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by the Fund, those alternative sources would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fu nd. As of August 31, 2009, the total value of securities held directly and indirectly that were fair valued or for which no alternative pricing source was available represented 20.46% of the net assets of the Fund.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund utilized third party valuation services (which use industry standard models and inputs from pricing vendors) to value credit default swaps.
13
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Foreign Government Obligations | $ | — | $ | 47,787,387 | $ | — | $ | 47,787,387 | |||||||||||
TOTAL DEBT OBLIGATIONS | — | 47,787,387 | — | 47,787,387 | |||||||||||||||
Mutual Funds | 21,177,185 | 198,504,945 | — | 219,682,130 | |||||||||||||||
Short-Term Investments | 7,721,269 | — | 7,721,269 | ||||||||||||||||
Total Investments | 21,177,185 | 254,013,601 | — | 275,190,786 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | — | 1,173,733 | — | 1,173,733 | |||||||||||||||
Futures Contracts | 2,128,581 | — | — | 2,128,581 | |||||||||||||||
Swap Agreements | — | — | 1,109,783 | 1,109,783 | |||||||||||||||
Total | $ | 23,305,766 | $ | 255,187,334 | $ | 1,109,783 | $ | 279,602,883 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | $ | — | $ | (403,171 | ) | $ | — | $ | (403,171 | ) | |||||||||
Futures Contracts | (27,432 | ) | — | — | (27,432 | ) | |||||||||||||
Swap Agreements | — | — | (960,257 | ) | (960,257 | ) | |||||||||||||
Total | $ | (27,432 | ) | $ | (403,171 | ) | $ | (960,257 | ) | $ | (1,390,860 | ) |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect ) in securities and other financial instruments using Level 3 inputs were 58.48% and (0.09)% of total net assets, respectively.
14
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Mutual Funds | $ | 33,462 | $ | — | $ | — | $ | — | $ | (4,584 | ) | $ | (28,878 | ) | $ | — | |||||||||||||||
Swaps Agreements | (30,505 | ) | (42,660 | ) | — | 42,660 | 180,031 | — | 149,526 | ||||||||||||||||||||||
Total | $ | 2,957 | $ | (42,660 | ) | $ | — | $ | 42,660 | $ | 175,447 | $ | (28,878 | ) | $ | 149,526 |
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
15
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
16
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts outstanding at the end of the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a
17
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
18
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at a later date at a fixed price. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which can cause the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, if any, at least annually. The Fund is permitted to, and will from time to time, declare and pay distributions from net investment income, if any, more frequently (e.g. monthly). 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are
19
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $7,106,783.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/29/2012 | $ | (7,601,799 | ) | ||||
2/28/2014 | (7,575,780 | ) | |||||
2/28/2015 | (269,796 | ) | |||||
2/28/2017 | (4,412,277 | ) | |||||
Total | $ | (19,859,652 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 322,965,745 | $ | 1,231,387 | $ | (49,006,346 | ) | $ | (47,774,959 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to
20
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
From prior to March 1, 2009 through August 2, 2009, the fee on cash redemptions was 2.00% of the amount redeemed. From August 3, 2009 through August 31, 2009, the fee on cash redemptions was 1.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relat ing to a cash purchase or redemption of the Fund's shares if the
21
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases an d redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. Many of these risks are more pronounced as a result of current global economic conditions that began to unfold in 2008. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. The Fund may be required to sell certain less liquid securities at distressed prices or meet redemption requests in-kind. Recent changes in credit markets have reduced the liquidity of all types of fixed income securities, including in particular the asset-backed securities held by the Fund through SDCF and Overlay Fund.
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to an OTC derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security, will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses OTC derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is
22
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected.
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Leveraging Risk (increased risks from use of reverse repurchase agreeme nts and other derivatives and securities lending), Focused Investment Risk (increased risk from the Fund's to focus on investments in countries, regions, or sectors with high positive correlations to one another), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. Certain of the above-referenced risks will be more pronounced for the Fund as a result of its investment in ECDF. For more information about reverse repurchase agreements and other derivatives, please refer to the descriptions of financial instruments (e.g. reverse repurchase agreements, swaps, futures and other types of derivative contracts) in Note 2 above as well as the discussion of the Fund's use of derivatives below.
The Fund invests (including through investment in underlying funds) in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of u nderlying assets or other support available to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in
23
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities generally. These events reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not continue or that they will not deteriorate further. Also, government actions and proposals affecting the terms of underl ying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
The Fund uses its cash balance to meet its collateral obligations and for other purposes. There is no assurance that the Fund's cash balance will be sufficient to meet those obligations. If it is not, the Fund would be required to liquidate portfolio positions. To manage the Fund's cash collateral needs, the Manager reserves the right to reduce or eliminate the Fund's derivative exposures. A reduction in those exposures may cause the performance of the Fund to track its benchmark less closely and make the Fund's performance more dependent on the performance of the asset-backed securities it holds directly or indirectly.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
24
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund uses derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund uses derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps (including credit default swaps) or other derivatives on an index, a single security or a basket of securities to gain investment exposures. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. For example, the Fund may use credit default swaps to take an active short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may attempt to alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed vs. variable and shorter duration vs. longer duration. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
25
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
26
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options, rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | 2,128,581 | — | — | — | — | 2,128,581 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 1,173,733 | — | — | — | 1,173,733 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | 1,109,783 | — | — | 1,109,783 | |||||||||||||||||||||
Total | $ | 2,128,581 | $ | 1,173,733 | $ | 1,109,783 | $ | — | $ | — | $ | 4,412,097 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | (27,432 | ) | — | — | — | — | (27,432 | ) | |||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | (403,171 | ) | — | — | — | (403,171 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | (960,257 | ) | — | — | (960,257 | ) | |||||||||||||||||||
Total | $ | (27,432 | ) | $ | (403,171 | ) | $ | (960,257 | ) | $ | — | $ | — | $ | (1,390,860 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
27
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options, rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | (2,783,899 | ) | — | — | — | — | (2,783,899 | ) | |||||||||||||||||||
Swap contracts | — | — | (42,600 | ) | — | — | (42,600 | ) | |||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 2,473,668 | — | — | — | 2,473,668 | |||||||||||||||||||||
Total | $ | (2,783,899 | ) | $ | 2,473,668 | $ | (42,600 | ) | $ | — | $ | — | $ | (352,831 | ) | ||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options, rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | 2,132,200 | — | — | — | — | 2,132,200 | |||||||||||||||||||||
Swap contracts | — | — | 180,031 | — | — | 180,031 | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 9,971,355 | — | — | — | 9,971,355 | |||||||||||||||||||||
Total | $ | 2,132,200 | $ | 9,971,355 | $ | 180,031 | $ | — | $ | — | $ | 12,283,586 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Forwards | Futures | Swaps | |||||||||||||
Average notional amount outstanding | $ | 143,163,065 | $ | 200,342,392 | $ | 36,000,000 | |||||||||
Highest notional amount outstanding | 159,782,127 | 303,222,317 | 36,000,000 | ||||||||||||
Lowest notional amount outstanding | 133,138,262 | 150,348,586 | 36,000,000 |
28
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Other matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the period ended August 31, 2009, the Fund received no distributions through SPHF in connection with settlement agreements related to that litigation.
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.25% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 to the extent that the sum of (a) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses); (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in ECDF (excluding ECDF's Excluded Fund Fees and Expenses); and (c) the amount of fees and expenses incurred indirectly (through investment in other underlying funds) by the Fund through its (direct or indirect) investment in GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.25% of the Fund's average daily net assets, subject to a maximum total reimbursement to such Fund equ al to 0.25% of the Fund's average daily net assets.
29
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 | ||||||||||||
0.022 | % | 0.005 | % | 0.010 | % | 0.037 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $2,247 and $1,288, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $23,275,252 and $12,300,000 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 69.24% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 0.02% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 33.71% of the Fund's shares were held by accounts for which the Manager had investment discretion.
30
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 531 | $ | 3,411 | 1,411,603 | $ | 12,089,225 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 150,142 | 1,015,483 | 2,363,492 | 19,546,079 | |||||||||||||||
Shares repurchased | (3,102,240 | ) | (21,077,854 | ) | (1,373,474 | ) | (11,349,226 | ) | |||||||||||
Redemption fees | — | 421,557 | — | 13,923 | |||||||||||||||
Net increase (decrease) | (2,951,567 | ) | $ | (19,637,403 | ) | 2,401,621 | $ | 20,300,001 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 | $ | 7,736,793 | $ | 159,100 | $ | — | $ | 159,100 | $ | — | $ | 10,359,235 | |||||||||||||||
GMO Short-Duration Collateral Fund | 159,431,112 | — | — | 1,213,314 | — | 149,641,482 | |||||||||||||||||||||
GMO Special Purpose Holding Fund | 33,462 | — | — | — | — | 28,878 | |||||||||||||||||||||
GMO U.S. Treasury Fund | — | 23,116,151 | 12,300,000 | 16,151 | — | 10,817,950 | |||||||||||||||||||||
GMO World Opportunity Overlay Fund | 46,286,913 | — | — | — | — | 48,834,585 | o | ||||||||||||||||||||
Totals | $ | 213,488,280 | $ | 23,275,251 | $ | 12,300,000 | $ | 1,388,565 | $ | — | $ | 219,682,130 |
o The Fund received return of capital distributions in the amount of $4,229,796.
31
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. On September 14, 2009, the Fund's redemption fee was eliminated.
32
GMO Global Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those p ersonnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
33
GMO Global Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, 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 to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to separate accoun t clients and the impact on the Manager of, and expenses and risks associated with, the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management b y, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and expanding existing client 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. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for advisory fees, shareholder fees and most other expenses of the underlying funds 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 u nder the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record
34
GMO Global Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
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. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
35
GMO Global Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including 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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.42 | % | $ | 1,000.00 | $ | 1,196.20 | $ | 2.32 | |||||||||||
2) Hypothetical | 0.42 | % | $ | 1,000.00 | $ | 1,023.09 | $ | 2.14 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
36
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Investments Concentration Summary (a)
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 92.5 | % | |||||
Short-Term Investments | 8.9 | ||||||
Futures | 0.8 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Reverse Repurchase Agreements | (0.4 | ) | |||||
Swaps | (0.6 | ) | |||||
Other | (1.2 | ) | |||||
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 funds").
1
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) / Shares | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 31.9% | |||||||||||||||
U.S. Government — 31.9% | |||||||||||||||
7,910,768 | U.S. Treasury Inflation Indexed Bond, 0.88%, due 04/15/10 (a) (b) (c) | 7,898,411 | |||||||||||||
TOTAL DEBT OBLIGATIONS (COST $7,850,651) | 7,898,411 | ||||||||||||||
MUTUAL FUNDS — 67.1% | |||||||||||||||
Affiliated Issuers — 67.1% | |||||||||||||||
936,264 | GMO Short-Duration Collateral Fund | 15,027,041 | |||||||||||||
64,213 | GMO U.S. Treasury Fund | 1,605,970 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $19,781,833) | 16,633,011 | ||||||||||||||
SHORT-TERM INVESTMENTS — 1.9% | |||||||||||||||
Money Market Funds — 1.9% | |||||||||||||||
408,165 | SSgA USD Liquidity Fund-Class I Stable NAV Shares (a) (d) | 408,165 | |||||||||||||
71,797 | State Street Institutional Treasury Plus Money Market Fund- Institutional Class | 71,797 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $479,962) | 479,962 | ||||||||||||||
TOTAL INVESTMENTS — 100.9% (Cost $28,112,446) | 25,011,384 | ||||||||||||||
Other Assets and Liabilities (net) — (0.9%) | (215,319 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 24,796,065 |
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, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Futures Contracts (a)
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
12 | Cocoa | December 2009 | $ | 335,280 | $ | 3,937 | |||||||||||||
4 | Copper | December 2009 | 282,650 | (7,617 | ) | ||||||||||||||
3 | Gasoline RBOB | October 2009 | 228,048 | (10,252 | ) | ||||||||||||||
4 | Gold 100 OZ | December 2009 | 381,400 | (177 | ) | ||||||||||||||
9 | Lean Hogs | October 2009 | 173,340 | 8,279 | |||||||||||||||
4 | Silver | December 2009 | 298,460 | 2,903 | |||||||||||||||
8 | Soybean | November 2009 | 391,800 | (17,192 | ) | ||||||||||||||
13 | Soybean Meal | December 2009 | 386,750 | (16,407 | ) | ||||||||||||||
3 | Sugar 11 | October 2009 | 81,950 | 22,274 | |||||||||||||||
$ | 2,559,678 | $ | (14,252 | ) | |||||||||||||||
Sales | |||||||||||||||||||
1 | Coffee "C" | December 2009 | $ | 45,862 | $ | 3,914 | |||||||||||||
27 | Corn | December 2009 | 445,163 | 84,960 | |||||||||||||||
1 | Heating Oil | October 2009 | 75,957 | 5,003 | |||||||||||||||
3 | Light Sweet Crude Oil | October 2009 | 209,880 | 7,936 | |||||||||||||||
28 | Live Cattle | October 2009 | 970,760 | 41,596 | |||||||||||||||
8 | Natural Gas | October 2009 | 238,160 | 55,492 | |||||||||||||||
8 | Soybean Oil | December 2009 | 170,880 | (5,326 | ) | ||||||||||||||
16 | Wheat | December 2009 | 399,000 | 8,132 | |||||||||||||||
$ | 2,555,662 | $ | 201,707 |
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, 2009 (Unaudited)
Swap Agreements (a)
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
7,943,141 | USD | 10/14/2009 | Barclays Capital | 1 month | Return on DJ-AIG | ||||||||||||||||||||||
T-Bill + 0.23% | Commodity | ||||||||||||||||||||||||||
Total Return Index (b) | $ | (112,090 | ) | ||||||||||||||||||||||||
$ | (112,090 | ) | |||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
As of August 31, 2009, for the futures and/or swap contracts held, 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:
(a) 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.
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic.
(c) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2).
(d) Fund is domiciled in Ireland.
Currency Abbreviations:
USD - United States Dollar
See accompanying notes to the financial statements.
4
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidating Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
GMO Alternative Asset Opportunity Fund | GMO Alternative Asset SPC Ltd. | Eliminations | Consolidated Totals | ||||||||||||||||
Assets: | |||||||||||||||||||
Investments in unaffiliated issuers, at value (consolidated cost $8,330,613) (Note 2) | $ | 71,797 | $ | 8,306,576 | $ | — | $ | 8,378,373 | |||||||||||
Investments in affiliated issuers, at value (consolidated cost $19,781,833) (Note 2) | 24,804,226 | — | (8,171,215 | ) | 16,633,011 | ||||||||||||||
Cash | — | 45,771 | — | 45,771 | |||||||||||||||
Dividends and interest receivable | 3 | 27,853 | — | 27,856 | |||||||||||||||
Receivable for expenses reimbursed by Manager (Note 3) | 8,091 | 7,688 | — | 15,779 | |||||||||||||||
Total assets | 24,884,117 | 8,387,888 | (8,171,215 | ) | 25,100,790 | ||||||||||||||
Liabilities: | |||||||||||||||||||
Payable to affiliate for (Note 3): | |||||||||||||||||||
Management fee | 9,410 | — | — | 9,410 | |||||||||||||||
Shareholder service fee | 3,137 | — | — | 3,137 | |||||||||||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 94 | — | — | 94 | |||||||||||||||
Payable for variation margin on open futures contracts (Note 2) | — | 29,001 | — | 29,001 | |||||||||||||||
Payable for open swap contracts (Note 2) | — | 112,090 | — | 112,090 | |||||||||||||||
Accrued expenses | 75,411 | 75,582 | — | 150,993 | |||||||||||||||
Total liabilities | 88,052 | 216,673 | — | 304,725 | |||||||||||||||
Net assets | $ | 24,796,065 | $ | 8,171,215 | $ | (8,171,215 | ) | $ | 24,796,065 | ||||||||||
Shareholders' capital | $ | 24,796,065 | $ | 24,796,065 | |||||||||||||||
Shares outstanding | 966,124 | 966,124 | |||||||||||||||||
Net asset value per share | $ | 25.67 | $ | 25.67 |
See accompanying notes to the financial statements.
5
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidating Statement of Operations — For the Six Months Ended August 31, 2009 (Unaudited)
GMO Alternative Asset Opportunity Fund | GMO Alternative Asset SPC Ltd. | Eliminations | Consolidated Totals | ||||||||||||||||
Investment Income: | |||||||||||||||||||
Dividends from affiliated issuers (Note 8) | $ | 122,721 | $ | — | $ | — | $ | 122,721 | |||||||||||
Dividends | 45 | 460 | — | 505 | |||||||||||||||
Interest | 32 | 237,274 | — | 237,306 | |||||||||||||||
Total income (loss) | 122,798 | 237,734 | — | 360,532 | |||||||||||||||
Expenses: | |||||||||||||||||||
Management fee (Note 3) | 52,984 | — | — | 52,984 | |||||||||||||||
Shareholder service fee (Note 3) | 17,661 | — | — | 17,661 | |||||||||||||||
Audit and tax fees | 46,368 | — | — | 46,368 | |||||||||||||||
Custodian and transfer agent fees | 1,564 | 39,560 | — | 41,124 | |||||||||||||||
Legal fees | 460 | — | — | 460 | |||||||||||||||
Trustees fees and related expenses (Note 3) | 226 | 4,232 | — | 4,458 | |||||||||||||||
Miscellaneous | 275 | 3,404 | — | 3,679 | |||||||||||||||
Total expenses | 119,538 | 47,196 | — | 166,734 | |||||||||||||||
Fees and expenses reimbursed by Manager (Note 3) | (48,484 | ) | (47,196 | ) | — | (95,680 | ) | ||||||||||||
Net expenses | 71,054 | — | — | 71,054 | |||||||||||||||
Net investment income (loss) | 51,744 | 237,734 | — | 289,478 | |||||||||||||||
Realized and unrealized gain (loss): | |||||||||||||||||||
Net realized gain (loss) on: | |||||||||||||||||||
Investments in unaffiliated issuers | — | (14,101 | ) | — | (14,101 | ) | |||||||||||||
Investments in affiliated issuers | (1,038,330 | ) | — | 1,038,783 | 453 | ||||||||||||||
Closed futures contracts | — | (354,416 | ) | — | (354,416 | ) | |||||||||||||
Closed swap contracts | — | 1,712,462 | — | 1,712,462 | |||||||||||||||
Net realized gain (loss) | (1,038,330 | ) | 1,343,945 | 1,038,783 | 1,344,398 | ||||||||||||||
Change in net unrealized appreciation (depreciation) on: | |||||||||||||||||||
Investments in unaffiliated issuers | — | 60,994 | — | 60,994 | |||||||||||||||
Investments in affiliated issuers | 4,638,181 | — | (2,485,672 | ) | 2,152,509 | ||||||||||||||
Open futures contracts | — | 117,059 | — | 117,059 | |||||||||||||||
Open swap contracts | — | (312,843 | ) | — | (312,843 | ) | |||||||||||||
Net unrealized gain (loss) | 4,638,181 | (134,790 | ) | (2,485,672 | ) | 2,017,719 | |||||||||||||
Net realized and unrealized gain (loss) | 3,599,851 | 1,209,155 | (1,446,889 | ) | 3,362,117 | ||||||||||||||
Net increase (decrease) in net assets resulting from operations | $ | 3,651,595 | $ | 1,446,889 | $ | (1,446,889 | ) | $ | 3,651,595 |
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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 289,478 | $ | 954,282 | |||||||
Net realized gain (loss) | 1,344,398 | (6,532,494 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 2,017,719 | (5,876,671 | ) | ||||||||
Net increase (decrease) in net assets from operations | 3,651,595 | (11,454,883 | ) | ||||||||
Fund share transactions: (Note 7) | |||||||||||
Proceeds from sale of shares | — | 388 | |||||||||
Cost of shares repurchased | (1,269,793 | ) | (131,245 | ) | |||||||
Redemption fees | 25,396 | 2,617 | |||||||||
Net increase (decrease) in Fund share transactions | (1,244,397 | ) | (128,240 | ) | |||||||
Total increase (decrease) in net assets | 2,407,198 | (11,583,123 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 22,388,867 | 33,971,990 | |||||||||
End of period | $ | 24,796,065 | $ | 22,388,867 |
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 21.94 | $ | 33.11 | $ | 28.54 | $ | 26.63 | $ | 25.00 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(b)† | 0.29 | 0.93 | 0.69 | 1.28 | 0.73 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 3.44 | (12.10 | ) | 3.88 | (c) | 0.63 | 0.90 | ||||||||||||||||
Total from investment operations | 3.73 | (11.17 | ) | 4.57 | 1.91 | 1.63 | |||||||||||||||||
Net asset value, end of period | $ | 25.67 | $ | 21.94 | $ | 33.11 | $ | 28.54 | $ | 26.63 | |||||||||||||
Total Return(d) | 17.00 | %** | (33.74 | )% | 16.01 | % | 7.17 | % | 6.52 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 24,796 | $ | 22,389 | $ | 33,972 | $ | 174,514 | $ | 181,947 | |||||||||||||
Net expenses to average daily net assets(e) | 0.60 | %* | 0.60 | %(f) | 0.60 | % | 0.60 | % | 0.61 | %* | |||||||||||||
Net investment income to average daily net assets(b) | 2.46 | %* | 3.24 | % | 2.41 | % | 4.60 | % | 3.12 | %* | |||||||||||||
Portfolio turnover rate | 12 | %** | 89 | % | 24 | % | 12 | % | 13 | %** | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.81 | %* | 0.73 | % | 0.21 | % | 0.12 | % | 0.15 | %* | |||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.03 | $ | 0.00 | (g) | — | — | — |
(a) Period from April 11, 2005 (commencement of operations) to February 28, 2006.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) 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.
(d) Total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(f) The net expense ratio does not include the effect of expense reductions.
(g) 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 Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Alternative Asset Opportunity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark. The Fund's benchmark is a composite of the Dow Jones-UBS Commodity Index, which is composed of futures contracts on nineteen physical commodities, and the J.P. Morgan U.S. 3 Month Cash Index, which measures the total return performance of three-month U.S. dollar Euro-deposits. The Dow Jones-UBS Commodity Index and J.P. Morgan U.S. 3 Month Cash Index each represent 50% of the composite benchmark. The Fund seeks indirect exposure to investment returns of commodities and, from time to time, other alternative asset classes (e.g., currencies). 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 (as discussed below), which, in turn, invests in various commodity-related derivatives. The Fund also may seek to add value by tak ing active positions in other exchange-traded and over-the-counter ("OTC") commodity-related derivatives, including options on commodity futures. The Fund also may use, directly or indirectly through its wholly owned subsidiary, a wide variety of other exchange-traded and OTC derivatives that are not linked to the value of a commodity or other commodity-related instrument (including financial futures, options, and swap contracts). The second component of the Fund's investment program consists of investments in U.S. and foreign fixed income securities, primarily asset-backed securities. The Fund has historically gained its investment exposure to fixed income securities through investment in GMO Short-Duration Collateral Fund ("SDCF"). A substantial portion of the Fund's investments (through SDCF) in fixed income securities may consist of asset-backed securities, including, but not limited to, securities backed by pools of residential and commercial mortgages, credit-card receivables, home equity loans, automo bile loans, educational loans, corporate and sovereign bonds, and bank loans made to corporations. In addition, the Fund may invest (including through SDCF) in government securities, corporate debt securities, money market instruments, and commercial paper, and enter into credit default swaps, reverse repurchase agreements, and repurchase agreements. The Fund may hold directly or indirectly (through SDCF) fixed income securities whose ratings, after the securities were acquired, were reduced below investment grade. In addition to its commodity-related investments, from time to time, the Fund may invest (through SDCF) a portion of its assets in a range of currency-related investments, including currency futures, forwards, and options. The Fund does not invest directly in commodities and commodity-related derivatives. Instead, to gain exposure to commodities and certain other assets, the Fund invests in a wholly owned subsidiary company, as noted above. GMO serves as the
9
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
investment manager to this company but does not receive any additional management or other fees for such services. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
The financial statements of the 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. Shares of SDCF are not publicly available for direct purchase.
As of August 31, 2009, shares of the Fund were not publicly offered and were principally available only to other series of the Trust and certain accredited investors.
The Fund currently limits subscriptions due to capacity considerations.
From prior to March 1, 2009 through July 12, 2009, the Fund had a policy to effect redemptions of its shares in-kind above de minimis levels. The Fund had established de minimis amounts below which redemptions would be honored for cash. Beginning July 13, 2009, the Fund expected to pay redemption requests with cash (less a redemption fee).
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
As of August 31, 2009, a significant portion of the Fund's dividends received from other GMO funds is expected to be a return of capital for U.S. federal income tax purposes. Accordingly, "dividends from affiliated issuers" reported in the Statement of Operations has been reduced by the portion estimated to be a return of capital as of August 31, 2009. The estimated return of capital is $3,135,950. In addition, all applicable related income disclosures throughout this Semiannual Report have been adjusted by the estimated return of capital. The dividends from affiliated issuers are subject to change and will not be finalized until February 28, 2010, the Fund's upcoming fiscal year-end. Finally, in early 2010, applicable shareholders will receive Form 1099-DIV that will indicate the appropriate tax character of all distributions paid by the Fund in 2009.
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements include the accounts (and the related notes when appoproate) of the GMO Alternative Asset Opportunity Fund and its wholly owned investment in
10
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
GMO Alternative Asset SPC Ltd. The consolidated financial statements include 100% of the assets and liabilities of GMO Alternative Asset SPC Ltd. All significant interfund accounts and transactions have been eliminated in consolidation.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by the Fund, those alternative sources would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fu nd. As of August 31, 2009, the total value of securities held directly and indirectly that were fair valued or for which no alternative pricing source was available represented 11.86% of the net assets of the Fund.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities
11
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant.
The following is a consolidated summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
U.S. Government | $ | — | $ | 7,898,411 | $ | — | $ | 7,898,411 | |||||||||||
TOTAL DEBT OBLIGATIONS | — | 7,898,411 | — | 7,898,411 | |||||||||||||||
Mutual Funds | 1,605,970 | 15,027,041 | — | 16,633,011 | |||||||||||||||
Short-Term Investments | — | 479,962 | — | 479,962 | |||||||||||||||
Total Investments | 1,605,970 | 23,405,414 | — | 25,011,384 | |||||||||||||||
Derivatives | |||||||||||||||||||
Futures Contracts | 244,426 | — | — | 244,426 | |||||||||||||||
Total | $ | 1,850,396 | $ | 23,405,414 | $ | — | $ | 25,255,810 |
12
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Futures Contracts | $ | (56,971 | ) | $ | — | $ | — | $ | (56,971 | ) | |||||||||
Swap Agreements | — | (112,090 | ) | — | (112,090 | ) | |||||||||||||
Total | $ | (56,971 | ) | $ | (112,090 | ) | $ | — | $ | (169,061 | ) |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (direct and indirect) in securities and other financial instruments using Level 3 inputs were 49.29% and (0.15%) of total net assets, respectively.
The Fund held no investments or other financial instruments directly at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
13
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level
14
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at a later date at a fixed price. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which can cause the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
15
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
Taxes
The Fund has elected to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Fund is not itself subject to federal income tax. Instead, each shareholder is required to take into account in determining its tax liability its distributive share of items of Fund income, gain, loss, deduction, credit, and tax preference for each taxable year substantially as though such items have been realized directly by the shareholder and without regard to whether any distribution by the Fund has been or will be received. Accordingly, no provision (benefit) for federal and state income taxes is reflected in the accompanying financial statements.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 32,698,604 | $ | 382,062 | $ | (8,069,282 | ) | $ | (7,687,220 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Distributions
Because the Fund has elected to be treated as a partnership for tax purposes, it is not required to make distributions to its shareholders. It is the policy of the Fund to declare and pay distributions as determined by the Trustees (or their delegates).
16
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
From prior to March 1, 2009 through August 2, 2009, the fee on cash redemptions was 2.00% of the amount redeemed. From August 3, 2009 through August 31, 2009, the fee on cash redemptions was 1.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relat ing to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind
17
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. Many of these risks are more pronounced as a result of current global economic conditions that began to unfold in 2008. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Commodities Risk — Because of the Fund's indirect exposure to the global commodity markets, the value of its shares is affected by factors particular to the commodity markets and may fluctuate more than the value of shares of a fund with a broader range of investments.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices.
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to an OTC derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. Credit risk is particularly pronounced for below investment grade securities. Additionally, to the extent that the Fund uses OTC derivatives, including swap contracts with longer-term maturities, and/or has significant exposure to a single counterparty, this risk will be particularly pronounced for the Fund. This risk is particularly acute in environments in which financial services firms are ex posed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
• Leveraging Risk — The Fund's use of reverse repurchase agreements and other derivatives may cause its portfolio to be leveraged. The Fund is not limited in the extent to which it may use derivatives or in the absolute face value of its derivative positions, the Fund may be leveraged in relation to its assets. Leverage may increase the Fund's portfolio losses and reduce opportunities for gain when interest rates or currency rates are changing.
• Derivatives Risk — The use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other assets. Derivatives may
18
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
increase other Fund risks, including market risk, liquidity risk, and credit and counterparty risk, and their value may or may not correlate with the value of the relevant underlying asset. Derivatives risk is particularly pronounced for the Fund because a basic component of the Fund's principal investment strategies involves using derivatives, in particular commodity swap contracts, commodity futures, and other exchange-traded and OTC commodity-related derivatives, to gain indirect exposure to the investment returns of commodities that trade in the commodity markets.
• Management Risk — This is the risk that the Manager's strategies and techniques will fail to produce the desired results.
• Market Disruption and Geopolitical Risk — This is the risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
Other principal risks of an investment in the Fund include Focused Investment Risk (increased risk from the Fund's focus on investments in industries with high positive correlations to one another), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified.
The Fund invests (including through investment in underlying funds) in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of u nderlying assets or other support available to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in
19
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities generally. These events reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not continue or that they will not deteriorate further. Also, government actions and proposals affecting the terms of underl ying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
The Fund uses its cash balance to meet its collateral obligations and for other purposes. There is no assurance that the Fund's cash balance will be sufficient to meet those obligations. If it is not, the Fund would be required to liquidate portfolio positions. To manage the Fund's cash collateral needs, the Manager reserves the right to reduce or eliminate the Fund's derivative exposures. A reduction in those exposures may cause the performance of the Fund to track its benchmark less closely and make the Fund's performance more dependent on the performance of the asset-backed securities it holds directly or indirectly.
20
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund uses derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund uses derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps (including credit default swaps) or other derivatives on an index, a single security or a basket of securities to gain investment exposures. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. For example, the Fund may use credit default swaps to take an active short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may attempt to alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed vs. variable and shorter duration vs. longer duration. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms
21
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
(e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictability of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
22
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
The following is a consolidated summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options, rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | 244,426 | 244,426 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 244,426 | $ | 244,426 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | (56,971 | ) | (56,971 | ) | |||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | (112,090 | ) | (112,090 | ) | |||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | (169,061 | ) | $ | (169,061 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
23
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options, rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | — | (354,416 | ) | (354,416 | ) | |||||||||||||||||||
Swap contracts | — | — | — | — | 1,712,462 | 1,712,462 | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 1,358,046 | $ | 1,358,046 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options, rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | — | 117,059 | 117,059 | |||||||||||||||||||||
Swap contracts | — | — | — | — | (312,843 | ) | (312,843 | ) | |||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | (195,784 | ) | $ | (195,784 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Futures | Swaps | ||||||||||
Average notional amount outstanding | $ | 5,147,263 | $ | 8,698,254 | |||||||
Highest notional amount outstanding | 5,411,607 | 10,009,814 | |||||||||
Lowest notional amount outstanding | 4,652,597 | 7,200,000 |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.45% of average daily net assets. The Fund has adopted a Shareholder Service Plan under
24
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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%.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.45% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fun d) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 to the extent that the sum of (i) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses) and (ii) the amount of fees and expenses incurred indirectly by the Fund through its investment in GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.45% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.45% of the Fund's average daily net assets.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 | % | 0.002 | % | 0.006 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $226 and $184, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
25
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund's investments in commodity-related derivatives are generally made through GMO Alternative Asset 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
For the period ended August 31, 2009, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 3,028,710 | $ | 1,348,666 | |||||||
Investments (non-U.S. Government securities) | 3,125,880 | 1,520,000 |
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 87.75% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
As of August 31, 2009, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 99.70% of the Fund's shares were held by accounts for which the Manager had investment discretion.
26
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
August 31, 2009 (Unaudited)
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||
Shares sold | — | $ | — | 15 | $ | 388 | |||||||||||||
Shares repurchased | (54,564 | ) | (1,269,793 | ) | (5,333 | ) | (131,245 | ) | |||||||||||
Redemption fees | — | 25,396 | — | 2,617 | |||||||||||||||
Net increase (decrease) | (54,564 | ) | $ | (1,244,397 | ) | (5,318 | ) | $ | (128,240 | ) |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 | $ | 16,010,119 | $ | — | $ | — | $ | 121,841 | $ | — | $ | 15,027,041 | |||||||||||||||
GMO U.S. Treasury Fund | — | 3,125,880 | 1,520,000 | 880 | — | 1,605,970 | |||||||||||||||||||||
Totals | $ | 16,010,119 | $ | 3,125,880 | $ | 1,520,000 | $ | 122,721 | $ | — | $ | 16,633,011 |
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. On September 14, 2009, the Fund's redemption fee was eliminated.
27
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including a one-year period and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees
28
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets u nder management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and expanding existing client 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. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for advisory fees, shareholder fees and most other expenses of the underlying funds 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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,
29
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
30
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including 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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.61 | % | $ | 1,000.00 | $ | 1,170.00 | $ | 3.34 | |||||||||||
2) Hypothetical | 0.61 | % | $ | 1,000.00 | $ | 1,022.13 | $ | 3.11 |
* Expenses are calculated using the Fund's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, 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 Strategic Fixed Income Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 95.9 | % | |||||
Short-Term Investments | 4.4 | ||||||
Options Purchased | 2.6 | ||||||
Loan Participations | 0.2 | ||||||
Swaps | 0.1 | ||||||
Loan Assignments | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Written Options | (0.8 | ) | |||||
Reverse Repurchase Agreements | (2.8 | ) | |||||
Other | 0.4 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) / Shares | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 5.1% | |||||||||||
United States — 5.1% | |||||||||||
U.S. Government | |||||||||||
81,099,600 | U.S. Treasury Inflation Indexed Bond, 0.88% , due 04/15/10 (a) | 80,972,923 | |||||||||
33,000,000 | U.S. Treasury Note, 1.13% , due 01/15/12 | 32,927,796 | |||||||||
Total United States | 113,900,719 | ||||||||||
TOTAL DEBT OBLIGATIONS (COST $116,238,382) | 113,900,719 | ||||||||||
MUTUAL FUNDS — 92.1% | |||||||||||
United States — 92.1% | |||||||||||
Affiliated Issuers | |||||||||||
7,397,456 | GMO Emerging Country Debt Fund, Class IV | 56,960,411 | |||||||||
96,859,391 | GMO Short-Duration Collateral Fund | 1,554,593,219 | |||||||||
41,284 | GMO U.S. Treasury Fund | 1,032,523 | |||||||||
23,773,633 | GMO World Opportunity Overlay Fund | 460,257,541 | |||||||||
Total United States | 2,072,843,694 | ||||||||||
TOTAL MUTUAL FUNDS (COST $2,463,739,773) | 2,072,843,694 | ||||||||||
SHORT-TERM INVESTMENTS — 2.0% | |||||||||||
Money Market Funds — 2.0% | |||||||||||
34,690,005 | State Street Institutional Liquid Reserves Fund-Institutional Class | 34,690,005 | |||||||||
10,100,198 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 10,100,198 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $44,790,203) | 44,790,203 | ||||||||||
TOTAL INVESTMENTS — 99.2% (Cost $2,624,768,358) | 2,231,534,616 | ||||||||||
Other Assets and Liabilities (net) — 0.8% | 17,930,241 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 2,249,464,857 |
See accompanying notes to the financial statements.
2
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Swap Agreements
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
200,000,000 | USD | 10/14/2009 | Barclays Bank Plc | 0.50 | % | Barclays U.S. TIPS | |||||||||||||||||||||
10 Yr + Index Total | |||||||||||||||||||||||||||
Return (a) | $ | 7,302,756 | |||||||||||||||||||||||||
270,000,000 | USD | 10/15/2009 | Barclays Bank Plc | 0.50 | % | Barclays U.S. TIPS 10 Yr + Index Total Return (a) | 10,839,602 | ||||||||||||||||||||
$ | 18,142,358 | ||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
As of August 31, 2009, for the swap contracts held, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
TIPS - Treasury Inflation Protected Securities
(a) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic.
Currency Abbreviations:
USD - United States Dollar
See accompanying notes to the financial statements.
3
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $161,028,585) (Note 2) | $ | 158,690,922 | |||||
Investments in affiliated issuers, at value (cost $2,463,739,773) (Notes 2 and 8) | 2,072,843,694 | ||||||
Receivable for investments sold | 21,187,758 | ||||||
Dividends and interest receivable | 319,615 | ||||||
Receivable for open swap contracts (Note 2) | 18,142,358 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 53,825 | ||||||
Total assets | 2,271,238,172 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 1,426 | ||||||
Payable for Fund shares repurchased | 20,923,688 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 475,061 | ||||||
Shareholder service fee | 115,686 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 5,116 | ||||||
Accrued expenses | 252,338 | ||||||
Total liabilities | 21,773,315 | ||||||
Net assets | $ | 2,249,464,857 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 2,902,268,556 | |||||
Distributions in excess of net investment income | (65,424,699 | ) | |||||
Accumulated net realized loss | (212,287,616 | ) | |||||
Net unrealized depreciation | (375,091,384 | ) | |||||
$ | 2,249,464,857 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 103,285,492 | |||||
Class VI shares | $ | 2,146,179,365 | |||||
Shares outstanding: | |||||||
Class III | 6,420,586 | ||||||
Class VI | 133,548,933 | ||||||
Net asset value per share: | |||||||
Class III | $ | 16.09 | |||||
Class VI | $ | 16.07 |
See accompanying notes to the financial statements.
4
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 13,584,114 | |||||
Interest | 2,590,171 | ||||||
Dividends | 253 | ||||||
Total investment income | 16,174,538 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 2,870,067 | ||||||
Shareholder service fee – Class III (Note 3) | 149,022 | ||||||
Shareholder service fee – Class VI (Note 3) | 576,772 | ||||||
Custodian, fund accounting agent and transfer agent fees | 153,732 | ||||||
Legal fees | 69,552 | ||||||
Audit and tax fees | 34,776 | ||||||
Trustees fees and related expenses (Note 3) | 34,434 | ||||||
Registration fees | 1,012 | ||||||
Miscellaneous | 18,125 | ||||||
Total expenses | 3,907,492 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (242,052 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (102,173 | ) | |||||
Shareholder service fee waived (Note 3) | (25,142 | ) | |||||
Net expenses | 3,538,125 | ||||||
Net investment income (loss) | 12,636,413 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (5,423,686 | ) | |||||
Investments in affiliated issuers | 42,114 | ||||||
Closed futures contracts | 30,988 | ||||||
Closed swap contracts | (80,457,812 | ) | |||||
Written options | 4,913,875 | ||||||
Net realized gain (loss) | (80,894,521 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 3,598,352 | ||||||
Investments in affiliated issuers | 300,282,519 | ||||||
Open futures contracts | (280,619 | ) | |||||
Open swap contracts | 135,530,070 | ||||||
Written options | (2,056,500 | ) | |||||
Net unrealized gain (loss) | 437,073,822 | ||||||
Net realized and unrealized gain (loss) | 356,179,301 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 368,815,714 |
See accompanying notes to the financial statements.
5
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 12,636,413 | $ | 125,135,018 | |||||||
Net realized gain (loss) | (80,894,521 | ) | (297,988,395 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 437,073,822 | (683,189,195 | ) | ||||||||
Net increase (decrease) in net assets from operations | 368,815,714 | (856,042,572 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (878,008 | ) | (8,839,751 | ) | |||||||
Class VI | (8,715,034 | ) | (159,237,634 | ) | |||||||
Total distributions from net investment income | (9,593,042 | ) | (168,077,385 | ) | |||||||
Return of capital | |||||||||||
Class III | (49,671,519 | ) | — | ||||||||
Class VI | (493,035,441 | ) | — | ||||||||
Total distributions from return of capital | (542,706,960 | ) | — | ||||||||
(552,300,002 | ) | (168,077,385 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (104,973,375 | ) | (688,142 | ) | |||||||
Class VI | 63,671,699 | (1,905,410,410 | ) | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (41,301,676 | ) | (1,906,098,552 | ) | |||||||
Redemption fees (Notes 2 and 7): | |||||||||||
Class III | 42,480 | 190,982 | |||||||||
Class VI | 558,877 | 4,100,512 | |||||||||
Increase in net assets resulting from redemption fees | 601,357 | 4,291,494 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (40,700,319 | ) | (1,901,807,058 | ) | |||||||
Total increase (decrease) in net assets | (224,184,607 | ) | (2,925,927,015 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 2,473,649,464 | 5,399,576,479 | |||||||||
End of period (including distributions in excess of net investment income of $65,424,699 and $68,468,070, respectively) | $ | 2,249,464,857 | $ | 2,473,649,464 |
See accompanying notes to the financial statements.
6
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 17.37 | $ | 23.60 | $ | 25.22 | $ | 25.06 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)(b)† | 0.09 | 0.71 | 0.78 | 0.96 | |||||||||||||||
Net realized and unrealized gain (loss) | 2.51 | (5.70 | ) | (1.37 | ) | 0.34 | |||||||||||||
Total from investment operations | 2.60 | (4.99 | ) | (0.59 | ) | 1.30 | |||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.07 | ) | (1.24 | ) | (0.97 | ) | (1.14 | ) | |||||||||||
From net realized gains | — | — | (0.06 | ) | — | ||||||||||||||
Return of capital | (3.81 | ) | — | — | — | ||||||||||||||
Total distributions | (3.88 | ) | (1.24 | ) | (1.03 | ) | (1.14 | ) | |||||||||||
Net asset value, end of period | $ | 16.09 | $ | 17.37 | $ | 23.60 | $ | 25.22 | |||||||||||
Total Return(c) | 17.74 | %** | (21.20 | )% | (2.39 | )% | 5.23 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 103,285 | $ | 227,453 | $ | 277,879 | $ | 226,917 | |||||||||||
Net expenses to average daily net assets(d) | 0.39 | %* | 0.40 | %(e) | 0.38 | %(e) | 0.39 | %* | |||||||||||
Net investment income to average daily net assets(b) | 1.08 | %* | 3.32 | % | 3.12 | % | 5.96 | %* | |||||||||||
Portfolio turnover rate | 19 | %** | 70 | % | 67 | % | 7 | %††** | |||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.03 | %* | 0.03 | % | 0.04 | % | 0.06 | %* | |||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.02 | — | — |
(a) Period from July 13, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds 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 and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(e) The net expense ratio does not include the effect of expense reductions.
(f) 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 period from May 31, 2006 through February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
7
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 17.35 | $ | 23.57 | $ | 25.22 | $ | 25.00 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)(b)† | 0.09 | 0.68 | 0.97 | 0.76 | |||||||||||||||
Net realized and unrealized gain (loss) | 2.51 | (5.64 | ) | (1.55 | ) | 0.61 | |||||||||||||
Total from investment operations | 2.60 | (4.96 | ) | (0.58 | ) | 1.37 | |||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.07 | ) | (1.26 | ) | (1.01 | ) | (1.15 | ) | |||||||||||
From net realized gains | — | — | (0.06 | ) | — | ||||||||||||||
Return of capital | (3.81 | ) | — | — | — | ||||||||||||||
Total distributions | (3.88 | ) | (1.26 | ) | (1.07 | ) | (1.15 | ) | |||||||||||
Net asset value, end of period | $ | 16.07 | $ | 17.35 | $ | 23.57 | $ | 25.22 | |||||||||||
Total Return(c) | 17.73 | %** | (21.09 | )% | (2.35 | )% | 5.52 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 2,146,179 | $ | 2,246,197 | $ | 5,121,698 | $ | 2,224,310 | |||||||||||
Net expenses to average daily net assets(d) | 0.30 | %* | 0.30 | %(e) | 0.29 | %(e) | 0.29 | %* | |||||||||||
Net investment income to average daily net assets(b) | 1.10 | %* | 3.14 | % | 3.87 | % | 4.01 | %* | |||||||||||
Portfolio turnover rate | 19 | %** | 70 | % | 67 | % | 7 | %** | |||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.03 | %* | 0.03 | % | 0.04 | % | 0.06 | %* | |||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.02 | — | — |
(a) Period from May 31, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds 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 and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(e) The net expense ratio does not include the effect of expense reductions.
(f) 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 Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Strategic Fixed Income Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the J.P. Morgan U.S. 3 Month Cash Index. 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. The Fund seeks additional returns by seeking to exploit differences in global interest rates, sectors, and credit, currency, and emerging country debt markets. The Fund may implement its strategies: (i) synthetically by using exchange-traded and over-the-counter ("OTC") derivatives and investing in other series of the Trust and/or (ii) directly by purchasing bonds denominated in various currencies. The Fund has historically gained its investment exposure primarily through the use of derivatives and investments in other series of the Trust. As a result, the Fu nd has substantial holdings of GMO Short-Duration Collateral Fund ("SDCF") (a Fund that invests primarily in asset-backed securities) and GMO World Opportunity Overlay Fund ("Overlay Fund") (a Fund that invests in asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Under normal circumstances, the Fund invests (directly or indirectly through investment in other series of the Trust) at least 80% of its assets in fixed income securities. For these purposes, "fixed income securities" includes (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by using a futures contract, swap contract, currency forward or option. To implement its investment strategies, the Fund may invest in or hold: investment-grade bonds denominated in various currencies, including foreign and U.S. government securities and asset-backed securities issued by fore ign governments and U.S. government agencies (including securities neither guaranteed nor insured by the U.S. government), corporate bonds, and mortgage-backed and other asset-backed securities issued by private issuers; derivatives, including without limitation, futures contracts, currency options, interest rate options, currency forwards, credit default swaps and other swap contracts; shares of SDCF (to gain exposure to asset-backed securities); shares of Overlay Fund (to attempt to exploit misvaluations in world interest rates, currencies, and credit markets); shares of GMO Emerging Country Debt Fund ("ECDF") (to gain exposure to sovereign debt of emerging countries); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). Because of the deterioration in credit markets that became acute in 2008, the Fund through its investment in SDCF and Overlay Fund currently holds and may continue to hold
9
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
material positions of below investment grade securities. This is in addition to the Fund's emerging country debt investments. The Fund also invests in unaffiliated money market funds.
As of August 31, 2009, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
Since April 2009, the Fund has declared and paid dividends when it has acquired a meaningful cash position rather than reinvesting that cash in portfolio securities. The Fund intends to continue this practice for the time being.
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). As of August 31, 2009, shares of SDCF and Overlay Fund were not publicly available for direct purchase.
From prior to March 1, 2009 through July 12, 2009, the Fund had a policy to effect redemptions of its shares in-kind above de minimis levels. The Fund had established de minimis amounts below which redemptions would be honored for cash. Beginning July 13, 2009, the Fund had a policy to pay redemption requests with cash (less a redemption fee).
The Fund was not offering shares for purchase as of August 31, 2009.
On March 19, 2009, the Trustees approved GMO's plan to maximize the amount of cash distributed to shareholders that represents receipts on its portfolio holdings (including shares of the underlying funds) and from dispositions of those holdings. The plan was adopted in light of the requirements of Section 562 (b) of the Code and calls for the Fund to cease operations within 2 years. For purposes of meeting that timetable, the Fund may distribute securities (including shares of the underlying funds) in-kind (See Note 9 — Subsequent events).
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
As of August 31, 2009, a significant portion of the Fund's dividends received from other GMO funds is expected to be a return of capital for U.S. federal income tax purposes. Accordingly, "dividends from affiliated issuers" reported in the Statement of Operations has been reduced by the portion estimated to be
10
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
a return of capital as of August 31, 2009. The estimated return of capital is $324,423,529. In addition, all applicable related income disclosures throughout this Semiannual Report have been adjusted by the estimated return of capital. Furthermore, the "distributions to shareholders from return of capital" disclosed in the Statement of Changes in Net Assets and Financial Highlights are also estimates as of August 31, 2009. Both the dividends from affiliated issuers and distributions to shareholders from return of capital are subject to change and will not be finalized until February 28, 2010, the Fund's upcoming fiscal year-end. Finally, in early 2010, applicable shareholders will receive Form 1099-DIV that will indicate the appropriate tax character of all distributions paid by the Fund in 2009.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by the Fund, those alternative sources would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fu nd. As of August 31, 2009, the total value of securities held directly and indirectly that were fair valued or for which no alternative pricing source was available represented 18.34% of the net assets of the Fund.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the
11
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
U.S. Government | $ | 32,927,796 | $ | 80,972,923 | $ | — | $ | 113,900,719 | |||||||||||
TOTAL DEBT OBLIGATIONS | 32,927,796 | 80,972,923 | — | 113,900,719 | |||||||||||||||
Mutual Funds | 57,992,934 | 2,014,850,760 | — | 2,072,843,694 | |||||||||||||||
Short-Term Investments | — | 44,790,203 | — | 44,790,203 | |||||||||||||||
Total Investments | 90,920,730 | 2,140,613,886 | — | 2,231,534,616 | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements | — | 18,142,358 | — | 18,142,358 | |||||||||||||||
Total | $ | 90,920,730 | $ | 2,158,756,244 | $ | — | $ | 2,249,676,974 |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's indirect investments in securities and other financial instruments using Level 3 inputs were 70.99% and (0.16)% of total net assets, respectively.
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
12
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the
13
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
14
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
For the period ended August 31, 2009, investment activity in written options contracts was as follows:
Puts | Calls | ||||||||||||||||||||||||||
Principal Amount of Contracts | Number of Contracts | Premiums | Principal Amount of Contracts | Number of Contracts | Premiums | ||||||||||||||||||||||
Outstanding, beginning of period | $ | — | — | $ | — | $ | — | (3,000 | ) | $ | (3,462,750 | ) | |||||||||||||||
Options written | — | — | — | — | (1,000 | ) | (1,451,125 | ) | |||||||||||||||||||
Options exercised | — | — | — | — | — | — | |||||||||||||||||||||
Options expired | — | — | — | — | 3,000 | 3,462,750 | |||||||||||||||||||||
Options sold | — | — | — | — | 1,000 | 1,451,125 | |||||||||||||||||||||
Outstanding, end of period | $ | — | — | $ | — | $ | — | — | $ | — |
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Loan agreements
The Fund may invest in loans to corporate, governmental, or other borrowers. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans. A loan is often administered by a bank or other financial institution 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, (i) the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the party from whom the Fund has purchased the participation and only upon receipt by that party of payments from the borrower and (ii) the Fund generally has no right to enforce compliance by the borrower with the terms of the loan agreement. As a result, the Fund may be subject to credit risk both of the party from whom it purchased the loan participation and the borrower. When the Fund purcha ses assignments of loans, it acquires direct rights against the borrower. The Fund had no loan agreements outstanding at the end of the period.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
15
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
16
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at a later date at a fixed price. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which can cause the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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
17
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, if any, at least annually. The Fund is permitted to, and will from time to time, declare and pay distributions from net investment income, if any, more frequently (e.g. monthly). As of August 31, 2009, all distributions have been paid in cash. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $92,972,393 and post-October currency losses of $6,458,589.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (137,475,668 | ) | ||||
Total | $ | (137,475,668 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 2,587,632,902 | $ | — | $ | (356,098,286 | ) | $ | (356,098,286 | ) |
18
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 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 incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
From prior to March 1, 2009 through August 2, 2009, the fee on cash redemptions was 2.00% of the amount redeemed. From August 3, 2009 through August 31, 2009, the fee on cash redemptions was 1.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or
19
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of e stimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. Many of these risks are more pronounced as a result of current global economic conditions that began to unfold in 2008. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to an OTC derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security, will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses OTC derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Le hman Brothers and subsequent market disruptions.
20
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. The Fund may be required to sell certain less liquid securities at distressed prices or meet redemption requests in-kind. Recent changes in credit markets have reduced the liquidity of all types of fixed income securities, including in particular the asset-backed securities held by the Fund through SDCF and Overlay Fund.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected.
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Leveraging Risk (increased risks from use of reverse repurchase agreeme nts and other derivatives and securities lending), Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies), Focused Investment Risk (increased risk from the Fund's focus on investments in countries, regions, or sectors with high positive correlations to one another), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. Certain of the above-referenced risks will be more pronounced for the Fund as a result of its investment in ECDF. For more information about reverse repurchase agreements and other derivatives, please refer to the descriptions of financial instruments (e.g. reverse repurchase agreements, swaps, futures and other types of derivative contracts) in Note 2 above as well as the discussion of the Fund's use of derivatives below.
The Fund invests (including through investment in underlying funds) in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of u nderlying assets or other support available to produce the cash flows necessary to service
21
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities generally. These events reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not continue or that they will not deteriorate further. Also, government actions and proposals affecting the terms of underl ying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
The Fund uses its cash balance to meet its collateral obligations and for other purposes. There is no assurance that the Fund's cash balance will be sufficient to meet those obligations. If it is not, the Fund would be required to liquidate portfolio positions. To manage the Fund's cash collateral needs, the Manager reserves the right to reduce or eliminate the Fund's derivative exposures. A reduction in those exposures may cause the performance of the Fund to track its benchmark less closely and make the Fund's performance more dependent on the performance of the asset-backed securities it holds directly or indirectly.
Among other trading agreements, the Fund is party to International Swaps and Derivatives Association, Inc. Master Agreements ("ISDA Agreements") with select counterparties that generally
22
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
govern over-the-counter derivative transactions entered into by the Fund. The ISDA Master Agreements typically include representations and warranties as well as contractual terms related to collateral, events of default, termination events, and other provisions. Termination events include the decline in the net assets of the Fund below a certain level over a specified period of time and entitle a counterparty to elect to terminate early with respect to some or all the transactions under the ISDA Agreement with that counterparty. Such an election by one or more of the counterparties could have a material adverse impact on the Fund's operations. Due to declines in the net assets of the Fund prior to August 31, 2009, one or more counterparties are entitled to terminate early but none has taken such action.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund uses derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund uses derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps (including credit default swaps) or other derivatives on an index, a single security or a basket of securities to gain investment exposures. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. For example, the Fund may use credit default swaps to take an active short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
23
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may attempt to alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed vs. variable and shorter duration vs. longer duration. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
24
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
25
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | 18,142,358 | — | — | — | — | 18,142,358 | |||||||||||||||||||||
Total | $ | 18,142,358 | $ | — | $ | — | $ | — | $ | — | $ | 18,142,358 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
26
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | 30,988 | — | — | — | — | 30,988 | |||||||||||||||||||||
Swap contracts | (80,457,812 | ) | — | — | — | — | (80,457,812 | ) | |||||||||||||||||||
Written options | 4,913,875 | — | — | — | — | 4,913,875 | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | (75,512,949 | ) | $ | — | $ | — | $ | — | $ | — | $ | (75,512,949 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | 2,302,874 | $ | — | $ | — | $ | — | $ | — | $ | 2,302,874 | |||||||||||||||
Futures contracts | (280,619 | ) | — | — | — | — | (280,619 | ) | |||||||||||||||||||
Swap contracts | 135,530,070 | — | — | — | — | 135,530,070 | |||||||||||||||||||||
Written options | (2,056,500 | ) | — | — | — | — | (2,056,500 | ) | |||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | 135,495,825 | $ | — | $ | — | $ | — | $ | — | $ | 135,495,825 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Futures | Swaps | Options | |||||||||||||
Average notional amount outstanding | $ | 7,301,259 | $ | 2,647,805,523 | $ | 85,714,286 | |||||||||
Highest notional amount outstanding | 51,108,813 | 15,643,319,332 | 600,000,000 | ||||||||||||
Lowest notional amount outstanding | — | 470,000,000 | — |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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
27
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 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 and 0.055% for Class VI shares; provided, however, that the amount of this waiver will not exceed the respective Class's shareholder service fee.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.25% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 to the extent that the sum of (a) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses); (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in ECDF (excluding ECDF's Excluded Fund Fees and Expenses); and (c) the amount of fees and expenses incurred indirectly (through investment in other underlying funds) by the Fund through its (direct or indirect) investment in GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.25% of the Fund's average daily net assets, subject to a maximum total reimbursement to such Fund equ al to 0.25% of the Fund's average daily net assets.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 | % | 0.002 | % | 0.011 | % | 0.027 | % |
28
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $29,466 and $11,316, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
4. Purchases and sales of securities
For the period ended August 31, 2009, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | — | $ | 16,962,813 | |||||||
Investments (non-U.S. Government securities) | 377,052,780 | 375,098,875 |
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 74.32% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. Two of the shareholders are other funds of the Trust.
As of August 31, 2009, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 99.79% of the Fund's shares were held by accounts for which the Manager had investment discretion.
29
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 102,086 | $ | 1,774,254 | 6,706,775 | $ | 123,683,482 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 400,493 | 7,025,456 | |||||||||||||||
Shares repurchased | (6,775,867 | ) | (106,747,629 | ) | (5,789,615 | ) | (131,397,080 | ) | |||||||||||
Redemption fees | — | 42,480 | — | 190,982 | |||||||||||||||
Net increase (decrease) | (6,673,781 | ) | $ | (104,930,895 | ) | 1,317,653 | $ | (497,160 | ) | ||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 5,504,041 | $ | 86,785,072 | 3,935,250 | $ | 89,019,736 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 9,080,584 | 159,234,461 | |||||||||||||||
Shares repurchased | (1,429,232 | ) | (23,113,373 | ) | (100,806,037 | ) | (2,153,664,607 | ) | |||||||||||
Redemption fees | — | 558,877 | — | 4,100,512 | |||||||||||||||
Net increase (decrease) | 4,074,809 | $ | 64,230,576 | (87,790,203 | ) | $ | (1,901,309,898 | ) |
30
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 | $ | 43,275,117 | $ | — | $ | — | $ | 888,434 | $ | — | $ | 56,960,411 | |||||||||||||||
GMO Short-Duration Collateral Fund | 1,656,295,579 | — | — | 12,604,862 | — | 1,554,593,219 | |||||||||||||||||||||
GMO U.S. Treasury Fund | — | 375,690,818 | 374,700,000 | 90,818 | $ | — | 1,032,523 | ||||||||||||||||||||
GMO World Opportunity Overlay Fund | 436,246,172 | — | — | — | — | 460,257,541 | o | ||||||||||||||||||||
Totals | $ | 2,135,816,868 | $ | 375,690,818 | $ | 374,700,000 | $ | 13,584,114 | $ | — | $ | 2,072,843,694 |
o The Fund received return of capital distributions in the amount of $39,865,097.
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. On September 14, 2009, the fund's redemption fee was eliminated.
On March 19, 2009, the Trustees of the Trust adopted a plan to cease the operations of the Fund within two years of that date. On October 19, 2009, the Trustees revoked that plan. "Distributions to shareholders", as disclosed in the Statement of Changes in Net Assets and the Financial Highlights for the period ended August 31, 2009 ("the statements"), have been adjusted to reclassify a portion of the distributions initially declared as a "return of capital" to "distributions from net investment income". The estimated sources of the distributions to shareholders as disclosed in the statements are subject to reclassification (depending on subsequent Fund operations) and will not be finalized until February 28, 2010, the Fund's fiscal year-end.
The Fund previously reported the estimated sources of "distributions from return of capital" paid on a per share basis. Pursuant to Rule 19a-1(e) of the Investment Company Act of 1940, the following serves as an update to the previously reported estimated sources of the distributions paid to shareholders. 1.74% of the distributions designated as "distributions from return of capital" in the 6 month period ended August 31, 2009 has been reclassified as distributions from "dividends" (income derived from dividends, interest and other income sources).
31
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including a one-year period and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel receiv ed from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
32
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, 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 to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to separate accoun t clients and the impact on the Manager of, and expenses and risks associated with, the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management b y, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and expanding existing client 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. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for advisory fees, shareholder fees and most other expenses of the underlying funds 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 u nder the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record
33
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
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. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
34
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including 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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.42 | % | $ | 1,000.00 | $ | 1,177.40 | $ | 2.31 | |||||||||||
2) Hypothetical | 0.42 | % | $ | 1,000.00 | $ | 1,023.09 | $ | 2.14 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.33 | % | $ | 1,000.00 | $ | 1,177.30 | $ | 1.81 | |||||||||||
2) Hypothetical | 0.33 | % | $ | 1,000.00 | $ | 1,023.54 | $ | 1.68 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
35
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 74.1 | % | |||||
Short-Term Investments | 26.3 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Swaps | (0.1 | ) | |||||
Reverse Repurchase Agreements | (0.3 | ) | |||||
Other | 0.0 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) / Shares | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 18.8% | |||||||||||
U.S. Government Agency — 18.8% | |||||||||||
81,667 | Agency for International Development Floater (Support of Botswana), 6 mo. U.S. Treasury Bill + .40%, 0.66%, due 10/01/12 (a) | 79,480 | |||||||||
526,725 | Agency for International Development Floater (Support of C.A.B.E.I), 6 mo. U.S. Treasury Bill + .40%, 0.66%, due 10/01/12 (a) | 512,574 | |||||||||
420,792 | Agency for International Development Floater (Support of Honduras), 3 mo. U.S. Treasury Bill x 117%, 0.26%, due 10/01/11 (a) | 410,716 | |||||||||
29,952 | Agency for International Development Floater (Support of Peru), Series B, 6 mo. U.S. Treasury Bill +.35%, 0.61%, due 05/01/14 (a) | 28,704 | |||||||||
231,581 | Small Business Administration Pool #502320, Prime - 2.19%, 1.06%, due 08/25/18 | 230,086 | |||||||||
Total U.S. Government Agency | 1,261,560 | ||||||||||
TOTAL DEBT OBLIGATIONS (COST $1,290,473) | 1,261,560 | ||||||||||
MUTUAL FUNDS — 80.5% | |||||||||||
Affiliated Issuers — 80.5% | |||||||||||
231,576 | GMO Short-Duration Collateral Fund | 3,716,797 | |||||||||
9,192 | GMO Special Purpose Holding Fund (b) | 5,791 | |||||||||
67,257 | GMO U.S. Treasury Fund | 1,682,108 | |||||||||
TOTAL MUTUAL FUNDS (COST $6,337,256) | 5,404,696 |
See accompanying notes to the financial statements.
2
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 0.8% | |||||||||||
Money Market Funds — 0.8% | |||||||||||
55,165 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 55,165 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $55,165) | 55,165 | ||||||||||
TOTAL INVESTMENTS — 100.1% (Cost $7,682,894) | 6,721,421 | ||||||||||
Other Assets and Liabilities (net) — (0.1%) | (5,201 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 6,716,220 |
Notes to Schedule of Investments:
C.A.B.E.I. - Central American Bank for Economic Integration
The rates shown on variable rate notes are the current interest rates at August 31, 2009, which are subject to change based on the terms of the 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) Underlying investment represents interests in defaulted securities.
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, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $1,345,638) (Note 2) | $ | 1,316,725 | |||||
Investments in affiliated issuers, at value (cost $6,337,256) (Notes 2 and 8) | 5,404,696 | ||||||
Receivable for investments sold | 4,123 | ||||||
Dividends and interest receivable | 3,557 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 3,751 | ||||||
Total assets | 6,732,852 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 368 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 283 | ||||||
Shareholder service fee | 850 | ||||||
Accrued expenses | 15,131 | ||||||
Total liabilities | 16,632 | ||||||
Net assets | $ | 6,716,220 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 10,381,184 | |||||
Distributions in excess of net investment income | (16,076 | ) | |||||
Accumulated net realized loss | (2,687,415 | ) | |||||
Net unrealized depreciation | (961,473 | ) | |||||
$ | 6,716,220 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 6,716,220 | |||||
Shares outstanding: | |||||||
Class III | 864,687 | ||||||
Net asset value per share: | |||||||
Class III | $ | 7.77 |
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, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 32,064 | |||||
Interest | 4,689 | ||||||
Dividends | 173 | ||||||
Total investment income | 36,926 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 1,618 | ||||||
Shareholder service fee – Class III (Note 3) | 4,852 | ||||||
Audit and tax fees | 18,768 | ||||||
Registration fees | 2,117 | ||||||
Custodian, fund accounting agent and transfer agent fees | 1,012 | ||||||
Legal fees | 184 | ||||||
Trustees fees and related expenses (Note 3) | 50 | ||||||
Total expenses | 28,601 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (22,080 | ) | |||||
Net expenses | 6,521 | ||||||
Net investment income (loss) | 30,405 | ||||||
Realized and unrealized gain (loss): | |||||||
Investments in unaffiliated issuers | 40 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 16,336 | ||||||
Investments in affiliated issuers | 531,755 | ||||||
Net unrealized gain (loss) | 548,091 | ||||||
Net realized and unrealized gain (loss) | 548,131 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 578,536 |
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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 30,405 | $ | 264,898 | |||||||
Net realized gain (loss) | 40 | 20,786 | |||||||||
Change in net unrealized appreciation (depreciation) | 548,091 | (1,134,234 | ) | ||||||||
Net increase (decrease) in net assets from operations | 578,536 | (848,550 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (47,230 | ) | (264,963 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | (44,388 | ) | (34,132 | ) | |||||||
Redemption fees (Notes 2 and 7): | |||||||||||
Class III | 1,201 | 352 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (43,187 | ) | (33,780 | ) | |||||||
Total increase (decrease) in net assets | 488,119 | (1,147,293 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 6,228,101 | 7,375,394 | |||||||||
End of period (including distributions in excess of net investment income of $16,076 and accumulated undistributed net investment income of $749, respectively) | $ | 6,716,220 | $ | 6,228,101 |
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.15 | $ | 8.45 | $ | 8.93 | $ | 8.82 | $ | 8.77 | $ | 8.75 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.04 | 0.30 | 0.32 | 0.47 | 0.27 | 0.23 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.63 | (1.29 | ) | (0.28 | ) | 0.11 | 0.07 | (0.01 | ) | ||||||||||||||||||
Total from investment operations | 0.67 | (0.99 | ) | 0.04 | 0.58 | 0.34 | 0.22 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.05 | ) | (0.31 | ) | (0.52 | ) | (0.47 | ) | (0.29 | ) | (0.20 | ) | |||||||||||||||
Total distributions | (0.05 | ) | (0.31 | ) | (0.52 | ) | (0.47 | ) | (0.29 | ) | (0.20 | ) | |||||||||||||||
Net asset value, end of period | $ | 7.77 | $ | 7.15 | $ | 8.45 | $ | 8.93 | $ | 8.82 | $ | 8.77 | |||||||||||||||
Total Return(b) | 9.47 | %** | (11.78 | )% | 0.40 | % | 6.62 | % | 3.83 | % | 2.49 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 6,716 | $ | 6,228 | $ | 7,375 | $ | 31,315 | $ | 29,454 | $ | 29,607 | |||||||||||||||
Net expenses to average daily net assets(c) | 0.20 | %* | 0.20 | % | 0.20 | % | 0.20 | % | 0.20 | % | 0.20 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 0.94 | %* | 3.81 | % | 3.59 | % | 5.21 | % | 3.01 | % | 2.57 | % | |||||||||||||||
Portfolio turnover rate | 3 | %** | 4 | % | 5 | % | 12 | % | 17 | % | 101 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.68 | %* | 0.79 | % | 0.60 | % | 0.14 | % | 0.13 | % | 0.10 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (d) | $ | 0.00 | (d) | — | — | — | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds 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 and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(d) 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 Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Short-Duration Investment Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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. To implement its investment strategies, the Fund may invest in asset-backed securities issued by private issuers, U.S. government and agency securities (including securities neither guaranteed nor insured by the U.S. government), corporate debt securities, money market instruments, prime commercial paper and master demand notes, and certificates of deposit, bankers' acceptances, and other bank obligations. The Fund has invested a substantial portion of its assets in GMO Short-Duration Collateral Fund ("SDCF") (which invests primarily in asset-backed securities). Because of the deterioration in credit markets that became acute in 2008, the Fund, in particular through its holdings of SDCF, currently holds and may continue to hold material positions of below investment grade securities. The Fund also invests in unaffili ated money market funds and in GMO U.S. Treasury Fund. The Fund is not a money market fund and is not subject to the duration, quality, diversification, and other requirements applicable to money market funds. The Fund's benchmark is the J.P. Morgan U.S. 3 Month Cash Index.
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). As of August 31, 2009, shares of GMO Special Purpose Holding Fund ("SPHF") and SDCF were not publicly available for direct purchase.
From prior to March 1, 2009 through July 12, 2009, the Fund had a policy to effect redemptions of its shares in-kind above de minimis levels. The Fund had established de minimis amounts below which redemptions would be honored for cash. Begining July 13, 2009, the Fund had a policy to pay redemption requests with cash (less a redemption fee).
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP
8
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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. The accounting records of the Fund are maintained in U.S. dollars.
As of August 31, 2009, a significant portion of the Fund's dividends received from other GMO funds is expected to be a return of capital for U.S. federal income tax purposes. Accordingly, "dividends from affiliated issuers" reported in the Statement of Operations has been reduced by the portion estimated to be a return of capital as of August 31, 2009. The estimated return of capital is $775,648. In addition, all applicable related income disclosures throughout this Semiannual Report have been adjusted by the estimated return of capital. The dividends from affiliated issuers are subject to change and will not be finalized until February 28, 2010, the Fund's upcoming fiscal year-end. Finally, in early 2010, applicable shareholders will receive Form 1099-DIV that will indicate the appropriate tax character of all distributions paid by the Fund in 2009.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by the Fund, those alternative sources would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fu nd. As of August 31, 2009, the total value of securities held directly and indirectly that were fair valued or for which no alternative pricing source was available represented 29.60% of the net assets of the Fund.
9
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund valued debt securities using a specified spread above the LIBOR Rate.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
U.S. Government Agency | $ | — | $ | 230,086 | $ | 1,031,474 | $ | 1,261,560 | |||||||||||
TOTAL DEBT OBLIGATIONS | — | 230,086 | 1,031,474 | 1,261,560 | |||||||||||||||
Mutual Funds | 1,682,108 | 3,722,588 | — | 5,404,696 | |||||||||||||||
Short-Term Investments | — | 55,165 | — | 55,165 | |||||||||||||||
Total Investments | $ | 1,682,108 | $ | 4,007,839 | $ | 1,031,474 | $ | 6,721,421 |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 60.36% and (0.13)% of total net assets, respectively.
10
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Debt Obligations U.S. Government Agency | $ | 1,195,846 | $ | (172,755 | ) | $ | 30 | $ | 40 | $ | 14,104 | $ | (5,791 | ) | $ | 1,031,474 | |||||||||||||||
Total | $ | 1,195,846 | $ | (172,755 | ) | $ | 30 | $ | 40 | $ | 14,104 | $ | (5,791 | ) | $ | 1,031,474 |
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or
11
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/29/2012 | $ | (470,429 | ) | ||||
2/28/2013 | (708 | ) | |||||
2/28/2014 | (1,377,141 | ) | |||||
2/29/2016 | (226,383 | ) | |||||
Total | $ | (2,074,661 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 8,299,462 | $ | 53,593 | $ | (1,631,634 | ) | $ | (1,578,041 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted
12
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
From prior to March 1, 2009 through August 2, 2009, the fee on cash redemptions was 2.00% of the amount redeemed. From August 3, 2009 through August 31, 2009, the fee on cash redemptions was 1.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relat ing to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
13
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. Many of these risks are more pronounced as a result of current global economic conditions that began to unfold in 2008. This summary is not intended to include every potential risk of investing in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. The Fund may be required to sell certain less liquid securities at distressed prices or to meet redemption requests in-kind. Recent changes in credit markets have reduced the liquidity of all types of fixed income securities, including in particular the asset-backed securities held by the Fund through SDCF. The Fund invests in fixed income securities, in particular asset-backed securities, that may be less liquid than the securities in its benchmark. As a result, the Fund's investments may not be as liquid as those of other short-duration fixed income funds.
• Focused Investment Risk — Focusing investments in countries, regions, or sectors with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for the Fund because of its exposure to asset-backed securities secured by different types of consumer debt (e.g., credit-card receivables, automobile loans, and home equity loans).
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected.
Other principal risks of an investment in the Fund include Derivatives Risk (use of derivatives by the Fund or SDCF involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund or SDCF), Credit and Counterparty Risk (risk of default of an issuer of a portfolio security or a derivatives counterparty of an underlying fund or borrower of an underlying fund's securities), Management Risk (risk that th e Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or
14
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
redeeming Fund shares in large amounts and/or on a frequent basis). The Fund and SDCF are non-diversified investment companies under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund or SDCF may affect the Fund's performance more than if the Fund or SDCF were diversified. For more information about reverse repurchase agreements and other derivatives, please refer to the descriptions of financial instruments (e.g. reverse repurchase agreements, swaps, futures and other types of derivative contracts) in Note 2 above as well as the discussion of the Fund's use of derivatives below.
The Fund invests (including through investment in underlying funds) in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of u nderlying assets or other support available to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities generally. These events reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not continue or that they will not deteriorate further. Also, government actions and proposals affecting the terms of underl ying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some
15
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund adopted SFAS 161 on March 1, 2009. As of August 31, 2009, the Fund held no derivative contracts for the purposes of SFAS 161.
Other Matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the period ended August 31, 2009, the Fund received no distributions through SPHF in connection with settlement agreements related to that litigation.
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.05% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging
16
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.05% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.05% of the Fund's average daily net assets.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 | ||||||||||||
0.037 | % | 0.000 | % | 0.002 | % | 0.039 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO the period ended August 31, 2009 was $50 and $0, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $1,681,928 and $185,103, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
17
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2009, 55.73% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
As of August 31, 2009, 13.89% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 77.90% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | 4 | $ | 32 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 3,480 | 25,773 | 23,717 | 175,909 | |||||||||||||||
Shares repurchased | (9,601 | ) | (70,161 | ) | (25,867 | ) | (210,073 | ) | |||||||||||
Redemption fees | — | 1,201 | — | 352 | |||||||||||||||
Net increase (decrease) | (6,121 | ) | $ | (43,187 | ) | (2,146 | ) | $ | (33,780 | ) |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 | $ | 3,959,951 | $ | — | $ | — | $ | 30,136 | $ | — | $ | 3,716,797 | |||||||||||||||
GMO Special Purpose Holding Fund | 6,710 | — | — | — | — | 5,791 | |||||||||||||||||||||
GMO U.S. Treasury Fund | — | 1,681,928 | — | 1,928 | — | 1,682,108 | |||||||||||||||||||||
Totals | $ | 3,966,661 | $ | 1,681,928 | $ | — | $ | 32,064 | $ | — | $ | 5,404,696 |
18
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. On September 14, 2009, the Fund's redemption fee was eliminated
19
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The
20
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for advisory fees, shareholder fees and most other expenses of the underlying funds 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management
21
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
22
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including 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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.24 | % | $ | 1,000.00 | $ | 1,094.70 | $ | 1.27 | |||||||||||
2) Hypothetical | 0.24 | % | $ | 1,000.00 | $ | 1,024.00 | $ | 1.22 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, 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 International Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO International Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 88.6 | % | |||||
Short-Term Investments | 12.1 | ||||||
Options Purchased | 2.0 | ||||||
Futures | 0.9 | ||||||
Forward Currency Contracts | 0.4 | ||||||
Loan Participations | 0.2 | ||||||
Loan Assignments | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Swaps | (0.5 | ) | |||||
Written Options | (0.6 | ) | |||||
Reverse Repurchase Agreements | (2.3 | ) | |||||
Other | (0.9 | ) | |||||
100.0 | % | ||||||
Country Summary** | % of Investments | ||||||
Euro Region*** | 52.8 | % | |||||
Japan | 26.2 | ||||||
United Kingdom | 14.1 | ||||||
Emerging**** | 4.5 | ||||||
Canada | 4.1 | ||||||
Australia | 2.4 | ||||||
Sweden | 0.4 | ||||||
United States | (4.5 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative contracts. Duration is based on the Manager's models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and negative) are factored into the duration-adjusted exposure using the reference security and applying the same methodology to that security.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
**** The "Emerging" exposure is associated with investments in the GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Uruguay, Turkey, and Indonesia. Additional information about the fund's emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
1
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 22.2% | |||||||||||||||
Canada — 1.1% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
CAD | 1,760,000 | Government of Canada, 8.00%, due 06/01/23 | 2,318,634 | ||||||||||||
France — 2.9% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
EUR | 4,500,000 | Government of France, 4.00%, due 10/25/38 | 6,335,075 | ||||||||||||
Germany — 3.3% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
EUR | 4,500,000 | Republic of Deutschland, 4.75%, due 07/04/34 (a) | 7,116,960 | ||||||||||||
Japan — 7.4% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
JPY | 1,438,400,000 | Japan Government Twenty Year Bond, 2.20%, due 06/20/26 | 16,028,305 | ||||||||||||
United Kingdom — 3.6% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
GBP | 4,500,000 | U.K. Treasury Gilt, 4.25%, due 12/07/27 | 7,661,302 | ||||||||||||
United States — 3.9% | |||||||||||||||
U.S. Government | |||||||||||||||
USD | 8,411,594 | U.S. Treasury Inflation Indexed Bond, 0.88%, due 04/15/10 (a) (b) | 8,398,455 | ||||||||||||
TOTAL DEBT OBLIGATIONS (COST $47,087,642) | 47,858,731 |
See accompanying notes to the financial statements.
2
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 74.5% | |||||||||||||||
United States — 74.5% | |||||||||||||||
Affiliated Issuers | |||||||||||||||
1,026,942 | GMO Emerging Country Debt Fund, Class III | 7,907,457 | |||||||||||||
6,390,009 | GMO Short-Duration Collateral Fund | 102,559,652 | |||||||||||||
37,466 | GMO Special Purpose Holding Fund (c) | 23,604 | |||||||||||||
613,955 | GMO U.S. Treasury Fund | 15,355,011 | |||||||||||||
1,778,001 | GMO World Opportunity Overlay Fund | 34,422,091 | |||||||||||||
Total United States | 160,267,815 | ||||||||||||||
TOTAL MUTUAL FUNDS (COST $185,774,272) | 160,267,815 | ||||||||||||||
SHORT-TERM INVESTMENTS — 3.0% | |||||||||||||||
Money Market Funds — 3.0% | |||||||||||||||
6,473,900 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 6,473,900 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $6,473,900) | 6,473,900 | ||||||||||||||
TOTAL INVESTMENTS — 99.7% (Cost $239,335,814) | 214,600,446 | ||||||||||||||
Other Assets and Liabilities (net) — 0.3% | 549,959 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 215,150,405 |
See accompanying notes to the financial statements.
3
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys † | |||||||||||||||||||
10/20/09 | AUD | 900,000 | $ | 757,805 | $ | 9,905 | |||||||||||||
9/01/09 | AUD | 900,000 | 760,680 | 58,680 | |||||||||||||||
9/08/09 | CAD | 2,600,000 | 2,375,017 | 49,436 | |||||||||||||||
10/06/09 | EUR | 52,700,000 | 75,553,112 | (310,646 | ) | ||||||||||||||
9/15/09 | GBP | 4,300,000 | 6,999,967 | (92,883 | ) | ||||||||||||||
10/13/09 | JPY | 5,590,000,000 | 60,092,174 | 1,049,323 | |||||||||||||||
$ | 146,538,755 | $ | 763,815 | ||||||||||||||||
Sales # | |||||||||||||||||||
9/01/09 | AUD | 900,000 | $ | 760,680 | $ | (9,990 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
Forward Cross Currency Contracts
Settlement Date | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | ||||||||||||
9/22/09 | EUR | 1,300,000 | SEK | 13,585,000 | $ | 44,841 |
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
17 | Australian Government Bond 10 Yr. | September 2009 | $ | 1,503,915 | $ | 7,980 | |||||||||||||
29 | Australian Government Bond 3 Yr. | September 2009 | 2,516,526 | (25,664 | ) | ||||||||||||||
33 | Canadian Government Bond 10 Yr. | December 2009 | 3,632,336 | 14,010 | |||||||||||||||
215 | Euro Bund | September 2009 | 37,797,490 | 1,199,187 | |||||||||||||||
169 | Euro BOBL | September 2009 | 28,174,541 | 449,499 | |||||||||||||||
400 | Federal Funds 30 day | September 2009 | 166,388,310 | (9,206 | ) |
See accompanying notes to the financial statements.
4
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Futures Contracts — continued
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
12 | Japanese Government Bond 10 Yr. (TSE) | September 2009 | $ | 17,942,612 | $ | 398,193 | |||||||||||||
3 | U.S. Treasury Note 5 Yr. (CBT) | December 2009 | 345,750 | 1,494 | |||||||||||||||
63 | UK Gilt Long Bond | December 2009 | 12,151,419 | 34,605 | |||||||||||||||
$ | 270,452,899 | $ | 2,070,098 | ||||||||||||||||
Sales | |||||||||||||||||||
2 | U.S. Treasury Bond (CBT) | December 2009 | $ | 239,500 | $ | (1,311 | ) | ||||||||||||
14 | U.S. Treasuy Note 2 Yr. (CBT) | December 2009 | 3,028,813 | (6,962 | ) | ||||||||||||||
52 | U.S. Treasury Note 10 Yr. (CBT) | December 2009 | 6,095,375 | (35,093 | ) | ||||||||||||||
$ | 9,363,688 | $ | (43,366 | ) |
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
21,000,000 | USD | 3/20/2014 | Deutsche | (Pay) | 1.70 | % | 0.71 | % | Republic of | NA | $ | (960,257 | ) | ||||||||||||||||||||||||||||||
Bank AG | Italy | ||||||||||||||||||||||||||||||||||||||||||
15,000,000 | USD | 3/20/2019 | Deutsche | Receive | 1.66 | % | 0.77 | % | Republic of | 15,000,000 | USD | 1,109,783 | |||||||||||||||||||||||||||||||
Bank AG | Italy | ||||||||||||||||||||||||||||||||||||||||||
$ | 149,526 | ||||||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
^ Receive - Fund receives premium and sells credit protection. (Pay) - Fund pays premium and buys credit protection.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2009, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider (i.e. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to make as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
See accompanying notes to the financial statements.
5
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
As of August 31, 2009, for the futures and/or swap contracts held, 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:
BOBL - Bundesobligationen
(a) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2).
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic.
(c) Underlying investment represents interests in defaulted securities.
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
SEK - Swedish Krona
USD - United States Dollar
See accompanying notes to the financial statements.
6
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $53,561,542) (Note 2) | $ | 54,332,631 | |||||
Investments in affiliated issuers, at value (cost $185,774,272) (Notes 2 and 8) | 160,267,815 | ||||||
Dividends and interest receivable | 473,745 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 1,212,185 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 2,422,420 | ||||||
Receivable for open swap contracts (Note 2) | 1,109,783 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 12,911 | ||||||
Other expense reimbursement from Manager (Note 2) | 830,768 | ||||||
Total assets | 220,662,258 | ||||||
Liabilities: | |||||||
Foreign currency due to custodian | 942,655 | ||||||
Payable for investments purchased | 752,799 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 44,675 | ||||||
Shareholder service fee | 26,805 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 482 | ||||||
Payable to broker for closed futures contracts | 1,478,383 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 413,519 | ||||||
Payable for open swap contracts (Note 2) | 960,257 | ||||||
Accrued expenses | 892,278 | ||||||
Total liabilities | 5,511,853 | ||||||
Net assets | $ | 215,150,405 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 280,701,480 | |||||
Accumulated undistributed net investment income | 25,485,719 | ||||||
Accumulated net realized loss | (69,251,207 | ) | |||||
Net unrealized depreciation | (21,785,587 | ) | |||||
$ | 215,150,405 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 215,150,405 | |||||
Shares outstanding: | |||||||
Class III | 30,503,197 | ||||||
Net asset value per share: | |||||||
Class III | $ | 7.05 |
See accompanying notes to the financial statements.
7
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 1,000,208 | |||||
Interest | 780,514 | ||||||
Dividends | 2,285 | ||||||
Total investment income | 1,783,007 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 260,346 | ||||||
Shareholder service fee – Class III (Note 3) | 156,208 | ||||||
Custodian, fund accounting agent and transfer agent fees | 48,024 | ||||||
Audit and tax fees | 33,396 | ||||||
Legal fees | 6,808 | ||||||
Trustees fees and related expenses (Note 3) | 2,224 | ||||||
Registration fees | 2,116 | ||||||
Miscellaneous | 2,116 | ||||||
Total expenses | 511,238 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (88,688 | ) | |||||
Expense reductions (Note 2) | (2 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (14,340 | ) | |||||
Shareholder service fee waived (Note 3) | (5,289 | ) | |||||
Net expenses | 402,919 | ||||||
Net investment income (loss) | 1,380,088 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (249,873 | ) | |||||
Investments in affiliated issuers | (6,211,252 | ) | |||||
Closed futures contracts | (2,582,734 | ) | |||||
Closed swap contracts | (42,600 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 1,934,391 | ||||||
Net realized gain (loss) | (7,152,068 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 4,259,526 | ||||||
Investments in affiliated issuers | 27,722,675 | ||||||
Open futures contracts | 1,666,148 | ||||||
Open swap contracts | 180,031 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 11,516,002 | ||||||
Net unrealized gain (loss) | 45,344,382 | ||||||
Net realized and unrealized gain (loss) | 38,192,314 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 39,572,402 |
See accompanying notes to the financial statements.
8
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,380,088 | $ | 8,570,499 | |||||||
Net realized gain (loss) | (7,152,068 | ) | (27,717,738 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 45,344,382 | (74,511,421 | ) | ||||||||
Net increase (decrease) in net assets from operations | 39,572,402 | (93,658,660 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (12,100,001 | ) | (53,793,041 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | (24,169,663 | ) | (155,905,746 | ) | |||||||
Redemption fees (Notes 2 and 7): | |||||||||||
Class III | 83,993 | 550,622 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (24,085,670 | ) | (155,355,124 | ) | |||||||
Total increase (decrease) in net assets | 3,386,731 | (302,806,825 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 211,763,674 | 514,570,499 | |||||||||
End of period (including accumulated undistributed net investment income of $25,485,719 and $36,205,632, respectively) | $ | 215,150,405 | $ | 211,763,674 |
See accompanying notes to the financial statements.
9
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.17 | $ | 9.51 | $ | 9.73 | $ | 9.57 | $ | 10.61 | $ | 10.38 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.04 | 0.19 | 0.41 | 0.41 | 0.21 | 0.17 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 1.23 | (2.32 | ) | 0.31 | 0.38 | (0.93 | ) | 1.02 | |||||||||||||||||||
Total from investment operations | 1.27 | (2.13 | ) | 0.72 | 0.79 | (0.72 | ) | 1.19 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.39 | ) | (1.21 | ) | (0.94 | ) | (0.54 | ) | (0.31 | ) | (0.91 | ) | |||||||||||||||
From net realized gains | — | — | — | (0.09 | ) | (0.01 | ) | (0.05 | ) | ||||||||||||||||||
Total distributions | (0.39 | ) | (1.21 | ) | (0.94 | ) | (0.63 | ) | (0.32 | ) | (0.96 | ) | |||||||||||||||
Net asset value, end of period | $ | 7.05 | $ | 6.17 | $ | 9.51 | $ | 9.73 | $ | 9.57 | $ | 10.61 | |||||||||||||||
Total Return(b) | 21.19 | %** | (24.52 | )% | 8.09 | % | 8.32 | % | (6.83 | )% | 11.81 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 215,150 | $ | 211,764 | $ | 514,570 | $ | 449,478 | $ | 422,528 | $ | 438,365 | |||||||||||||||
Net expenses to average daily net assets(c) | 0.39 | %(d)* | 0.39 | % | 0.38 | %(d) | 0.39 | % | 0.39 | % | 0.39 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 1.33 | %* | 2.20 | % | 4.26 | % | 4.17 | % | 2.13 | % | 1.65 | % | |||||||||||||||
Portfolio turnover rate | 6 | %** | 47 | % | 51 | % | 32 | % | 36 | % | 51 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.10 | %* | 0.09 | % | 0.07 | % | 0.26 | %(e) | 0.08 | % | 0.09 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.01 | — | — | — | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds 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 and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(d) The net expense ratio does not include the effect of expense reductions.
(e) Includes 0.19% non-recurring Internal Revenue Code Section 860 expense reimbursed by the Manager (Note 2).
(f) 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.
10
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO International Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the J.P. Morgan Non-U.S. Government Bond Index. The Fund typically invests in bonds included in the Fund's benchmark and in securities and instruments with similar characteristics. The Fund seeks additional returns by seeking to exploit differences in global interest rates, sectors, and credit, currency, and emerging country debt markets. The Fund may implement its strategies: (i) synthetically by using exchange-traded and over-the-counter ("OTC") derivatives and investing in other series of the Trust and/or (ii) directly by purchasing bonds denominated in various currencies. The Fund has historically gained its investment exposure primarily through the use of derivatives and investments in other series of the Trust. As a result, the Fund has substantial holdings of GMO Short-Duration Collateral Fund ("SDCF") (a Fund that invests primarily in asset-backed securities ) and GMO World Opportunity Overlay Fund ("Overlay Fund") (a Fund that invests in asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Under normal circumstances, the Fund invests (directly and indirectly through other series of the Trust) at least 80% of its assets in bonds. For these purposes, the term "bonds" includes (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by using a futures contract, swap contract, currency forward or option. To implement its investment strategies, the Fund may invest in or hold: investment-grade bonds denominated in various currencies, including foreign and U.S. government securities and asset-backed securities issued by foreign governments and U.S. government agencies (including securities neither guaranteed nor insured by the U.S. government), corporate bonds, and mortgage-backed and other as set-backed securities issued by private issuers; derivatives, including without limitation, futures contracts, currency options, currency forwards, credit default swaps and other swap contracts (to gain exposure to the global interest rate, credit, and currency markets); shares of SDCF (to gain exposure to asset-backed securities); shares of Overlay Fund (to attempt to exploit misvaluations in world interest rates, currencies, and credit markets); shares of GMO Emerging Country Debt Fund ("ECDF") (to gain exposure to sovereign debt of emerging countries); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). Because of the deterioration in credit markets that became acute in 2008, the Fund through its investment in SDCF and Overlay Fund currently holds and may continue to hold material positions of below investment grade securities. This is in addition to the Fund's emerging country debt investments. The Fund also may invest in unaffiliated money market funds.
11
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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, upon request, without charge by calling (617) 346-7646 (collect). As of August 31, 2009, shares of the GMO Short-Duration Collateral Fund, the GMO World Opportunity Overlay Fund and the GMO Special Purpose Holding Fund were not publicly available for direct purchase.
From prior to March 1, 2009 through July 12, 2009, the Fund had a policy to effect redemptions of its shares in-kind above de minimis levels. The Fund had established de minimis amounts below which redemptions would be honored for cash. Beginning July 13, 2009, the Fund had a policy to pay redemption requests with cash (less a redemption fee).
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
As of August 31, 2009, a significant portion of the Fund's dividends received from other GMO funds is expected to be a return of capital for U.S. federal income tax purposes. Accordingly, "dividends from affiliated issuers" reported in the Statement of Operations has been reduced by the portion estimated to be a return of capital as of August 31, 2009. The estimated return of capital is $22,112,994. In addition, all applicable related income disclosures throughout this Semiannual Report have been adjusted by the estimated return of capital. The dividends from affiliated issuers are subject to change and will not be finalized until February 28, 2010, the Fund's upcoming fiscal year-end. Finally, in early 2010, applicable shareholders will receive Form 1099-DIV that will indicate the appropriate tax character of all distributions paid by the Fund in 2009.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost.
12
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by the Fund, those alternative sources would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fu nd. As of August 31, 2009, the total value of securities held directly and indirectly that were fair valued or for which no alternative pricing source was available represented 20.27% of the net assets of the Fund.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund utilizes third party valuation services (which use industry standard models and inputs from pricing vendors) to value credit default swaps.
13
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Foreign Government Obligations | $ | — | $ | 39,460,276 | $ | — | $ | 39,460,276 | |||||||||||
U.S. Government | — | 8,398,455 | — | 8,398,455 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 47,858,731 | — | 47,858,731 | |||||||||||||||
Mutual Funds | 23,262,468 | 137,005,347 | — | 160,267,815 | |||||||||||||||
Short-Term Investments | — | 6,473,900 | — | 6,473,900 | |||||||||||||||
Total Investments | 23,262,468 | 191,337,978 | — | 214,600,446 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | — | 1,212,185 | — | 1,212,185 | |||||||||||||||
Futures Contracts | 2,104,968 | — | — | 2,104,968 | |||||||||||||||
Swap Agreements | — | — | 1,109,783 | 1,109,783 | |||||||||||||||
Total | $ | 25,367,436 | $ | 192,550,163 | $ | 1,109,783 | $ | 219,027,382 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | $ | — | $ | (413,519 | ) | $ | — | $ | (413,519 | ) | |||||||||
Futures Contracts | (78,236 | ) | — | — | (78,236 | ) | |||||||||||||
Swap Agreements | — | — | (960,257 | ) | (960,257 | ) | |||||||||||||
Total | $ | (78,236 | ) | $ | (413,519 | ) | $ | (960,257 | ) | $ | (1,452,012 | ) |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their
14
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
financial statements. The aggregate net value of the Fund's investments (both direct and indirect ) in securities and other financial instruments using Level 3 inputs were 51.96% and (0.07%) of total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Mutual Fund | $ | 27,350 | $ | — | $ | — | $ | — | $ | (3,746 | ) | $ | (23,604 | ) | $ | — | |||||||||||||||
Swaps | (30,505 | ) | (42,600 | ) | — | 42,600 | 180,031 | — | 149,526 | ||||||||||||||||||||||
Total | $ | (3,155 | ) | $ | (42,600 | ) | $ | — | $ | 42,600 | $ | 176,285 | $ | (23,604 | ) | $ | 149,526 |
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
15
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
16
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts outstanding at the end of the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
17
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not received timely by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at a later date at a fixed price. The Fund can use the proceeds received from entering into a reverse repurchase agreement to
18
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
make additional investments, which can cause the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the perio d.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, if any, at least annually. The Fund is permitted to, and will from time to time, declare and pay distributions from net investment income, if any, more frequently (e.g., monthly). 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
19
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $8,848,476.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Such losses expire as follows:
2/28/2015 | $ | (23,687,952 | ) | ||||
2/29/2016 | (507,910 | ) | |||||
2/28/2017 | (14,485,912 | ) | |||||
Total | $ | (38,681,774 | ) |
Utilization of the capital loss carryforwards, post-October capital losses and future losses, if any, realized subsequent to February 28, 2009, could be subject to limitations imposed by the Code related to share ownership activity.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 248,447,778 | $ | 1,137,638 | $ | (34,984,970 | ) | $ | (33,847,332 | ) |
On October 12, 2006, the Fund paid a dividend under Code Section 860 of $0.09229 per share to shareholders of record as of October 11, 2006. It is anticipated the Fund will be required to make a payment, estimated to be, $830,768 to the Internal Revenue Service ("IRS") related to such dividend, which has been included in accrued expenses on the Statement of Assets and Liabilities. The Manager will make a reimbursement payment to the Fund concurrent with the Fund's payment to the IRS.
For the period ended August 31, 2009, the Fund had net realized losses attributed to redemption in-kind transactions of $6,390,613.
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to
20
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
From prior to March 1, 2009 through August 2, 2009, the fee on cash redemptions was 2.00% of the amount redeemed. From August 3, 2009 through August 31, 2009, the fee on cash redemptions was 1.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relat ing to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the
21
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. Many of these risks are more pronounced as a result of current global economic conditions that began to unfold in 2008.This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. The Fund may be required to sell certain less liquid securities at distressed prices or meet redemption requests in-kind. Recent changes in credit markets have reduced the liquidity of all types of fixed income securities, including in particular the asset-backed securities held by the Fund through SDCF and Overlay Fund.
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to an OTC derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security, will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses OTC derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments where financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehma n Brothers and subsequent market disruptions.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected.
22
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Leveraging Risk (increased risks from use of reverse repurchase agreeme nts and other derivatives and securities lending), Focused Investment Risk (increased risk from the Fund's focus on investments in countries, regions, or sectors with high positive correlations to one another), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. For more information about reverse repurchase agreement and other derivatives, please refer to the descriptions of financial instruments (e.g. reverse repurchase agreements, swaps, futures, and other types of derivative contracts) in Note 2 above as well as the discussion of the Fund's use of derivatives below. Certain of the above-referenced risks will be more pronounced for the Fund as a result of its investment in ECDF.
The Fund invests (including through investment in underlying funds) in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of u nderlying assets or other support available to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type
23
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities generally. These events reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not continue or that they will not deteriorate further. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
The Fund uses its cash balance to meet its collateral obligations and for other purposes. There is no assurance that the Fund's cash balance will be sufficient to meet those obligations. If it is not, the Fund would be required to liquidate portfolio positions. To manage the Fund's cash collateral needs, the Manager reserves the right to reduce or eliminate the Fund's derivative exposures. A reduction in those exposures may cause the performance of the Fund to track its benchmark less closely and make the Fund's performance more dependent on the performance of the asset-backed securities it holds directly or indirectly.
Among other trading agreements, the Fund is party to International Swaps and Derivatives Association, Inc. Master Agreements ("ISDA Agreements") with select counterparties that generally govern over-the-counter derivative transactions entered into by the Fund. The ISDA Master Agreements typically include representations and warranties as well as contractual terms related to collateral, events of default, termination events, and other provisions. Termination events include the decline in the net assets of the Fund below a certain level over a specified period of time and entitle a counterparty to elect to terminate early with respect to some or all the transactions under the ISDA Agreement with that counterparty. Such an election by one or more of the counterparties could have a material adverse impact on the Fund's operations. Due to declines in the net assets of the Fund prior to August 31, 2009, one or more counterparties are entitled to terminate early but none has taken such action.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133
24
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund uses derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund uses derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps (including credit default swaps) or other derivatives on an index, a single security or a basket of securities to gain investment exposures. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. For example, the Fund may use credit default swaps to take an active short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may attempt to alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed vs. variable and shorter duration vs. longer duration. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue
25
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
26
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | 2,104,968 | — | — | — | — | 2,104,968 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 1,212,185 | — | — | — | 1,212,185 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | 1,109,783 | — | — | 1,109,783 | |||||||||||||||||||||
Total | $ | 2,104,968 | $ | 1,212,185 | $ | 1,109,783 | $ | — | $ | — | $ | 4,426,936 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | (78,236 | ) | — | — | — | — | (78,236 | ) | |||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | (413,519 | ) | — | — | — | (413,519 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | (960,257 | ) | — | — | (960,257 | ) | |||||||||||||||||||
Total | $ | (78,236 | ) | $ | (413,519 | ) | $ | (960,257 | ) | $ | — | $ | — | $ | (1,452,012 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
27
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | (2,582,734 | ) | — | — | — | — | (2,582,734 | ) | |||||||||||||||||||
Swap contracts | — | — | (42,600 | ) | — | — | (42,600 | ) | |||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 1,954,641 | — | — | — | 1,954,641 | |||||||||||||||||||||
Total | $ | (2,582,734 | ) | $ | 1,954,641 | $ | (42,600 | ) | $ | — | $ | — | $ | (670,693 | ) | ||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | 1,666,148 | — | — | — | — | 1,666,148 | |||||||||||||||||||||
Swap contracts | — | — | 180,031 | — | — | 180,031 | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 11,504,111 | — | — | — | 11,504,111 | |||||||||||||||||||||
Total | $ | 1,666,148 | $ | 11,504,111 | $ | 180,031 | $ | — | $ | — | $ | 13,350,290 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Forwards | Futures | Swaps | |||||||||||||
Average notional amount outstanding | $ | 162,055,448 | $ | 244,076,186 | $ | 36,000,000 | |||||||||
Highest notional amount outstanding | 180,541,615 | 451,555,746 | 36,000,000 | ||||||||||||
Lowest notional amount outstanding | 149,158,171 | 113,841,668 | 36,000,000 |
Other matters
GMO Special Purpose Holding Fund ("SPHF"), an investment of the Fund, has litigation pending against various entities related to the 2002 default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the period ended August 31, 2009, the Fund received no distributions through SPHF in connection with settlement agreements related to that litigation.
28
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.25% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 to the extent that the sum of (a) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses); (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in ECDF (excluding ECDF's Excluded Fund Fees and Expenses); and (c) the amount of fees and expenses incurred indirectly (through investment in other underlying funds) by the Fund through its (direct or indirect) investment in GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.25% of the Fund's average daily net assets, subject to a maximum total reimbursement to such Fund equ al to 0.25% of the Fund's average daily net assets.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 | ||||||||||||
0.022 | % | 0.005 | % | 0.010 | % | 0.037 | % |
29
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $1,764 and $1,012, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
4. Purchases and sales of securities
For the period ended August 31, 2009, cost of purchases and proceeds from sales of investments, other than short-term obligations and class exchanges, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | — | $ | 178,867 | |||||||
Investments (non-U.S. Government securities) | 36,117,816 | 11,542,399 |
Proceeds from sales of securities for in-kind transactions for the period ended August 31, 2009 were $18,714,234.
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 67.75% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 2.45% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 29.96% of the Fund's shares were held by accounts for which the Manager had investment discretion.
30
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 18,052 | $ | 114,154 | 251,099 | $ | 2,399,856 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 128,981 | 851,231 | 6,462,644 | 51,930,698 | |||||||||||||||
Shares repurchased | (3,952,346 | ) | (25,135,048 | ) | (26,487,403 | ) | (210,236,300 | ) | |||||||||||
Redemption fees | — | 83,993 | — | 550,622 | |||||||||||||||
Net increase (decrease) | (3,805,313 | ) | $ | (24,085,670 | ) | (19,773,660 | ) | $ | (155,355,124 | ) |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 | $ | 6,547,297 | $ | 121,445 | $ | 686,730 | $ | 121,445 | $ | — | $ | 7,907,457 | |||||||||||||||
GMO Short-Duration Collateral Fund | 121,140,551 | — | 11,232,639 | 859,158 | — | 102,559,652 | |||||||||||||||||||||
GMO Special Purpose Holding Fund | 27,350 | — | — | — | — | 23,604 | |||||||||||||||||||||
GMO U.S. Treasury Fund | — | 26,299,605 | 10,950,000 | 19,605 | — | 15,355,011 | |||||||||||||||||||||
GMO World Opportunity Overlay Fund | 36,170,948 | — | 3,551,413 | — | — | 34,422,091 | o | ||||||||||||||||||||
Totals | $ | 163,886,146 | $ | 26,421,050 | $ | 26,420,782 | $ | 1,000,208 | $ | — | $ | 160,267,815 |
o The Fund received return of capital distributions in the amount of $3,017,029.
31
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. On September 14, 2009, the Fund's redemption fee was eliminated.
32
GMO International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those p ersonnel 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The
33
GMO International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for advisory fees, shareholder fees and most other expenses of the underlying funds 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the
34
GMO International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
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 shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
35
GMO International Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including 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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.42 | % | $ | 1,000.00 | $ | 1,211.90 | $ | 2.34 | |||||||||||
2) Hypothetical | 0.42 | % | $ | 1,000.00 | $ | 1,023.09 | $ | 2.14 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
36
GMO Real Estate Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Real Estate Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 97.9 | % | |||||
Short-Term Investments | 2.2 | ||||||
Other | (0.1 | ) | |||||
100.0 | % | ||||||
Industry Summary | % of REIT Investments | ||||||
Health Care | 14.2 | % | |||||
Shopping Centers | 13.5 | ||||||
Apartments | 12.8 | ||||||
Office Suburban | 11.3 | ||||||
Storage | 8.5 | ||||||
Diversified | 7.6 | ||||||
Industrial | 7.3 | ||||||
Office Central Business District | 7.3 | ||||||
Regional Malls | 6.6 | ||||||
Hotels | 5.3 | ||||||
Triple Net | 4.0 | ||||||
Manufactured Housing | 1.0 | ||||||
Outlets | 0.6 | ||||||
100.0 | % |
1
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
REAL ESTATE INVESTMENTS — 97.9% | |||||||||||||||
REAL ESTATE INVESTMENT TRUSTS — 97.9% | |||||||||||||||
Apartments — 12.6% | |||||||||||||||
3,000 | American Campus Communities, Inc. | 78,030 | |||||||||||||
5,586 | Apartment Investment & Management Co.-Class A | 67,982 | |||||||||||||
6,273 | AvalonBay Communities, Inc. | 404,169 | |||||||||||||
5,500 | BRE Properties, Inc. | 155,485 | |||||||||||||
3,200 | Camden Property Trust | 117,440 | |||||||||||||
13,400 | Equity Residential | 365,954 | |||||||||||||
1,730 | Essex Property Trust, Inc. | 129,075 | |||||||||||||
2,900 | Home Properties, Inc. | 110,113 | |||||||||||||
1,200 | Investors Real Estate Trust | 11,112 | |||||||||||||
1,900 | Mid-America Apartment Communities, Inc. | 83,182 | |||||||||||||
1,600 | Post Properties, Inc. | 27,264 | |||||||||||||
6,781 | UDR, Inc. | 86,729 | |||||||||||||
Total Apartments | 1,636,535 | ||||||||||||||
Diversified — 7.4% | |||||||||||||||
440 | Alexander's, Inc. | 124,652 | |||||||||||||
4,300 | Franklin Street Properties Corp. | 61,103 | |||||||||||||
11,559 | Vornado Realty Trust | 664,874 | |||||||||||||
3,800 | Washington Real Estate Investment Trust | 102,448 | |||||||||||||
1,900 | Winthrop Realty Trust | 17,385 | |||||||||||||
Total Diversified | 970,462 | ||||||||||||||
Health Care — 13.9% | |||||||||||||||
20,700 | HCP, Inc. | 589,536 | |||||||||||||
9,000 | Health Care, Inc. | 384,390 | |||||||||||||
3,500 | Healthcare Realty Trust, Inc. | 75,775 | |||||||||||||
1,200 | LTC Properties, Inc. | 30,564 | |||||||||||||
5,000 | Medical Properties Trust, Inc. | 37,850 | |||||||||||||
2,200 | National Health Investors, Inc. | 72,820 | |||||||||||||
4,400 | Nationwide Health Properties, Inc. | 140,272 |
See accompanying notes to the financial statements.
2
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Health Care — continued | |||||||||||||||
6,900 | Omega Healthcare Investors, Inc. | 116,679 | |||||||||||||
7,700 | Senior Housing Properties Trust | 154,462 | |||||||||||||
300 | Universal Health Realty Income Trust | 10,077 | |||||||||||||
5,100 | Ventas, Inc. | 199,971 | |||||||||||||
Total Health Care | 1,812,396 | ||||||||||||||
Hotels — 5.2% | |||||||||||||||
5,000 | DiamondRock Hospitality Co. | 34,250 | |||||||||||||
9,000 | Hospitality Properties Trust | 163,980 | |||||||||||||
48,200 | Host Hotels & Resorts, Inc. | 480,554 | |||||||||||||
Total Hotels | 678,784 | ||||||||||||||
Industrial — 7.1% | |||||||||||||||
8,300 | AMB Property Corp. | 189,489 | |||||||||||||
5,500 | Digital Realty Trust, Inc. | 239,690 | |||||||||||||
5,200 | DuPont Fabros Technology, Inc. | 68,016 | |||||||||||||
2,000 | EastGroup Properties, Inc. | 75,280 | |||||||||||||
31,938 | ProLogis | 355,151 | |||||||||||||
Total Industrial | 927,626 | ||||||||||||||
Manufactured Housing — 1.0% | |||||||||||||||
2,800 | Equity Lifestyle Properties, Inc. | 112,700 | |||||||||||||
1,100 | Sun Communities, Inc. | 19,646 | |||||||||||||
Total Manufactured Housing | 132,346 | ||||||||||||||
Office Central Business District — 7.1% | |||||||||||||||
9,500 | BioMed Realty Trust, Inc. | 128,060 | |||||||||||||
10,400 | Boston Properties, Inc. | 630,032 | |||||||||||||
4,723 | SL Green Realty Corp. | 166,675 | |||||||||||||
Total Office Central Business District | 924,767 | ||||||||||||||
Office Suburban — 11.1% | |||||||||||||||
3,300 | Alexandria Real Estate Equities, Inc. | 183,843 | |||||||||||||
1,389 | Brandywine Realty Trust | 14,737 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Office Suburban — continued | |||||||||||||||
4,800 | Corporate Office Properties Trust | 176,928 | |||||||||||||
12,600 | Duke Realty Corp. | 145,152 | |||||||||||||
4,600 | Highwoods Properties, Inc. | 135,102 | |||||||||||||
18,600 | HRPT Properties Trust | 120,528 | |||||||||||||
4,000 | Kilroy Realty Corp. | 110,840 | |||||||||||||
8,900 | Liberty Property Trust | 291,653 | |||||||||||||
6,000 | Mack-Cali Realty Corp. | 192,180 | |||||||||||||
1,400 | PS Business Parks, Inc. | 74,102 | |||||||||||||
Total Office Suburban | 1,445,065 | ||||||||||||||
Outlets — 0.6% | |||||||||||||||
2,000 | Tanger Factory Outlet Centers, Inc. | 75,240 | |||||||||||||
Total Outlets | 75,240 | ||||||||||||||
Regional Malls — 6.5% | |||||||||||||||
16,531 | CBL & Associates Properties, Inc. | 154,896 | |||||||||||||
2,053 | Macerich Co. (The) | 58,839 | |||||||||||||
9,479 | Simon Property Group, Inc. | 603,054 | |||||||||||||
900 | Taubman Centers, Inc. | 28,503 | |||||||||||||
Total Regional Malls | 845,292 | ||||||||||||||
Shopping Centers — 13.2% | |||||||||||||||
1,884 | Acadia Realty Trust | 28,844 | |||||||||||||
9,300 | Cedar Shopping Centers, Inc. | 59,799 | |||||||||||||
16,297 | Developers Diversified Realty Corp. | 127,768 | |||||||||||||
5,600 | Equity One, Inc. | 88,200 | |||||||||||||
3,600 | Federal Realty Investment Trust | 224,532 | |||||||||||||
12,200 | Inland Real Estate Corp. | 102,236 | |||||||||||||
36,358 | Kimco Realty Corp. | 456,293 | |||||||||||||
4,500 | Ramco-Gershenson Properties Trust | 47,340 | |||||||||||||
7,300 | Regency Centers Corp. | 244,915 | |||||||||||||
1,400 | Saul Centers, Inc. | 45,626 | |||||||||||||
3,400 | Urstadt Biddle Properties, Inc. | 52,598 | |||||||||||||
12,000 | Weingarten Realty Investors | 238,320 | |||||||||||||
Total Shopping Centers | 1,716,471 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Storage — 8.3% | |||||||||||||||
5,500 | Extra Space Storage, Inc. | 54,450 | |||||||||||||
14,014 | Public Storage | 988,688 | |||||||||||||
1,400 | Sovran Self Storage, Inc. | 41,146 | |||||||||||||
Total Storage | 1,084,284 | ||||||||||||||
Triple Net — 3.9% | |||||||||||||||
2,800 | Entertainment Properties Trust | 87,808 | |||||||||||||
3,000 | Getty Realty Corp. | 70,770 | |||||||||||||
202 | Lexington Realty Trust | 941 | |||||||||||||
8,100 | National Retail Properties, Inc. | 166,212 | |||||||||||||
7,000 | Realty Income Corp. | 178,850 | |||||||||||||
Total Triple Net | 504,581 | ||||||||||||||
TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $18,015,450) | 12,753,849 | ||||||||||||||
TOTAL REAL ESTATE INVESTMENTS (COST $18,015,450) | 12,753,849 | ||||||||||||||
SHORT-TERM INVESTMENTS — 2.2% | |||||||||||||||
Money Market Funds — 2.2% | |||||||||||||||
280,846 | State Street Institutional Treasury Money Market Fund-Institutional Class | 280,846 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $280,846) | 280,846 | ||||||||||||||
TOTAL INVESTMENTS — 100.1% (Cost $18,296,296) | 13,034,695 | ||||||||||||||
Other Assets and Liabilities (net) — (0.1%) | (12,171 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 13,022,524 |
See accompanying notes to the financial statements.
5
GMO Real Estate Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $18,296,296) (Note 2) | $ | 13,034,695 | |||||
Dividends receivable | 25,020 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 5,146 | ||||||
Total assets | 13,064,861 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 3,547 | ||||||
Shareholder service fee | 1,612 | ||||||
Accrued expenses | 37,178 | ||||||
Total liabilities | 42,337 | ||||||
Net assets | $ | 13,022,524 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 21,961,994 | |||||
Accumulated undistributed net investment income | 301,873 | ||||||
Accumulated net realized loss | (3,979,742 | ) | |||||
Net unrealized depreciation | (5,261,601 | ) | |||||
$ | 13,022,524 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 13,022,524 | |||||
Shares outstanding: | |||||||
Class III | 2,393,753 | ||||||
Net asset value per share: | |||||||
Class III | $ | 5.44 |
See accompanying notes to the financial statements.
6
GMO Real Estate Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 334,977 | |||||
Total investment income | 334,977 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 17,669 | ||||||
Shareholder service fee – Class III (Note 3) | 8,031 | ||||||
Audit and tax fees | 28,153 | ||||||
Custodian, fund accounting agent and transfer agent fees | 2,760 | ||||||
Registration fees | 1,288 | ||||||
Legal fees | 184 | ||||||
Trustees fees and related expenses (Note 3) | 60 | ||||||
Total expenses | 58,145 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (32,384 | ) | |||||
Expense reductions (Note 2) | (2 | ) | |||||
Net expenses | 25,759 | ||||||
Net investment income (loss) | 309,218 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (2,336,114 | ) | |||||
Change in net unrealized appreciation (depreciation) on investments | 7,360,240 | ||||||
Net realized and unrealized gain (loss) | 5,024,126 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 5,333,344 |
See accompanying notes to the financial statements.
7
GMO Real Estate Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 309,218 | $ | 763,238 | |||||||
Net realized gain (loss) | (2,336,114 | ) | (1,621,100 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 7,360,240 | (9,140,643 | ) | ||||||||
Net increase (decrease) in net assets from operations | 5,333,344 | (9,998,505 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (140,914 | ) | (728,184 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (312,412 | ) | ||||||||
(140,914 | ) | (1,040,596 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (469,315 | ) | (126,775 | ) | |||||||
Total increase (decrease) in net assets | 4,723,115 | (11,165,876 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 8,299,409 | 19,465,285 | |||||||||
End of period (including accumulated undistributed net investment income of $301,873 and $133,569, respectively) | $ | 13,022,524 | $ | 8,299,409 |
See accompanying notes to the financial statements.
8
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 3.34 | $ | 7.85 | $ | 12.87 | $ | 12.27 | $ | 14.54 | $ | 14.65 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.13 | 0.31 | 0.40 | 0.38 | 0.61 | 0.59 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.03 | (4.40 | ) | (3.29 | ) | 2.72 | 3.24 | 1.55 | |||||||||||||||||||
Total from investment operations | 2.16 | (4.09 | ) | (2.89 | ) | 3.10 | 3.85 | 2.14 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.06 | ) | (0.29 | ) | (0.14 | ) | (0.31 | ) | (0.40 | ) | (0.87 | ) | |||||||||||||||
From net realized gains | — | (0.13 | ) | (1.99 | ) | (2.19 | ) | (5.72 | ) | (1.38 | ) | ||||||||||||||||
Total distributions | (0.06 | ) | (0.42 | ) | (2.13 | ) | (2.50 | ) | (6.12 | ) | (2.25 | ) | |||||||||||||||
Net asset value, end of period | $ | 5.44 | $ | 3.34 | $ | 7.85 | $ | 12.87 | $ | 12.27 | $ | 14.54 | |||||||||||||||
Total Return(a) | 65.26 | %** | (54.45 | )% | (24.04 | )% | 29.76 | % | 28.89 | % | 16.01 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 13,023 | $ | 8,299 | $ | 19,465 | $ | 37,650 | $ | 41,391 | $ | 235,837 | |||||||||||||||
Net expenses to average daily net assets | 0.48 | %(b)* | 0.48 | %(b) | 0.48 | % | 0.48 | % | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 5.78 | %* | 4.44 | % | 3.78 | % | 3.24 | % | 3.91 | % | 4.13 | % | |||||||||||||||
Portfolio turnover rate | 19 | %** | 29 | % | 49 | % | 43 | % | 52 | % | 134 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.60 | %* | 0.41 | % | 0.22 | % | 0.28 | % | 0.25 | % | 0.25 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
9
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Real Estate Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 its benchmark, 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 in companies with similar characteristics. The Fund has a fundamental policy to concentrate its investments in real estate-related investments. Under normal circumstances, the Fund invests at least 80% of its assets in real estate investment trusts ("REITs") and other real estate-related investments (which includes REITs and companies that derive at least 50% of their revenues and profits from, or have at least 50% of their assets invested in, (i) the development, construction, management, or sale of real estate; (ii) real estate holdings; or (iii) products or services related to the real estate industry). The Fund generally seeks to be fully invested and normally does not take te mporary defensive positions through investment in cash and cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the counter derivatives, including options, futures, and swap contracts. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the
10
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
Asset Valuation Inputs | Investments in Securities | Other Financial Instruments | |||||||||
Level 1 - Quoted Prices | $ | 12,753,849 | $ | — | |||||||
Level 2 - Other Significant Observable Inputs | 280,846 | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | 13,034,695 | $ | — |
11
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Liability Valuation Inputs | Investments in Securities | Other Financial Instruments | |||||||||
Level 1 - Quoted Prices | $ | — | $ | — | |||||||
Level 2 - Other Significant Observable Inputs | — | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | — | $ | — |
All of the Fund's common stocks are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks. All short-term investments are classified as Level 2.
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
12
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $730,582.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (517,045 | ) | ||||
Total | $ | (517,045 | ) |
13
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 18,995,652 | $ | 316,327 | $ | (6,277,284 | ) | $ | (5,960,957 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. Distributions paid by real estate investment trusts ("REITs") in excess of their income are recorded as reductions of the cost of the related investments which increases/decreases the realized gains/losses as applicable. If the Fund no longer owns the applicable securities, any distributions received in excess of income are recorded as realized gains. 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 Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds.
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the
14
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Real Estate Risk — Real estate-related investments may decline in value as a result of factors affecting the real estate industry, such as the supply of real property in certain markets, changes in zoning laws, delays in completion of construction, changes in real estate values, changes in property taxes, levels of occupancy, adequacy of rent to cover operating expenses, and local and regional market conditions. The value of real estate-related investments also may be affected by changes in interest rates and social and economic trends. REITs are subject to substantial cash flow dependency, defaults by borrowers, and the risk of failing to qualify for the special tax treatment accorded REITs under the Internal Revenue Code of 1986 and/or to maintain exempt status under the 1940 Act.
• Focused Investment Risk — Focusing investments in sectors and industries with high positive correlations to one another creates additional risk. This risk is particularly pronounced for the Fund, which concentrates its investments in real estate-related investments, making the Fund's net asset value more susceptible to economic, market, political, and other developments affecting the real estate industry.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund's securities may not increase to what the Manager believes to be their fundamental value or that the Manager may have overestimated their fundamental value), Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Credit and Counterparty Risk (risk of default of a derivatives counterparty or borrower of the Fund's securities), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally),
15
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund adopted SFAS 161 on March 1, 2009. As of August 31, 2009, the Fund held no derivative contracts for the purposes of SFAS 161.
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.33% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fun d) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds
16
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $60 and $0, respectively. The Fund paid no remuneration 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, 2009 aggregated $1,943,193 and $2,291,583, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 84.44% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 0.54% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 73.35% of the Fund's shares were held by accounts for which the Manager had investment discretion.
17
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 27,442 | $ | 81,742 | 37,799 | $ | 261,394 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 5,387 | 21,654 | 62,656 | 420,430 | |||||||||||||||
Shares repurchased | (123,019 | ) | (572,711 | ) | (96,908 | ) | (808,599 | ) | |||||||||||
Net increase (decrease) | (90,190 | ) | $ | (469,315 | ) | 3,547 | $ | (126,775 | ) |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
18
GMO Real Estate Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The
19
GMO Real Estate Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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
20
GMO Real Estate Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
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.
Following their review, on June 15, 2009, 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, 2009.
21
GMO Real Estate Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.48 | % | $ | 1,000.00 | $ | 1,652.60 | $ | 3.21 | |||||||||||
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, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
22
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 97.7 | % | |||||
Short-Term Investments | 2.2 | ||||||
Preferred Stocks | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | 0.1 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
Japan | 27.1 | % | |||||
United Kingdom | 23.0 | ||||||
France | 10.8 | ||||||
Switzerland | 7.8 | ||||||
Italy | 5.1 | ||||||
Germany | 5.0 | ||||||
Australia | 3.1 | ||||||
Sweden | 3.0 | ||||||
Spain | 2.9 | ||||||
Netherlands | 2.4 | ||||||
Canada | 1.9 | ||||||
Belgium | 1.8 | ||||||
Hong Kong | 1.5 | ||||||
Singapore | 1.4 | ||||||
Greece | 0.9 | ||||||
Finland | 0.6 | ||||||
Denmark | 0.5 | ||||||
Ireland | 0.5 | ||||||
New Zealand | 0.4 | ||||||
Austria | 0.1 | ||||||
Norway | 0.1 | ||||||
Portugal | 0.1 | ||||||
Malta | 0.0 | ||||||
100.0 | % |
1
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Industry Group Summary | % of Equity Investments | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 15.6 | % | |||||
Banks | 13.8 | ||||||
Energy | 8.5 | ||||||
Materials | 6.9 | ||||||
Telecommunication Services | 6.1 | ||||||
Capital Goods | 5.3 | ||||||
Food, Beverage & Tobacco | 5.2 | ||||||
Automobiles & Components | 4.9 | ||||||
Utilities | 4.8 | ||||||
Diversified Financials | 4.5 | ||||||
Retailing | 4.4 | ||||||
Food & Staples Retailing | 2.7 | ||||||
Consumer Durables & Apparel | 2.7 | ||||||
Technology Hardware & Equipment | 2.2 | ||||||
Insurance | 1.9 | ||||||
Transportation | 1.7 | ||||||
Software & Services | 1.6 | ||||||
Household & Personal Products | 1.5 | ||||||
Media | 1.3 | ||||||
Health Care Equipment & Services | 1.2 | ||||||
Real Estate | 1.1 | ||||||
Semiconductors & Semiconductor Equipment | 0.9 | ||||||
Consumer Services | 0.8 | ||||||
Commercial & Professional Services | 0.4 | ||||||
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 97.7% | |||||||||||||||
Australia — 3.1% | |||||||||||||||
116,687 | Australia and New Zealand Banking Group Ltd | 2,096,260 | |||||||||||||
301,186 | BlueScope Steel Ltd | 728,675 | |||||||||||||
158,971 | Foster's Group Ltd | 735,366 | |||||||||||||
1,718,063 | GPT Group (REIT) | 894,867 | |||||||||||||
173,800 | Lihir Gold Ltd * | 402,200 | |||||||||||||
24,255 | Macquarie Group Ltd | 1,041,247 | |||||||||||||
258,757 | Macquarie Infrastructure Group | 290,454 | |||||||||||||
1,221,102 | Macquarie Office Trust | 278,493 | |||||||||||||
74,350 | National Australia Bank Ltd | 1,788,955 | |||||||||||||
30,190 | Newcrest Mining Ltd | 769,181 | |||||||||||||
39,252 | Origin Energy Ltd | 507,705 | |||||||||||||
26,178 | QBE Insurance Group Ltd | 505,888 | |||||||||||||
5,784 | Rio Tinto Ltd | 274,915 | |||||||||||||
442,677 | Stockland (REIT) | 1,408,751 | |||||||||||||
163,892 | Suncorp-Metway Ltd | 1,083,824 | |||||||||||||
75,951 | TABCORP Holdings Ltd | 430,230 | |||||||||||||
301,138 | Telstra Corp Ltd | 829,082 | |||||||||||||
56,214 | Woodside Petroleum Ltd | 2,332,506 | |||||||||||||
51,116 | Woolworths Ltd | 1,208,497 | |||||||||||||
Total Australia | 17,607,096 | ||||||||||||||
Austria — 0.1% | |||||||||||||||
18,071 | OMV AG | 713,476 | |||||||||||||
Belgium — 1.7% | |||||||||||||||
74,299 | Anheuser-Busch InBev NV | 3,212,436 | |||||||||||||
21,002 | Belgacom SA | 788,900 | |||||||||||||
6,444 | Colruyt SA | 1,479,556 | |||||||||||||
16,879 | Delhaize Group | 1,131,934 | |||||||||||||
133,416 | Dexia SA * | 1,144,300 | |||||||||||||
233,806 | Fortis * | 997,408 |
See accompanying notes to the financial statements.
3
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Belgium — continued | |||||||||||||||
2,616 | Mobistar SA | 168,591 | |||||||||||||
9,267 | Solvay SA | 977,053 | |||||||||||||
Total Belgium | 9,900,178 | ||||||||||||||
Canada — 1.9% | |||||||||||||||
50,100 | Bank of Montreal | 2,425,485 | |||||||||||||
9,400 | Bank of Nova Scotia | 393,774 | |||||||||||||
9,600 | Canadian National Railway Co | 464,062 | |||||||||||||
11,500 | Canadian Pacific Railway Ltd | 550,655 | |||||||||||||
22,800 | Magna International Inc Class A | 1,033,003 | |||||||||||||
33,200 | National Bank of Canada | 1,863,567 | |||||||||||||
34,600 | Sun Life Financial Inc | 1,024,015 | |||||||||||||
76,416 | Suncor Energy Inc | 2,337,677 | |||||||||||||
22,200 | Teck Cominco Ltd Class B * | 535,761 | |||||||||||||
Total Canada | 10,627,999 | ||||||||||||||
Denmark — 0.5% | |||||||||||||||
32,757 | Danske Bank A/S * | 878,174 | |||||||||||||
34,338 | Novo-Nordisk A/S Class B | 2,094,931 | |||||||||||||
Total Denmark | 2,973,105 | ||||||||||||||
Finland — 0.6% | |||||||||||||||
98,099 | Nokia Oyj | 1,377,097 | |||||||||||||
19,800 | Rautaruukki Oyj | 463,571 | |||||||||||||
30,266 | Sampo Oyj Class A | 725,465 | |||||||||||||
38,689 | Tieto Oyj | 708,185 | |||||||||||||
Total Finland | 3,274,318 | ||||||||||||||
France — 10.5% | |||||||||||||||
29,738 | Air France-KLM * | 454,994 | |||||||||||||
8,951 | Air Liquide SA | 957,472 | |||||||||||||
41,425 | ArcelorMittal | 1,481,533 | |||||||||||||
99,312 | BNP Paribas | 8,007,707 | |||||||||||||
3,285 | Bongrain SA * | 235,349 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
France — continued | |||||||||||||||
8,940 | Carrefour SA | 422,196 | |||||||||||||
9,357 | Casino Guichard-Perrachon SA | 710,017 | |||||||||||||
24,714 | Compagnie de Saint-Gobain | 1,116,564 | |||||||||||||
12,581 | Dassault Systemes SA | 644,394 | |||||||||||||
29,264 | Essilor International SA | 1,583,254 | |||||||||||||
1,804 | Esso SAF | 246,935 | |||||||||||||
25,622 | European Aeronautic Defense and Space Co NV | 532,893 | |||||||||||||
17,895 | Eutelsat Communications | 479,189 | |||||||||||||
104,929 | France Telecom SA | 2,668,561 | |||||||||||||
15,997 | GDF Suez | 676,166 | |||||||||||||
16,002 | GDF Suez VVPR Strip * | 23 | |||||||||||||
5,048 | Gemalto NV * | 210,398 | |||||||||||||
12,530 | Hermes International | 1,857,634 | |||||||||||||
3,134 | Iliad SA | 321,564 | |||||||||||||
10,797 | L'Oreal SA | 1,065,852 | |||||||||||||
7,859 | Lafarge SA | 669,735 | |||||||||||||
5,550 | Nexans SA | 406,604 | |||||||||||||
4,045 | NYSE Euronext | 113,544 | |||||||||||||
2,680 | Pernod-Ricard SA | 209,344 | |||||||||||||
43,449 | Peugeot SA * | 1,261,123 | |||||||||||||
7,159 | PPR | 833,407 | |||||||||||||
19,398 | Publicis Groupe | 714,954 | |||||||||||||
49,401 | Renault SA * | 2,229,055 | |||||||||||||
249,394 | Sanofi-Aventis | 16,980,670 | |||||||||||||
29,745 | SES | 583,957 | |||||||||||||
62,818 | Societe Generale | 5,077,555 | |||||||||||||
53,296 | STMicroelectronics NV | 463,179 | |||||||||||||
13,959 | Technip SA | 865,643 | |||||||||||||
144,742 | Thomson * | 198,699 | |||||||||||||
81,861 | Total SA | 4,697,161 | |||||||||||||
4,609 | Unibail-Rodamco SE (REIT) | 913,613 | |||||||||||||
8,847 | Vinci SA | 476,189 | |||||||||||||
Total France | 60,367,127 |
See accompanying notes to the financial statements.
5
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Germany — 4.9% | |||||||||||||||
20,123 | Adidas AG | 949,075 | |||||||||||||
2,342 | Allianz SE (Registered) | 271,355 | |||||||||||||
21,246 | Aurubis AG | 810,153 | |||||||||||||
19,180 | BASF AG | 1,002,367 | |||||||||||||
38,538 | Bayerische Motoren Werke AG | 1,758,947 | |||||||||||||
6,648 | Beiersdorf AG | 337,492 | |||||||||||||
6,486 | Demag Cranes AG | 195,874 | |||||||||||||
47,018 | Deutsche Bank AG (Registered) | 3,193,328 | |||||||||||||
5,360 | Deutsche Boerse AG | 409,959 | |||||||||||||
43,986 | Deutsche Post AG (Registered) | 760,461 | |||||||||||||
194,073 | Deutsche Telekom AG (Registered) | 2,584,067 | |||||||||||||
37,427 | E.ON AG | 1,585,847 | |||||||||||||
20,830 | Fresenius Medical Care AG & Co | 934,641 | |||||||||||||
28,154 | Gildemeister AG | 357,193 | |||||||||||||
36,072 | Hannover Rueckversicherung AG (Registered) * | 1,589,167 | |||||||||||||
51,526 | Heidelberger Druckmaschinen AG * | 451,439 | |||||||||||||
68,857 | Infineon Technologies AG * | 362,745 | |||||||||||||
35,099 | Kloeckner & Co AG * | 938,409 | |||||||||||||
17,999 | MTU Aero Engines Holding AG | 761,058 | |||||||||||||
4,716 | Muenchener Rueckversicherungs-Gesellschaft AG (Registered) | 704,686 | |||||||||||||
7,915 | RWE AG | 733,930 | |||||||||||||
17,623 | Salzgitter AG | 1,682,011 | |||||||||||||
58,895 | SAP AG | 2,875,705 | |||||||||||||
8,384 | SGL Carbon SE * | 310,395 | |||||||||||||
6,911 | Software AG | 530,415 | |||||||||||||
37,961 | Suedzucker AG | 738,639 | |||||||||||||
23,291 | ThyssenKrupp AG | 794,333 | |||||||||||||
2,371 | Vossloh AG | 279,851 | |||||||||||||
Total Germany | 27,903,542 | ||||||||||||||
Greece — 0.9% | |||||||||||||||
49,615 | Alpha Bank A.E. * | 823,829 | |||||||||||||
68,847 | National Bank of Greece SA * | 2,162,434 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Greece — continued | |||||||||||||||
63,941 | OPAP SA | 1,561,707 | |||||||||||||
20,009 | Public Power Corp SA * | 471,843 | |||||||||||||
Total Greece | 5,019,813 | ||||||||||||||
Hong Kong — 1.5% | |||||||||||||||
544,500 | BOC Hong Kong Holdings Ltd | 1,087,506 | |||||||||||||
499,400 | CLP Holdings Ltd | 3,341,494 | |||||||||||||
172,500 | Esprit Holdings Ltd | 1,045,125 | |||||||||||||
370,000 | Hong Kong Electric Holdings Ltd | 2,068,355 | |||||||||||||
60,700 | Hong Kong Exchanges and Clearing Ltd | 1,055,997 | |||||||||||||
Total Hong Kong | 8,598,477 | ||||||||||||||
Ireland — 0.5% | |||||||||||||||
47,729 | C&C Group Plc | 178,182 | |||||||||||||
80,660 | CRH Plc | 2,063,758 | |||||||||||||
9,095 | DCC Plc | 220,587 | |||||||||||||
17,788 | Kerry Group Plc Class A | 465,339 | |||||||||||||
Total Ireland | 2,927,866 | ||||||||||||||
Italy — 5.0% | |||||||||||||||
27,884 | Ansaldo STS SPA | 563,810 | |||||||||||||
29,737 | Atlantia SPA | 663,775 | |||||||||||||
239,678 | Banca Monte dei Paschi di Siena SPA | 504,684 | |||||||||||||
90,968 | Bulgari SPA | 660,717 | |||||||||||||
422,988 | Enel SPA | 2,499,785 | |||||||||||||
323,196 | ENI SPA | 7,679,318 | |||||||||||||
57,923 | Fiat SPA * | 688,177 | |||||||||||||
223,415 | Mediaset SPA | 1,472,764 | |||||||||||||
355,006 | Parmalat SPA | 912,869 | |||||||||||||
37,248 | Saipem SPA | 1,001,277 | |||||||||||||
250,459 | Snam Rete Gas SPA | 1,164,949 | |||||||||||||
870,316 | Telecom Italia SPA | 1,410,428 | |||||||||||||
1,117,630 | Telecom Italia SPA-Di RISP | 1,269,731 | |||||||||||||
36,738 | Tenaris SA | 538,522 |
See accompanying notes to the financial statements.
7
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Italy — continued | |||||||||||||||
266,586 | Terna SPA | 983,584 | |||||||||||||
1,738,874 | UniCredit SPA * | 6,316,574 | |||||||||||||
Total Italy | 28,330,964 | ||||||||||||||
Japan — 26.5% | |||||||||||||||
9,500 | ABC-Mart Inc | 275,675 | |||||||||||||
98,550 | Aiful Corp | 294,207 | |||||||||||||
22,800 | Aisin Seiki Co Ltd | 570,101 | |||||||||||||
13,000 | Asahi Breweries Ltd | 225,574 | |||||||||||||
74,000 | Asahi Glass Co Ltd | 643,638 | |||||||||||||
181,000 | Asahi Kasei Corp | 870,512 | |||||||||||||
52,800 | Astellas Pharma Inc | 2,110,407 | |||||||||||||
15,300 | Bridgestone Corp | 279,217 | |||||||||||||
23,500 | Canon Inc | 898,327 | |||||||||||||
53,600 | Chubu Electric Power Co Inc | 1,246,222 | |||||||||||||
47,500 | Chugai Pharmaceutical Co Ltd | 967,455 | |||||||||||||
12,100 | Chugoku Electric Power Co Inc | 265,842 | |||||||||||||
205,000 | Cosmo Oil Co Ltd | 629,220 | |||||||||||||
45,800 | Culture Convenience Club Co Ltd | 338,387 | |||||||||||||
63,800 | Daiei Inc * | 282,998 | |||||||||||||
184,000 | Daikyo Inc * | 478,273 | |||||||||||||
19,200 | Daito Trust Construction Co Ltd | 914,988 | |||||||||||||
165,000 | Daiwa Securities Group Inc | 1,016,185 | |||||||||||||
99,000 | Daiwabo Co Ltd | 453,742 | |||||||||||||
27,400 | Denso Corp | 797,396 | |||||||||||||
20,700 | Don Quijote Co Ltd | 495,515 | |||||||||||||
142,000 | Dowa Holdings Co Ltd | 799,418 | |||||||||||||
108,000 | Ebara Corp * | 483,832 | |||||||||||||
29,900 | Eisai Co Ltd | 1,092,691 | |||||||||||||
22,600 | Electric Power Development Co Ltd | 685,442 | |||||||||||||
65,300 | Elpida Memory Inc * | 1,018,189 | |||||||||||||
9,700 | FamilyMart Co Ltd | 300,131 | |||||||||||||
27,700 | Fast Retailing Co Ltd | 3,316,552 | |||||||||||||
355,000 | Fuji Heavy Industries Ltd | 1,534,014 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
23,500 | Fuji Oil Co Ltd | 329,749 | |||||||||||||
10,500 | FujiFilm Holdings Corp | 312,499 | |||||||||||||
94,000 | Fujitsu Ltd | 631,165 | |||||||||||||
49,000 | Furukawa Electric Co Ltd (The) | 216,540 | |||||||||||||
85,000 | GS Yuasa Corp | 740,216 | |||||||||||||
84,000 | Hankyu Hanshin Holdings Inc | 402,203 | |||||||||||||
119,000 | Hanwa Co Ltd | 468,701 | |||||||||||||
29,100 | Hitachi Construction Machinery | 589,395 | |||||||||||||
254,000 | Hitachi Ltd | 893,502 | |||||||||||||
194,000 | Honda Motor Co Ltd | 6,082,977 | |||||||||||||
30,800 | Hosiden Corp | 455,105 | |||||||||||||
26,700 | Ibiden Co Ltd | 947,973 | |||||||||||||
110 | INPEX Corp | 895,715 | |||||||||||||
137,000 | Iseki & Co Ltd * | 623,352 | |||||||||||||
158,000 | Itochu Corp | 1,118,332 | |||||||||||||
59,600 | JFE Holdings Inc | 2,080,001 | |||||||||||||
238,000 | Kajima Corp | 667,280 | |||||||||||||
122 | Kakaku.com Inc | 455,941 | |||||||||||||
101,000 | Kamigumi Co Ltd | 855,053 | |||||||||||||
32,400 | Kansai Electric Power Co Inc | 744,550 | |||||||||||||
100,000 | Kao Corp | 2,532,734 | |||||||||||||
216,000 | Kawasaki Kisen Kaisha Ltd | 946,910 | |||||||||||||
481 | Kenedix Inc * | 232,069 | |||||||||||||
72,000 | Kintetsu Corp | 311,792 | |||||||||||||
187,000 | Kobe Steel Ltd | 345,487 | |||||||||||||
35,500 | Komatsu Ltd | 639,596 | |||||||||||||
7,400 | Kyocera Corp | 614,993 | |||||||||||||
17,000 | Kyudenko Corp | 111,959 | |||||||||||||
42,700 | Kyushu Electric Power Co Inc | 942,915 | |||||||||||||
23,500 | Lawson Inc | 1,017,533 | |||||||||||||
49,900 | Leopalace21 Corp | 451,361 | |||||||||||||
231,000 | Marubeni Corp | 1,147,170 | |||||||||||||
712,000 | Mazda Motor Corp | 1,976,096 | |||||||||||||
168,000 | Mitsubishi Chemical Holdings Corp | 762,623 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
71,500 | Mitsubishi Corp | 1,445,365 | |||||||||||||
212,000 | Mitsubishi Motors Corp * | 384,876 | |||||||||||||
388,000 | Mitsubishi UFJ Financial Group Inc | 2,466,620 | |||||||||||||
23,450 | Mitsubishi UFJ Lease & Finance Co Ltd | 743,145 | |||||||||||||
298,000 | Mitsui Mining & Smelting Co Ltd * | 850,435 | |||||||||||||
217,000 | Mitsui OSK Lines Ltd | 1,383,891 | |||||||||||||
1,012,100 | Mizuho Financial Group Inc | 2,462,344 | |||||||||||||
19,500 | Murata Manufacturing Co Ltd | 924,326 | |||||||||||||
21,000 | Nagase & Co | 250,670 | |||||||||||||
178 | Net One Systems Co Ltd | 292,717 | |||||||||||||
26,000 | NGK Insulators Ltd | 604,996 | |||||||||||||
2,700 | Nintendo Co Ltd | 731,763 | |||||||||||||
19,000 | Nippon Corp | 164,331 | |||||||||||||
45,000 | Nippon Electric Glass Co Ltd | 466,828 | |||||||||||||
14,000 | Nippon Meat Packers Inc | 168,999 | |||||||||||||
444,500 | Nippon Mining Holdings Inc | 2,210,692 | |||||||||||||
412,000 | Nippon Oil Corp | 2,352,373 | |||||||||||||
25,900 | Nippon Paper Group Inc | 761,202 | |||||||||||||
61,300 | Nippon Telegraph & Telephone Corp | 2,728,952 | |||||||||||||
115,000 | Nippon Yakin Koguo Co Ltd | 671,344 | |||||||||||||
360,000 | Nippon Yusen KK | 1,557,300 | |||||||||||||
817,200 | Nissan Motor Co Ltd | 5,701,889 | |||||||||||||
105,000 | Nisshinbo Holdings Inc | 1,225,068 | |||||||||||||
9,550 | Nitori Co Ltd | 737,750 | |||||||||||||
16,100 | Nitto Denko Corp | 488,251 | |||||||||||||
59,700 | Nomura Holdings Inc | 529,017 | |||||||||||||
2,167 | NTT Docomo Inc | 3,336,349 | |||||||||||||
162,000 | Obayashi Corp | 728,988 | |||||||||||||
20,000 | Odakyu Electric Railway Co Ltd | 179,517 | |||||||||||||
145,000 | OJI Paper Co Ltd | 683,203 | |||||||||||||
12,000 | Ono Pharmaceutical Co Ltd | 589,892 | |||||||||||||
10,800 | Oriental Land Co Ltd | 730,153 | |||||||||||||
44,830 | ORIX Corp | 3,435,113 | |||||||||||||
514,000 | Osaka Gas Co Ltd | 1,776,393 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
180,000 | Pacific Metals Co Ltd | 1,507,437 | |||||||||||||
11,630 | Point Inc | 710,938 | |||||||||||||
1,169 | Rakuten Inc | 706,146 | |||||||||||||
145,600 | Resona Holdings Inc | 1,983,279 | |||||||||||||
103,400 | Ricoh Company Ltd | 1,487,541 | |||||||||||||
9,400 | Rohm Co Ltd | 634,462 | |||||||||||||
15,200 | Ryohin Keikaku Co Ltd | 693,670 | |||||||||||||
9,700 | Ryosan Co | 246,346 | |||||||||||||
36,600 | Sankyo Co Ltd | 2,302,153 | |||||||||||||
129,000 | Sanyo Electric Co Ltd * | 347,726 | |||||||||||||
118,800 | Sega Sammy Holdings Inc | 1,547,860 | |||||||||||||
205,600 | Seven & I Holdings Co Ltd | 4,962,087 | |||||||||||||
101,000 | Sharp Corp | 1,165,872 | |||||||||||||
4,600 | Shimamura Co Ltd | 411,696 | |||||||||||||
21,800 | Shin-Etsu Chemical Co Ltd | 1,287,312 | |||||||||||||
36,900 | SoftBank Corp | 826,263 | |||||||||||||
597,800 | Sojitz Corp | 1,277,380 | |||||||||||||
79,800 | SUMCO Corp | 1,627,327 | |||||||||||||
129,200 | Sumitomo Corp | 1,321,841 | |||||||||||||
109,600 | Sumitomo Electric Industries Ltd | 1,414,072 | |||||||||||||
523,000 | Sumitomo Metal Industries Ltd | 1,308,790 | |||||||||||||
110,000 | Sumitomo Metal Mining Co Ltd | 1,692,472 | |||||||||||||
305,423 | Sumitomo Trust & Banking Co Ltd | 1,863,090 | |||||||||||||
34,200 | Suzuki Motor Corp | 815,049 | |||||||||||||
332,000 | Taisei Corp | 727,795 | |||||||||||||
38,000 | Taisho Pharmaceutical Co Ltd | 745,103 | |||||||||||||
57,000 | Taiyo Yuden Co Ltd | 678,868 | |||||||||||||
69,500 | Takeda Pharmaceutical Co Ltd | 2,795,789 | |||||||||||||
62,790 | Takefuji Corp | 320,793 | |||||||||||||
25,300 | Tohoku Electric Power Co Inc | 547,580 | |||||||||||||
94,200 | Tokyo Electric Power Co Inc (The) | 2,453,793 | |||||||||||||
16,400 | Tokyo Electron Ltd | 890,702 | |||||||||||||
400,000 | Tokyo Gas Co Ltd | 1,601,814 | |||||||||||||
96,500 | Tokyo Steel Manufacturing Co | 1,270,442 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
114,000 | Tokyo Tatemono Co Ltd | 673,407 | |||||||||||||
69,000 | TonenGeneral Sekiyu KK | 659,673 | |||||||||||||
150,000 | Tosoh Corp | 434,842 | |||||||||||||
28,000 | Toyo Suisan Kaisha Ltd | 712,599 | |||||||||||||
43,100 | Toyota Motor Corp | 1,837,536 | |||||||||||||
44,900 | Toyota Tsusho Corp | 727,542 | |||||||||||||
10,900 | Ulvac Inc | 313,534 | |||||||||||||
6,900 | Unicharm Corp | 618,201 | |||||||||||||
96,600 | UNY Co Ltd | 816,383 | |||||||||||||
11,210 | USS Co Ltd | 705,824 | |||||||||||||
2,213 | Yahoo Japan Corp | 751,937 | |||||||||||||
48,400 | Yamaha Motor Co Ltd | 570,834 | |||||||||||||
Total Japan | 151,588,189 | ||||||||||||||
Malta — 0.0% | |||||||||||||||
1,718,063 | BGP Holding Plc * | — | |||||||||||||
Netherlands — 2.4% | |||||||||||||||
319,579 | Aegon NV * | 2,409,287 | |||||||||||||
43,506 | Heineken NV | 1,840,323 | |||||||||||||
326,900 | ING Groep NV * | 4,928,984 | |||||||||||||
124,002 | Koninklijke Ahold NV | 1,456,240 | |||||||||||||
29,921 | Koninklijke DSM NV | 1,092,186 | |||||||||||||
52,954 | Reed Elsevier NV | 562,625 | |||||||||||||
42,526 | Unilever NV | 1,191,484 | |||||||||||||
Total Netherlands | 13,481,129 | ||||||||||||||
New Zealand — 0.4% | |||||||||||||||
160,177 | Fletcher Building Ltd | 861,856 | |||||||||||||
624,496 | Telecom Corp of New Zealand | 1,172,791 | |||||||||||||
Total New Zealand | 2,034,647 | ||||||||||||||
Norway — 0.1% | |||||||||||||||
26,000 | DnB NOR ASA * | 266,935 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Norway — continued | |||||||||||||||
15,144 | Frontline Ltd | 341,133 | |||||||||||||
Total Norway | 608,068 | ||||||||||||||
Portugal — 0.1% | |||||||||||||||
79,046 | Portugal Telecom SGPS SA | 819,629 | |||||||||||||
Singapore — 1.3% | |||||||||||||||
741,000 | Golden Agri-Resources Ltd * | 244,244 | |||||||||||||
661,500 | Neptune Orient Lines Ltd | 739,543 | |||||||||||||
204,000 | Oversea-Chinese Banking Corp Ltd | 1,095,906 | |||||||||||||
553,000 | SembCorp Marine Ltd | 1,184,835 | |||||||||||||
186,000 | Singapore Exchange Ltd | 1,079,441 | |||||||||||||
150,000 | Singapore Press Holdings Ltd | 380,843 | |||||||||||||
939,670 | Singapore Telecommunications | 2,048,241 | |||||||||||||
80,000 | United Overseas Bank Ltd | 927,902 | |||||||||||||
Total Singapore | 7,700,955 | ||||||||||||||
Spain — 2.8% | |||||||||||||||
8,317 | ACS Actividades de Construccion y Servicios SA | 429,445 | |||||||||||||
107,791 | Banco Bilbao Vizcaya Argentaria SA | 1,916,449 | |||||||||||||
89,019 | Banco Popular Espanol SA | 959,483 | |||||||||||||
307,005 | Banco Santander SA | 4,726,387 | |||||||||||||
25,020 | Inditex SA | 1,364,508 | |||||||||||||
90,534 | Repsol YPF SA | 2,250,286 | |||||||||||||
175,272 | Telefonica SA | 4,431,750 | |||||||||||||
Total Spain | 16,078,308 | ||||||||||||||
Sweden — 2.9% | |||||||||||||||
24,159 | Assa Abloy AB Class B | 388,112 | |||||||||||||
158,286 | Boliden AB | 1,630,379 | |||||||||||||
33,006 | Electrolux AB Series B * | 686,105 | |||||||||||||
221,287 | Ericsson LM B Shares | 2,123,396 | |||||||||||||
84,819 | Hennes & Mauritz AB Class B | 4,709,528 | |||||||||||||
22,336 | Investor AB Class B | 416,509 |
See accompanying notes to the financial statements.
13
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Sweden — continued | |||||||||||||||
191,944 | Nordea Bank AB | 2,013,279 | |||||||||||||
140,709 | Skandinaviska Enskilda Banken AB Class A * | 992,324 | |||||||||||||
16,858 | Skanska AB Class B | 244,734 | |||||||||||||
42,612 | SKF AB Class B | 652,903 | |||||||||||||
41,476 | Svenska Cellulosa AB Class B | 542,171 | |||||||||||||
58,100 | Svenska Handelsbanken AB Class A | 1,526,907 | |||||||||||||
47,379 | Swedbank AB Class A * | 497,466 | |||||||||||||
20,063 | Swedish Match AB | 387,326 | |||||||||||||
Total Sweden | 16,811,139 | ||||||||||||||
Switzerland — 7.6% | |||||||||||||||
8,365 | Actelion Ltd (Registered) * | 483,331 | |||||||||||||
2,523 | Bobst Group AG (Registered) * | 104,520 | |||||||||||||
51,153 | Compagnie Financiere Richemont SA Class A | 1,396,355 | |||||||||||||
68,981 | Credit Suisse Group AG (Registered) | 3,519,341 | |||||||||||||
181,542 | Nestle SA (Registered) | 7,558,152 | |||||||||||||
336,231 | Novartis AG (Registered) | 15,618,977 | |||||||||||||
46,276 | Roche Holding AG (Non Voting) | 7,370,643 | |||||||||||||
6,641 | Swatch Group AG | 1,435,575 | |||||||||||||
2,245 | Swisscom AG (Registered) | 777,922 | |||||||||||||
2,527 | Syngenta AG (Registered) | 593,958 | |||||||||||||
20,390 | Synthes Inc | 2,388,923 | |||||||||||||
121,550 | UBS AG (Registered) * | 2,237,666 | |||||||||||||
Total Switzerland | 43,485,363 | ||||||||||||||
United Kingdom — 22.4% | |||||||||||||||
151,214 | 3i Group Plc | 739,921 | |||||||||||||
79,832 | Amlin Plc | 477,136 | |||||||||||||
74,745 | Antofagasta Plc | 923,329 | |||||||||||||
304,107 | AstraZeneca Plc | 14,111,993 | |||||||||||||
57,777 | Autonomy Corp Plc * | 1,218,548 | |||||||||||||
33,712 | BAE Systems Plc | 170,320 | |||||||||||||
1,690,063 | Barclays Plc * | 10,345,270 | |||||||||||||
209,639 | BG Group Plc | 3,439,574 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
242,489 | BP Plc | 2,078,276 | |||||||||||||
116,923 | British American Tobacco Plc | 3,552,739 | |||||||||||||
536,129 | BT Group Plc | 1,216,711 | |||||||||||||
126,276 | Burberry Group Plc | 989,010 | |||||||||||||
275,515 | Cable & Wireless Plc | 662,289 | |||||||||||||
195,670 | Cadbury Plc | 1,837,265 | |||||||||||||
64,189 | Capita Group Plc | 709,340 | |||||||||||||
212,432 | Centrica Plc | 868,177 | |||||||||||||
197,295 | Cobham Plc | 646,438 | |||||||||||||
149,646 | Compass Group Plc | 790,378 | |||||||||||||
165,679 | Diageo Plc | 2,563,899 | |||||||||||||
116,587 | Drax Group Plc | 905,996 | |||||||||||||
1,342,512 | DSG International Plc * | 604,104 | |||||||||||||
99,270 | Experian Plc | 830,736 | |||||||||||||
1,155,815 | GlaxoSmithKline Plc | 22,570,513 | |||||||||||||
386,361 | Home Retail Group Plc | 1,947,740 | |||||||||||||
184,797 | HSBC Holdings Plc | 1,997,382 | |||||||||||||
23,999 | Imperial Tobacco Group Plc | 673,131 | |||||||||||||
26,347 | Intertek Group Plc | 516,237 | |||||||||||||
86,979 | J Sainsbury Plc | 458,825 | |||||||||||||
42,419 | Kazakhmys Plc | 673,195 | |||||||||||||
353,846 | Kingfisher Plc | 1,212,293 | |||||||||||||
1,886,864 | Lloyds Banking Group Plc * | 3,378,646 | |||||||||||||
246,715 | Marks & Spencer Group Plc | 1,357,161 | |||||||||||||
71,343 | Next Plc | 1,892,400 | |||||||||||||
176,774 | Old Mutual Plc | 268,035 | |||||||||||||
84,929 | Pearson Plc | 1,033,105 | |||||||||||||
42,347 | Prudential Plc | 366,311 | |||||||||||||
74,819 | Reckitt Benckiser Group Plc | 3,459,442 | |||||||||||||
165,891 | Reed Elsevier Plc | 1,200,047 | |||||||||||||
831,066 | Royal Bank of Scotland Group Plc * | 769,676 | |||||||||||||
188,582 | Royal Dutch Shell Group Class A (Amsterdam) | 5,230,452 | |||||||||||||
7,678 | Royal Dutch Shell Plc A Shares (London) | 212,361 | |||||||||||||
158,745 | Royal Dutch Shell Plc B Shares (London) | 4,283,025 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
240,203 | RSA Insurance Group Plc | 507,507 | |||||||||||||
156,433 | Sage Group Plc | 559,350 | |||||||||||||
79,519 | Scottish & Southern Energy Plc | 1,443,475 | |||||||||||||
36,302 | Signet Jewelers Ltd | 858,711 | |||||||||||||
157,015 | Smith & Nephew Plc | 1,329,412 | |||||||||||||
29,186 | SSL International Plc | 264,242 | |||||||||||||
98,792 | Standard Chartered Plc | 2,229,886 | |||||||||||||
241,841 | Tesco Plc | 1,472,143 | |||||||||||||
11,935 | Thomson Reuters Plc | 374,448 | |||||||||||||
94,798 | Travis Perkins Plc | 1,236,871 | |||||||||||||
106,015 | Tullow Oil Plc | 1,846,177 | |||||||||||||
36,764 | Unilever Plc | 1,004,611 | |||||||||||||
20,868 | Vedanta Resources Plc | 602,731 | |||||||||||||
2,917,045 | Vodafone Group Plc | 6,311,972 | |||||||||||||
253,927 | William Hill Plc | 761,670 | |||||||||||||
80,496 | Wolseley Plc * | 1,883,682 | |||||||||||||
251,559 | Wolseley Plc (Deferred) | — | |||||||||||||
39,772 | WPP Plc | 332,406 | |||||||||||||
164,910 | Xstrata Plc | 2,187,920 | |||||||||||||
Total United Kingdom | 128,388,640 | ||||||||||||||
TOTAL COMMON STOCKS (COST $540,780,882) | 559,240,028 | ||||||||||||||
PREFERRED STOCKS — 0.0% | |||||||||||||||
Germany — 0.0% | |||||||||||||||
5,825 | Henkel AG & Co KGaA 1.85% | 230,215 | |||||||||||||
TOTAL PREFERRED STOCKS (COST $168,104) | 230,215 |
See accompanying notes to the financial statements.
16
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 2.2% | |||||||||||||||
EUR | 2,090,665 | Allied Irish Bank Time Deposit, 0.06%, due 09/01/09 | 2,997,178 | ||||||||||||
EUR | 1,589,906 | Banco Santander Time Deposit, 0.06%, due 09/01/09 | 2,279,289 | ||||||||||||
CAD | 44,843 | Bank of America Time Deposit, 0.04%, due 09/01/09 | 40,962 | ||||||||||||
EUR | 2,090,665 | Bank of Ireland Time Deposit, 0.06%, due 09/01/09 | 2,997,178 | ||||||||||||
CHF | 10,802 | Brown Brothers Harriman Time Deposit, 0.02%, due 09/01/09 | 10,201 | ||||||||||||
DKK | 52,405 | Brown Brothers Harriman Time Deposit, 0.30%, due 09/01/09 | 10,093 | ||||||||||||
HKD | 77,503 | Brown Brothers Harriman Time Deposit, 0.01%, due 09/01/09 | 10,000 | ||||||||||||
NZD | 14,878 | Brown Brothers Harriman Time Deposit, 1.50%, due 09/01/09 | 10,210 | ||||||||||||
SEK | 72,229 | Brown Brothers Harriman Time Deposit, 0.01%, due 09/01/09 | 10,147 | ||||||||||||
AUD | 91,684 | Deutsche Bank Time Deposit, 2.17%, due 09/01/09 | 77,491 | ||||||||||||
USD | 664,458 | DnB Nor Bank Time Deposit, 0.03%, due 09/01/09 | 664,458 | ||||||||||||
JPY | 7,177,600 | HSBC Bank (Hong Kong) Time Deposit, 0.01%, due 09/01/09 | 77,137 | ||||||||||||
EUR | 2,090,665 | ING Bank Time Deposit, 0.06%, due 09/01/09 | 2,997,178 | ||||||||||||
NOK | 128,661 | JPMorgan Chase Time Deposit, 0.35%, due 09/01/09 | 21,381 | ||||||||||||
SGD | 79,260 | JPMorgan Chase Time Deposit, 0.01%, due 09/01/09 | 55,005 | ||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $12,257,908) | 12,257,908 | ||||||||||||||
TOTAL INVESTMENTS — 99.9% (Cost $553,206,894) | 571,728,151 | ||||||||||||||
Other Assets and Liabilities (net) — 0.1% | 811,764 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 572,539,915 |
See accompanying notes to the financial statements.
17
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
* Non-income producing security.
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krone
EUR - Euro
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.
18
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $553,206,894) (Note 2) | $ | 571,728,151 | |||||
Dividends receivable | 1,426,827 | ||||||
Foreign taxes receivable | 438,360 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 26,877 | ||||||
Total assets | 573,620,215 | ||||||
Liabilities: | |||||||
Foreign currency due to custodian | 13,719 | ||||||
Payable for Fund shares repurchased | 499,875 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 240,743 | ||||||
Shareholder service fee | 72,223 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 1,063 | ||||||
Accrued expenses | 252,677 | ||||||
Total liabilities | 1,080,300 | ||||||
Net assets | $ | 572,539,915 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 642,963,885 | |||||
Accumulated undistributed net investment income | 7,804,674 | ||||||
Accumulated net realized loss | (96,898,466 | ) | |||||
Net unrealized appreciation | 18,669,822 | ||||||
$ | 572,539,915 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 572,539,915 | |||||
Shares outstanding: | |||||||
Class III | 42,688,623 | ||||||
Net asset value per share: | |||||||
Class III | $ | 13.41 |
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, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $947,642) | $ | 9,686,049 | |||||
Interest | 10,886 | ||||||
Total investment income | 9,696,935 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 1,252,506 | ||||||
Shareholder service fee – Class III (Note 3) | 375,752 | ||||||
Custodian and fund accounting agent fees | 188,640 | ||||||
Audit and tax fees | 40,480 | ||||||
Transfer agent fees | 16,928 | ||||||
Legal fees | 9,384 | ||||||
Trustees fees and related expenses (Note 3) | 4,893 | ||||||
Registration fees | 1,472 | ||||||
Miscellaneous | 6,531 | ||||||
Total expenses | 1,896,586 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (258,928 | ) | |||||
Expense reductions (Note 2) | (176 | ) | |||||
Net expenses | 1,637,482 | ||||||
Net investment income (loss) | 8,059,453 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (51,200,643 | ) | |||||
Closed futures contracts | (434,665 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 1,077,262 | ||||||
Net realized gain (loss) | (50,558,046 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 222,250,561 | ||||||
Open futures contracts | 614,019 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 486,111 | ||||||
Net unrealized gain (loss) | 223,350,691 | ||||||
Net realized and unrealized gain (loss) | 172,792,645 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 180,852,098 |
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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 8,059,453 | $ | 24,126,859 | |||||||
Net realized gain (loss) | (50,558,046 | ) | (41,865,325 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 223,350,691 | (401,368,403 | ) | ||||||||
Net increase (decrease) in net assets from operations | 180,852,098 | (419,106,869 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (1,808,416 | ) | (24,318,799 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (25,255,573 | ) | ||||||||
(1,808,416 | ) | (49,574,372 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (20,527,824 | ) | (209,640,633 | ) | |||||||
Total increase (decrease) in net assets | 158,515,858 | (678,321,874 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 414,024,057 | 1,092,345,931 | |||||||||
End of period (including accumulated undistributed net investment income of $7,804,674 and $1,553,637, respectively) | $ | 572,539,915 | $ | 414,024,057 |
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 9.28 | $ | 18.73 | $ | 20.76 | $ | 18.31 | $ | 15.78 | $ | 13.19 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.18 | 0.48 | 0.51 | 0.36 | 0.35 | 0.26 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 3.99 | (8.92 | ) | 0.20 | (a) | 3.28 | 2.77 | 2.61 | |||||||||||||||||||
Total from investment operations | 4.17 | (8.44 | ) | 0.71 | 3.64 | 3.12 | 2.87 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.04 | ) | (0.49 | ) | (0.57 | ) | (0.40 | ) | (0.31 | ) | (0.28 | ) | |||||||||||||||
From net realized gains | — | (0.52 | ) | (2.17 | ) | (0.79 | ) | (0.28 | ) | — | |||||||||||||||||
Total distributions | (0.04 | ) | (1.01 | ) | (2.74 | ) | (1.19 | ) | (0.59 | ) | (0.28 | ) | |||||||||||||||
Net asset value, end of period | $ | 13.41 | $ | 9.28 | $ | 18.73 | $ | 20.76 | $ | 18.31 | $ | 15.78 | |||||||||||||||
Total Return(b) | 45.02 | %** | (46.71 | )% | 2.28 | % | 20.33 | % | 20.04 | % | 21.94 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 572,540 | $ | 414,024 | $ | 1,092,346 | $ | 1,105,264 | $ | 829,583 | $ | 559,912 | |||||||||||||||
Net expenses to average daily net assets | 0.65 | %(c)* | 0.67 | %(c) | 0.69 | %(c) | 0.69 | % | 0.69 | % | 0.69 | % | |||||||||||||||
Net investment income to average daily net assets | 3.22 | %* | 3.09 | % | 2.33 | % | 1.83 | % | 2.10 | % | 1.91 | % | |||||||||||||||
Portfolio turnover rate | 25 | %** | 67 | % | 41 | % | 34 | % | 39 | % | 44 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.10 | %* | 0.11 | % | 0.09 | % | 0.08 | % | 0.10 | % | 0.16 | % |
(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 and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions.
† 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, 2009 (Unaudited)
1. Organization
GMO Tax-Managed International Equities Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 its benchmark, 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 companies tied economically to countries other than the U.S. The Manager uses quantitative models integrated with tax management techniques to provide broad exposure to the international equity markets to investors subject to U.S. federal income tax. Under normal circumstances, the Fund invests at least 80% of its assets in equity investments (which include common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depository receipts). The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. The Fund may make investments in emerging countries, but these investments generally will represent 15% or less of the Fund's total assets. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter derivatives, including options, futures, and swap contracts. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the
23
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 95.39% of the net assets of the Fund were valued using fair value prices based on models used by a third party vendor and are classified as using Level 2 inputs in the table below.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation or quoted prices for similar securities.
Level 3 – Valuations based on inputs that are unobservable and significant.
24
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | — | $ | 17,607,096 | $ | — | $ | 17,607,096 | |||||||||||
Austria | — | 713,476 | — | 713,476 | |||||||||||||||
Belgium | — | 9,900,178 | — | 9,900,178 | |||||||||||||||
Canada | 10,627,999 | — | — | 10,627,999 | |||||||||||||||
Denmark | — | 2,973,105 | — | 2,973,105 | |||||||||||||||
Finland | — | 3,274,318 | — | 3,274,318 | |||||||||||||||
France | 2,668,561 | 57,698,566 | — | 60,367,127 | |||||||||||||||
Germany | — | 27,903,542 | — | 27,903,542 | |||||||||||||||
Greece | — | 5,019,813 | — | 5,019,813 | |||||||||||||||
Hong Kong | — | 8,598,477 | — | 8,598,477 | |||||||||||||||
Ireland | — | 2,927,866 | — | 2,927,866 | |||||||||||||||
Italy | — | 28,330,964 | — | 28,330,964 | |||||||||||||||
Japan | — | 151,588,189 | — | 151,588,189 | |||||||||||||||
Malta | — | 0 | * | — | 0 | ||||||||||||||
Netherlands | — | 13,481,129 | — | 13,481,129 | |||||||||||||||
New Zealand | — | 2,034,647 | — | 2,034,647 | |||||||||||||||
Norway | — | 608,068 | — | 608,068 | |||||||||||||||
Portugal | — | 819,629 | — | 819,629 | |||||||||||||||
Singapore | — | 7,700,955 | — | 7,700,955 | |||||||||||||||
Spain | — | 16,078,308 | — | 16,078,308 | |||||||||||||||
Sweden | — | 16,811,139 | — | 16,811,139 | |||||||||||||||
Switzerland | — | 43,485,363 | — | 43,485,363 | |||||||||||||||
United Kingdom | — | 128,388,640 | — | 128,388,640 | |||||||||||||||
TOTAL COMMON STOCKS | 13,296,560 | 545,943,468 | — | 559,240,028 | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Germany | — | 230,215 | — | 230,215 | |||||||||||||||
Short-Term Investments | 12,257,908 | — | — | 12,257,908 | |||||||||||||||
Total | $ | 25,554,468 | $ | 546,173,683 | $ | — | $ | 571,728,151 |
* Represents the interest in securities that have no value at August 31, 2009.
25
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized
26
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because many foreign exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign futures in those markets or on 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, the Fund generally values foreign futures using f air value prices, which are based on adjustments to closing prices supplied by a third party vendor based on that vendor's proprietary models. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to
27
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity
28
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the
29
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $46,304,941.
30
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 553,277,223 | $ | 70,115,345 | $ | (51,664,417 | ) | $ | 18,450,928 |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds.
Brown Brothers Harriman & Co. ("BBH") serves as custodian and fund accounting agent of the Fund. State Street Bank and Trust Company ("State Street") serves as transfer agent of the Fund. BBH and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
31
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. There can be no assurance that the Fund's tax management strategies will be effective, and an investor may incur tax liabilities that exceed their economic return. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund's securities may not increase to what the Manager believes to be their fundamental value or that the Manager may have overestimated their fundamental value), Liquidity Risk (difficulty in selling Fund investments), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investm ents in securities and other investments by the Fund), Credit and Counterparty Risk (risk of default of a derivatives counterparty), Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified.
32
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms
33
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
(e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictability of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
34
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
35
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (1,008,597 | ) | $ | — | $ | (1,008,597 | ) | |||||||||||||
Futures contracts | — | — | — | (434,665 | ) | — | (434,665 | ) | |||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | (1,443,262 | ) | $ | — | $ | (1,443,262 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | 34,593 | $ | — | $ | 34,593 | |||||||||||||||
Futures contracts | — | — | — | 614,019 | — | 614,019 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 648,612 | $ | — | $ | 648,612 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Futures | Rights/Warrants | ||||||||||
Average notional amount outstanding | $ | 2,448,009 | $ | 205,675 | |||||||
Highest notional amount outstanding | 9,186,120 | 947,308 | |||||||||
Lowest notional amount outstanding | — | — |
36
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.50% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fun d) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.50% of the Fund's average daily 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's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $3,881 and $2,300, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $122,445,198 and $127,650,935, 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 that provide general indemnifications. The Fund's
37
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 10.11% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 1.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,979,893 | $ | 21,461,024 | 3,751,313 | $ | 51,736,423 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 78,868 | 916,440 | 2,520,757 | 35,938,181 | |||||||||||||||
Shares repurchased | (3,973,109 | ) | (42,905,288 | ) | (19,981,045 | ) | (297,315,237 | ) | |||||||||||
Net increase (decrease) | (1,914,348 | ) | $ | (20,527,824 | ) | (13,708,975 | ) | $ | (209,640,633 | ) |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
38
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In
39
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefi t 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
40
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (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.
Following their review, on June 15, 2009, 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, 2009.
41
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 | 0.65 | % | $ | 1,000.00 | $ | 1,450.20 | $ | 4.01 | |||||||||||
2) Hypothetical | 0.65 | % | $ | 1,000.00 | $ | 1,021.93 | $ | 3.31 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
42
GMO International Small Companies Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO International Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 97.4 | % | |||||
Short-Term Investments | 7.6 | ||||||
Preferred Stocks | 0.9 | ||||||
Futures Contracts | 0.4 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | (6.4 | ) | |||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
Japan | 35.5 | % | |||||
United Kingdom | 21.2 | ||||||
Germany | 6.8 | ||||||
Sweden | 4.7 | ||||||
Italy | 4.2 | ||||||
France | 3.9 | ||||||
Australia | 3.2 | ||||||
Canada | 3.1 | ||||||
Ireland | 2.9 | ||||||
Netherlands | 2.9 | ||||||
Singapore | 1.9 | ||||||
Belgium | 1.7 | ||||||
Finland | 1.6 | ||||||
Hong Kong | 1.5 | ||||||
Norway | 1.2 | ||||||
Austria | 1.1 | ||||||
Switzerland | 0.9 | ||||||
Greece | 0.6 | ||||||
Portugal | 0.4 | ||||||
New Zealand | 0.3 | ||||||
Spain | 0.2 | ||||||
Denmark | 0.2 | ||||||
100.0 | % |
1
GMO International Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Industry Group Summary | % of Equity Investments | ||||||
Capital Goods | 16.2 | % | |||||
Materials | 11.2 | ||||||
Retailing | 9.5 | ||||||
Real Estate | 7.9 | ||||||
Food, Beverage & Tobacco | 5.1 | ||||||
Consumer Services | 5.1 | ||||||
Software & Services | 4.4 | ||||||
Diversified Financials | 4.3 | ||||||
Technology Hardware & Equipment | 4.1 | ||||||
Transportation | 3.6 | ||||||
Media | 3.3 | ||||||
Health Care Equipment & Services | 3.2 | ||||||
Automobiles & Components | 3.1 | ||||||
Energy | 3.0 | ||||||
Insurance | 2.8 | ||||||
Consumer Durables & Apparel | 2.7 | ||||||
Commercial & Professional Services | 2.4 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 2.3 | ||||||
Semiconductors & Semiconductor Equipment | 1.8 | ||||||
Food & Staples Retailing | 1.1 | ||||||
Banks | 0.9 | ||||||
Household & Personal Products | 0.8 | ||||||
Utilities | 0.7 | ||||||
Telecommunication Services | 0.5 | ||||||
100.0 | % |
2
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 97.4% | |||||||||||||||
Australia — 3.1% | |||||||||||||||
200,919 | Ansell Ltd | 1,638,100 | |||||||||||||
1,458,388 | Australian Infrastructure Fund | 1,921,127 | |||||||||||||
767,645 | Challenger Financial Services Group Ltd | 2,032,679 | |||||||||||||
2,468,601 | Commonwealth Property Office Fund | 1,863,619 | |||||||||||||
464,953 | Downer Edi Ltd | 3,142,146 | |||||||||||||
10,877,038 | Goodman Group | 5,697,016 | |||||||||||||
384,402 | Iluka Resources Ltd * | 1,283,722 | |||||||||||||
297,221 | JB Hi-Fi Ltd | 4,473,620 | |||||||||||||
95,907 | Karoon Gas Australia Ltd * | 866,186 | |||||||||||||
5,732,828 | Macquarie CountryWide Trust | 3,051,333 | |||||||||||||
18,340,715 | Macquarie Office Trust | 4,182,913 | |||||||||||||
2,432,161 | Pacific Brands Ltd * | 2,295,971 | |||||||||||||
6,344,870 | PanAust Ltd * | 2,191,825 | |||||||||||||
2,449,350 | PaperlinX Ltd | 1,429,390 | |||||||||||||
1,225,994 | Sigma Pharmaceuticals Ltd | 1,248,999 | |||||||||||||
Total Australia | 37,318,646 | ||||||||||||||
Austria — 1.1% | |||||||||||||||
43,411 | AI Airports International Ltd ADC | 174,786 | |||||||||||||
83,402 | BWIN Interactive Entertainment AG * | 3,273,809 | |||||||||||||
37,495 | Flughafen Wien AG | 1,587,396 | |||||||||||||
1,521,072 | Immofinanz AG * | 4,838,418 | |||||||||||||
141,274 | Wienerberger AG * | 3,229,406 | |||||||||||||
Total Austria | 13,103,815 | ||||||||||||||
Belgium — 1.7% | |||||||||||||||
30,618 | Bekaert NV | 4,073,785 | |||||||||||||
9,192 | Cofinimmo SA | 1,218,863 | |||||||||||||
117,065 | Euronav SA | 2,287,047 | |||||||||||||
44,058 | GIMV NV | 2,266,706 | |||||||||||||
444,347 | Nyrstar * | 4,598,555 | |||||||||||||
68,787 | Omega Pharma SA | 2,658,725 | |||||||||||||
80,854 | Tessenderlo Chemie | 2,826,512 | |||||||||||||
Total Belgium | 19,930,193 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Canada — 3.1% | |||||||||||||||
117,775 | ACE Aviation Holdings Inc Class A * | 467,980 | |||||||||||||
258,500 | Advantage Oil & Gas Ltd | 1,473,432 | |||||||||||||
105,300 | Biovail Corp | 1,345,647 | |||||||||||||
154,375 | Daylight Resources Trust | 1,135,162 | |||||||||||||
53,300 | Dorel Industries Inc Class B | 1,467,424 | |||||||||||||
198,000 | Fairborne Energy Ltd * | 643,873 | |||||||||||||
269,600 | Hudbay Minerals Inc * | 2,078,487 | |||||||||||||
202,500 | Jean Coutu Group PJC (The) Inc | 1,797,945 | |||||||||||||
118,900 | Kingsway Financial Services Inc | 398,596 | |||||||||||||
109,000 | Linamar Corp | 1,264,490 | |||||||||||||
223,900 | Methanex Corp | 4,008,623 | |||||||||||||
39,575 | Open Text Corp * | 1,393,937 | |||||||||||||
164,500 | Osisko Mining Corp * | 1,075,880 | |||||||||||||
309,200 | Precision Drilling Trust | 1,765,243 | |||||||||||||
358,000 | Quadra Mining Ltd * | 3,675,652 | |||||||||||||
69,871 | Quebecor Inc Class B | 1,575,169 | |||||||||||||
477,400 | RONA Inc * | 6,122,581 | |||||||||||||
77,700 | Russel Metals Inc | 1,161,863 | |||||||||||||
140,450 | Torstar Corp Class B | 822,365 | |||||||||||||
151,825 | Transcontinental Inc | 1,317,504 | |||||||||||||
336,300 | Trinidad Drilling Ltd | 1,766,362 | |||||||||||||
Total Canada | 36,758,215 | ||||||||||||||
Denmark — 0.2% | |||||||||||||||
33,973 | D/S Norden A/S | 1,196,177 | |||||||||||||
26,190 | Genmab A/S * | 740,065 | |||||||||||||
Total Denmark | 1,936,242 | ||||||||||||||
Finland — 1.6% | |||||||||||||||
212,770 | Amer Sports Oyj Class A | 2,264,904 | |||||||||||||
254,391 | Huhtamaki Oyj | 3,075,291 | |||||||||||||
45,400 | Orion Oyj Class B | 772,034 | |||||||||||||
100,784 | Outotec Oyj | 2,936,346 | |||||||||||||
87,918 | Pohjola Bank Plc | 1,016,110 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Finland — continued | |||||||||||||||
507,506 | Ruukki Group Oyj * | 1,340,185 | |||||||||||||
131,294 | Tieto Oyj | 2,403,281 | |||||||||||||
370,437 | YIT Oyj | 5,310,166 | |||||||||||||
Total Finland | 19,118,317 | ||||||||||||||
France — 3.8% | |||||||||||||||
29,901 | Alten * | 709,445 | |||||||||||||
4,595 | Bollore | 772,411 | |||||||||||||
55,998 | Bourbon SA | 2,481,314 | |||||||||||||
13,663 | Ciments Francais | 1,503,756 | |||||||||||||
29,831 | Faiveley SA | 2,321,601 | |||||||||||||
22,813 | Fonciere des Regions | 2,390,815 | |||||||||||||
88,684 | Gemalto NV * | 3,696,310 | |||||||||||||
143,917 | Groupe Steria SCA | 3,957,859 | |||||||||||||
365,033 | Havas SA | 1,116,805 | |||||||||||||
44,573 | IMS International Metal Service * | 800,678 | |||||||||||||
123,854 | Maurel et Prom | 2,308,693 | |||||||||||||
44,813 | Nexans SA | 3,283,086 | |||||||||||||
123,012 | Rallye SA | 4,004,273 | |||||||||||||
297,741 | Silicon-On-Insulator Technologies * | 2,734,145 | |||||||||||||
7,903 | Societe BIC SA | 486,382 | |||||||||||||
53,505 | Teleperformance | 1,843,412 | |||||||||||||
2,675,275 | Thomson * | 3,672,559 | |||||||||||||
125,272 | Valeo SA * | 3,195,738 | |||||||||||||
42,388 | Wendel | 2,003,479 | |||||||||||||
65,600 | Zodiac Aerospace | 2,493,701 | |||||||||||||
Total France | 45,776,462 | ||||||||||||||
Germany — 5.8% | |||||||||||||||
259,059 | Aixtron AG | 5,096,547 | |||||||||||||
292,361 | Arques Industries AG * | 757,106 | |||||||||||||
150,508 | Aurubis AG | 5,739,172 | |||||||||||||
40,631 | Bechtle AG | 1,096,057 | |||||||||||||
36,275 | Centrotherm Photovoltaics AG * | 1,465,919 |
See accompanying notes to the financial statements.
5
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Germany — continued | |||||||||||||||
33,358 | Fielmann AG | 2,151,389 | |||||||||||||
122,736 | Freenet AG * | 1,647,641 | |||||||||||||
64,706 | Hannover Rueckversicherung AG (Registered) * | 2,850,650 | |||||||||||||
442,776 | Heidelberger Druckmaschinen AG * | 3,879,327 | |||||||||||||
1,391,805 | Infineon Technologies AG * | 7,332,150 | |||||||||||||
171,564 | Kloeckner & Co AG * | 4,586,946 | |||||||||||||
211,633 | MTU Aero Engines Holding AG | 8,948,549 | |||||||||||||
200,149 | Praktiker Bau-Und Heimwerkermaerkte Holding AG | 2,588,655 | |||||||||||||
91,100 | Qiagen NV * | 1,876,118 | |||||||||||||
48,878 | Rheinmetall AG | 2,392,917 | |||||||||||||
84,499 | Software AG | 6,485,247 | |||||||||||||
174,636 | Suedzucker AG | 3,398,038 | |||||||||||||
157,459 | Tognum AG | 2,406,915 | |||||||||||||
14,153 | Vossloh AG | 1,670,492 | |||||||||||||
252,994 | Wirecard AG | 2,660,603 | |||||||||||||
Total Germany | 69,030,438 | ||||||||||||||
Greece — 0.6% | |||||||||||||||
2,086,065 | Alapis Holding Industrial & Commercial SA | 1,794,368 | |||||||||||||
367,257 | Intralot SA | 2,322,889 | |||||||||||||
69,460 | Jumbo SA | 746,785 | |||||||||||||
158,913 | Motor Oil (Hellas) Corinth Refineries SA | 2,220,387 | |||||||||||||
Total Greece | 7,084,429 | ||||||||||||||
Hong Kong — 1.5% | |||||||||||||||
300,800 | Dah Sing Financial Group | 1,622,014 | |||||||||||||
2,000,000 | First Pacific Co | 1,278,065 | |||||||||||||
3,069,600 | HKR International Ltd * | 1,207,865 | |||||||||||||
4,715,500 | Johnson Electric Holdings Ltd * | 1,867,161 | |||||||||||||
7,546,000 | Pacific Basin Shipping Ltd | 5,036,678 | |||||||||||||
1,032,000 | Sun Hung Kai & Co Ltd | 888,542 | |||||||||||||
908,000 | Texwinca Holdings Ltd | 714,536 | |||||||||||||
657,000 | VTech Holdings Ltd | 5,178,773 | |||||||||||||
Total Hong Kong | 17,793,634 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Ireland — 2.9% | |||||||||||||||
1,006,408 | Allied Irish Banks Plc * | 3,836,395 | |||||||||||||
1,069,039 | Bank of Ireland * | 3,766,025 | |||||||||||||
1,804,969 | C&C Group Plc | 6,738,311 | |||||||||||||
294,223 | DCC Plc | 7,135,999 | |||||||||||||
920,737 | Fyffes Plc | 647,293 | |||||||||||||
776,891 | Grafton Group Plc * | 4,014,734 | |||||||||||||
315,473 | Kingspan Group Plc | 2,833,390 | |||||||||||||
86,743 | Paddy Power Plc | 2,396,658 | |||||||||||||
250,250 | Smurfit Kappa Group Plc | 1,972,053 | |||||||||||||
1,671,045 | Total Produce Ltd | 895,994 | |||||||||||||
Total Ireland | 34,236,852 | ||||||||||||||
Italy — 4.1% | |||||||||||||||
302,578 | Amplifon SPA * | 1,070,377 | |||||||||||||
218,424 | Ansaldo STS SPA | 4,416,495 | |||||||||||||
465,610 | Arnoldo Mondadori Editore SPA * | 2,008,732 | |||||||||||||
53,212 | Autostrada Torino-Milano SPA | 598,869 | |||||||||||||
369,507 | Azimut Holding SPA | 4,274,521 | |||||||||||||
342,916 | Benetton Group SPA | 3,270,020 | |||||||||||||
2,105,270 | Beni Stabili SPA | 1,873,857 | |||||||||||||
338,809 | Cementir SPA | 1,717,716 | |||||||||||||
1,461,487 | CIR-Compagnie Industriali Riunite SPA * | 3,007,646 | |||||||||||||
80,534 | Danieli & Co SPA | 1,699,474 | |||||||||||||
109,061 | DiaSorin SPA | 3,433,245 | |||||||||||||
118,703 | ERG SPA | 1,697,516 | |||||||||||||
283,336 | Indesit Company SPA * | 1,947,276 | |||||||||||||
203,250 | Italcementi SPA-Di RISP | 1,577,881 | |||||||||||||
24,914 | Italmobiliare SPA | 1,144,892 | |||||||||||||
32,164 | Italmobiliare SPA-RSP * | 969,415 | |||||||||||||
485,692 | Maire Tecnimont SPA | 2,082,958 | |||||||||||||
824,936 | Milano Assicurazioni SPA | 2,721,546 | |||||||||||||
3,378,327 | Pirelli & Co Real Estate SPA * | 2,957,554 | |||||||||||||
516,776 | Recordati SPA | 3,491,956 | |||||||||||||
11,909,302 | Seat Pagine Gialle SPA * | 3,111,706 | |||||||||||||
Total Italy | 49,073,652 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — 34.9% | |||||||||||||||
704 | Access Co Ltd * | 1,886,633 | |||||||||||||
230,900 | ADEKA Corp | 2,319,481 | |||||||||||||
71,900 | Aderans Co Ltd | 978,860 | |||||||||||||
1,411,450 | Aiful Corp | 4,213,678 | |||||||||||||
100,100 | Alpen Co Ltd | 1,690,339 | |||||||||||||
401,600 | Alps Electric Co Ltd | 2,416,671 | |||||||||||||
406,200 | AOC Holdings Inc | 3,139,774 | |||||||||||||
116,000 | Aoyama Trading Co Ltd | 2,153,048 | |||||||||||||
141,400 | Autobacs Seven Co Ltd | 5,296,053 | |||||||||||||
610,200 | Cedyna Financial Corp * | 1,140,414 | |||||||||||||
719,000 | Central Glass Co Ltd | 3,536,761 | |||||||||||||
300,500 | Century Tokyo Leasing Corp | 3,454,182 | |||||||||||||
34,200 | Chiba Kogyo Bank Ltd * | 294,366 | |||||||||||||
157,200 | Circle K Sunkus Co Ltd | 2,554,138 | |||||||||||||
92,900 | CMK Corp | 805,483 | |||||||||||||
196,000 | COMSYS Holdings Corp | 2,259,523 | |||||||||||||
399,400 | CSK Holdings Corp * | 1,924,889 | |||||||||||||
203,000 | Culture Convenience Club Co Ltd | 1,499,839 | |||||||||||||
734 | DA Office Investment Corp (REIT) | 2,321,223 | |||||||||||||
640,600 | Daiei Inc * | 2,841,508 | |||||||||||||
130,600 | Daiichikosho Co Ltd | 1,726,543 | |||||||||||||
3,194,000 | Daikyo Inc * | 8,302,202 | |||||||||||||
189,000 | Daio Paper Corp | 1,805,012 | |||||||||||||
608,000 | Daiwabo Co Ltd | 2,786,616 | |||||||||||||
275,100 | DCM Japan Holdings Co Ltd | 1,851,834 | |||||||||||||
294 | DeNa Co Ltd | 929,803 | |||||||||||||
126,900 | Don Quijote Co Ltd | 3,037,720 | |||||||||||||
3,656 | eAccess Ltd | 2,686,754 | |||||||||||||
1,514,000 | Ebara Corp * | 6,782,611 | |||||||||||||
589,600 | Edion Corp | 5,028,613 | |||||||||||||
128,600 | Foster Electric Co Ltd | 2,596,105 | |||||||||||||
42,500 | FP Corp | 2,018,923 | |||||||||||||
351,300 | Fuji Oil Co Ltd | 4,929,401 | |||||||||||||
106,000 | Fuji Soft Inc | 2,003,385 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
485,000 | Fujikura Ltd | 2,551,253 | |||||||||||||
72,000 | Funai Electric Co Ltd | 2,877,256 | |||||||||||||
497,400 | Futaba Industrial Co Ltd | 2,069,977 | |||||||||||||
44,100 | Fuyo General Lease Co Ltd | 983,203 | |||||||||||||
1,187,000 | Godo Steel | 2,904,817 | |||||||||||||
107,090 | Goldcrest Co Ltd | 3,130,560 | |||||||||||||
56,860 | Gulliver International Co Ltd | 3,978,861 | |||||||||||||
169,400 | H.I.S. Co Ltd | 3,596,489 | |||||||||||||
1,288,000 | Hanwa Co Ltd | 5,073,001 | |||||||||||||
2,119,500 | Haseko Corp * | 2,388,913 | |||||||||||||
121,300 | Hitachi Capital Corp | 1,741,132 | |||||||||||||
98,300 | Hitachi Maxell Ltd | 1,828,169 | |||||||||||||
1,184,500 | Hitachi Zosen Corp * | 1,578,345 | |||||||||||||
268,500 | Hokuetsu Paper Mills Ltd | 1,455,392 | |||||||||||||
51,100 | Horiba Ltd | 1,156,508 | |||||||||||||
622,000 | Iseki & Co Ltd * | 2,830,109 | |||||||||||||
188,600 | Itochu Enex Co Ltd | 1,158,380 | |||||||||||||
560,000 | Iwatani International Corp | 1,657,748 | |||||||||||||
407,000 | J-Oil Mills Inc | 1,508,028 | |||||||||||||
651,000 | JACCS Co Ltd | 1,650,179 | |||||||||||||
254 | Japan Excellent Inc | 1,237,513 | |||||||||||||
242,600 | Japan Securities Finance Co Ltd | 1,976,017 | |||||||||||||
620,000 | JFE Shoji Holdings Inc | 2,513,418 | |||||||||||||
1,018,000 | Juki Corp | 1,366,408 | |||||||||||||
254,000 | K's Holdings Corp | 7,790,262 | |||||||||||||
81,500 | Kaga Electronics Co Ltd | 977,625 | |||||||||||||
784 | Kakaku.com Inc | 2,929,980 | |||||||||||||
344,000 | Kaken Pharmaceutical Co Ltd | 3,140,644 | |||||||||||||
463,000 | Kayaba Industry Co | 1,247,027 | |||||||||||||
113,600 | Keihin Corp | 1,885,203 | |||||||||||||
7,159 | Kenedix Inc * | 3,454,023 | |||||||||||||
959 | Kenedix Realty Investment Corp (REIT) | 3,588,792 | |||||||||||||
12,393 | KK daVinci Holdings * | 1,898,937 | |||||||||||||
48,000 | Kobayashi Pharmaceutical Co Ltd | 2,155,719 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
140,300 | Kohnan Shoji Co Ltd | 1,589,667 | |||||||||||||
121,000 | Koito Manufacturing Co Ltd | 1,604,971 | |||||||||||||
273,500 | Kojima Co Ltd | 1,417,582 | |||||||||||||
633,000 | Kurabo Industries Ltd | 1,393,185 | |||||||||||||
100,200 | Kyoei Steel Ltd | 2,386,227 | |||||||||||||
235,000 | Kyokuyo Co Ltd | 484,659 | |||||||||||||
131,000 | Kyorin Co Ltd | 2,225,302 | |||||||||||||
279,000 | Kyowa Exeo Corp | 2,808,804 | |||||||||||||
115,000 | Kyudenko Corp | 757,368 | |||||||||||||
71,800 | Lintec Corp | 1,504,435 | |||||||||||||
113,000 | Maeda Road Construction Co Ltd | 995,217 | |||||||||||||
44,600 | Mandom Corp | 1,295,382 | |||||||||||||
52,100 | Mars Engineering Corp | 1,679,416 | |||||||||||||
1,862,525 | Maruha Group Inc | 2,820,639 | |||||||||||||
124,700 | Megachips Corp | 2,805,629 | |||||||||||||
52,000 | Meitec Corp | 1,032,022 | |||||||||||||
203,600 | Miraca Holdings Inc | 5,870,691 | |||||||||||||
686,000 | Mitsubishi Steel Manufacturing Co Ltd | 1,589,487 | |||||||||||||
1,235,000 | Mizuho Investors Securities Co Ltd * | 1,459,041 | |||||||||||||
475,000 | Morinaga Milk Industry Co Ltd | 2,072,788 | |||||||||||||
238,000 | Nabtesco Corp | 2,645,497 | |||||||||||||
60,000 | Nagase & Co | 716,201 | |||||||||||||
569,000 | Nakayama Steel Works Ltd | 1,210,239 | |||||||||||||
1,705 | Net One Systems Co Ltd | 2,803,837 | |||||||||||||
910,000 | Nichias Corp | 3,500,054 | |||||||||||||
161,400 | Nichicon Corp | 2,245,163 | |||||||||||||
345,000 | Nichirei Corp | 1,332,637 | |||||||||||||
65,000 | Nifco Inc | 1,157,801 | |||||||||||||
74,300 | Nihon Dempa Kogyo Co Ltd | 1,685,401 | |||||||||||||
162,300 | Nihon Kohden Corp | 2,657,316 | |||||||||||||
151,000 | Nihon Nohyaku Co Ltd | 1,249,670 | |||||||||||||
418,000 | Nippon Chemi-Con Corp | 1,616,811 | |||||||||||||
1,315,000 | Nippon Coke & Engineering Co Ltd | 1,722,110 | |||||||||||||
1,200 | Nippon Commercial Investment Corp (REIT) | 2,154,204 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
379,000 | Nippon Corp | 3,277,975 | |||||||||||||
129,000 | Nippon Densetsu Kogyo Co Ltd | 1,277,487 | |||||||||||||
431,000 | Nippon Flour Mills Co Ltd | 2,212,009 | |||||||||||||
215,000 | Nippon Kayaku Co Ltd | 1,882,605 | |||||||||||||
2,344,000 | Nippon Light Metal * | 2,696,669 | |||||||||||||
685,000 | Nippon Metal Industry Co Ltd | 1,521,802 | |||||||||||||
1,025 | Nippon Residential Investment Corp (REIT) | 2,550,259 | |||||||||||||
524,000 | Nippon Sharyo Ltd | 3,462,258 | |||||||||||||
318,000 | Nippon Shokubai Co Ltd | 3,006,810 | |||||||||||||
508,000 | Nippon Soda Co Ltd | 2,408,608 | |||||||||||||
414,000 | Nippon Synthetic Chemical Industry Co Ltd | 2,765,295 | |||||||||||||
261,600 | Nippon System Development Co Ltd | 2,774,492 | |||||||||||||
1,393,500 | Nippon Yakin Koguo Co Ltd | 8,134,932 | |||||||||||||
240,000 | Nipro Corp | 5,121,737 | |||||||||||||
108,600 | Nishimatsuya Chain Co Ltd | 1,086,442 | |||||||||||||
456,000 | Nissan Shatai Co Ltd | 3,742,795 | |||||||||||||
552,000 | Nisshin Oillio Group Ltd (The) | 2,934,761 | |||||||||||||
212,200 | Nissin Kogyo Co Ltd | 2,760,867 | |||||||||||||
431,000 | NOF Corp | 2,452,458 | |||||||||||||
70,800 | Okinawa Electric Power Co | 4,217,198 | |||||||||||||
1,322,500 | Orient Corp * | 1,447,739 | |||||||||||||
245 | ORIX JREIT Inc (REIT) | 1,273,843 | |||||||||||||
78,300 | Osaka Steel Co Ltd | 1,400,467 | |||||||||||||
935,000 | Pacific Metals Co Ltd | 7,830,295 | |||||||||||||
361,200 | Park24 Co Ltd | 3,644,627 | |||||||||||||
63,700 | Pigeon Corp | 2,635,824 | |||||||||||||
104,100 | PLENUS Co Ltd | 1,538,413 | |||||||||||||
86,120 | Point Inc | 5,264,484 | |||||||||||||
159 | Premier Investment Corp (REIT) | 667,945 | |||||||||||||
268,400 | QP Corp | 2,882,493 | |||||||||||||
19,200 | Rinnai Corp | 951,942 | |||||||||||||
577,000 | Round One Corp | 5,227,457 | |||||||||||||
492,000 | Ryobi Ltd | 1,457,872 | |||||||||||||
59,800 | Ryosan Co | 1,518,713 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
186,800 | Saizeriya Co Ltd | 3,095,092 | |||||||||||||
559,000 | Sanken Electric Co Ltd | 2,023,768 | |||||||||||||
553,000 | Sankyo-Tateyama Holdings Inc * | 600,276 | |||||||||||||
41,300 | Sawai Pharmaceuticals Co Ltd | 2,380,449 | |||||||||||||
474,000 | Seino Holdings Co Ltd | 4,216,658 | |||||||||||||
513,000 | Shinwa Kaiun Kaisha Ltd | 1,414,393 | |||||||||||||
46,700 | SHO-BOND Holdings Co Ltd | 903,776 | |||||||||||||
482,800 | Showa Corp | 3,089,429 | |||||||||||||
1,188,000 | Sumitomo Light Metal Industries Ltd * | 1,264,906 | |||||||||||||
38,530 | Sumitomo Real Estate Sales Co Ltd | 1,658,247 | |||||||||||||
961 | T-Gaia Corp | 1,692,863 | |||||||||||||
600,000 | Taihei Kogyo Co Ltd | 1,837,586 | |||||||||||||
303,000 | Taiyo Yuden Co Ltd | 3,608,719 | |||||||||||||
158,700 | Takata Corp | 3,018,487 | |||||||||||||
671,400 | Takefuji Corp | 3,430,169 | |||||||||||||
497,000 | TOA Corp | 608,977 | |||||||||||||
1,189,000 | Toho Zinc Co Ltd | 5,814,187 | |||||||||||||
133,800 | Tokai Rika Co Ltd | 2,393,865 | |||||||||||||
424,000 | Tokyo Rope Manufacturing Co Ltd | 1,436,612 | |||||||||||||
117,800 | Tokyo Steel Manufacturing Co | 1,550,861 | |||||||||||||
355 | Top REIT Inc | 1,476,259 | |||||||||||||
939,000 | Topy Industries Ltd | 2,352,329 | |||||||||||||
215,000 | Toshiba Plant Systems & Services Corp | 2,917,477 | |||||||||||||
45,300 | Towa Pharmaceutical Co Ltd | 2,280,986 | |||||||||||||
1,210,000 | Toyo Tire & Rubber Co Ltd * | 2,874,063 | |||||||||||||
144,000 | TS Tech Co Ltd | 2,605,462 | |||||||||||||
155,000 | Uchida Yoko Co Ltd | 520,120 | |||||||||||||
108,400 | Ulvac Inc | 3,118,083 | |||||||||||||
710,000 | Uniden Corp * | 1,966,020 | |||||||||||||
46,100 | Union Tool Co | 1,413,805 | |||||||||||||
134,000 | Unipres Corp | 1,797,167 | |||||||||||||
325 | United Urban Investment Corp (REIT) | 1,808,423 | |||||||||||||
1,645 | Wacom Co Ltd | 3,305,217 | |||||||||||||
48,700 | WATAMI Co Ltd | 1,020,098 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
1,094 | Works Applications Co Ltd | 713,849 | |||||||||||||
357,000 | Zeon Corp | 1,753,652 | |||||||||||||
Total Japan | 415,973,629 | ||||||||||||||
Netherlands — 2.9% | |||||||||||||||
294,333 | Aalberts Industries NV | 3,619,304 | |||||||||||||
174,073 | Crucell NV * | 3,806,411 | |||||||||||||
216,150 | CSM | 4,704,516 | |||||||||||||
469,294 | Koninklijke BAM Groep NV | 4,936,733 | |||||||||||||
26,963 | Koninklijke Vopak NV * | 1,734,378 | |||||||||||||
102,721 | Mediq NV | 1,629,440 | |||||||||||||
450,596 | OCE NV | 2,647,984 | |||||||||||||
32,004 | Smit International NV | 2,327,218 | |||||||||||||
204,883 | USG People NV * | 3,321,914 | |||||||||||||
56,993 | Vastned NV | 3,465,334 | |||||||||||||
22,048 | Wereldhave NV | 2,165,347 | |||||||||||||
Total Netherlands | 34,358,579 | ||||||||||||||
New Zealand — 0.3% | |||||||||||||||
1,451,590 | Fisher & Paykel Healthcare Corp Ltd | 3,233,315 | |||||||||||||
Norway — 1.2% | |||||||||||||||
1,142,000 | DNO International ASA * | 1,203,593 | |||||||||||||
5,695,000 | Marine Harvest * | 4,052,700 | |||||||||||||
329,000 | Petroleum Geo-Services ASA * | 2,619,664 | |||||||||||||
249,000 | Storebrand ASA * | 1,357,894 | |||||||||||||
225,376 | Tandberg ASA | 4,686,530 | |||||||||||||
Total Norway | 13,920,381 | ||||||||||||||
Portugal — 0.3% | |||||||||||||||
156,125 | Redes Energeticas Nacionais SA | 635,540 | |||||||||||||
2,907,243 | Sonae | 3,586,266 | |||||||||||||
Total Portugal | 4,221,806 |
See accompanying notes to the financial statements.
13
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Singapore — 1.8% | |||||||||||||||
5,620,000 | CapitaCommercial Trust | 3,473,436 | |||||||||||||
3,288,000 | Indofood Agri Resources Ltd * | 3,791,161 | |||||||||||||
688,000 | Keppel Land Ltd | 1,222,231 | |||||||||||||
653,000 | Kim Eng Holdings Ltd | 946,775 | |||||||||||||
1,115,000 | KS Energy Services Ltd | 967,720 | |||||||||||||
1,637,000 | MobileOne Ltd | 1,943,465 | |||||||||||||
514,000 | Singapore Airport Terminal Services Ltd | 881,944 | |||||||||||||
1,524,000 | SMRT Corp Ltd | 1,798,148 | |||||||||||||
3,112,000 | Suntec Real Estate Investment Trust | 2,158,207 | |||||||||||||
612,000 | Venture Corp Ltd | 3,657,339 | |||||||||||||
680,000 | Wheelock Properties Ltd | 853,647 | |||||||||||||
Total Singapore | 21,694,073 | ||||||||||||||
Spain — 0.2% | |||||||||||||||
39,633 | Corp Financiera Alba SA | 2,151,372 | |||||||||||||
Sweden — 4.6% | |||||||||||||||
116,691 | Axfood AB | 3,138,147 | |||||||||||||
118,200 | Betsson AB * | 1,427,013 | |||||||||||||
1,616,534 | Boliden AB | 16,650,644 | |||||||||||||
37,947 | Cardo AB | 999,199 | |||||||||||||
63,100 | D Carnegie AB * (a) | 4,432 | |||||||||||||
754,262 | Eniro AB * | 3,815,207 | |||||||||||||
815,018 | Fabege AB | 4,494,063 | |||||||||||||
199,620 | Hexagon AB Class B | 2,068,116 | |||||||||||||
193,223 | Kinnevik Investment AB Class B | 2,629,758 | |||||||||||||
820,225 | Kungsleden AB | 5,725,108 | |||||||||||||
385,439 | NCC Class B | 4,750,804 | |||||||||||||
28,367 | Oriflame Cosmetics SA SDR | 1,383,554 | |||||||||||||
390,158 | Peab AB | 2,292,351 | |||||||||||||
56,900 | Ratos AB Series B | 1,340,947 | |||||||||||||
856,956 | Trelleborg AB Class B * | 4,622,963 | |||||||||||||
81,342 | Vostok Gas Ltd * (a) | 2,514 | |||||||||||||
Total Sweden | 55,344,820 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Switzerland — 0.8% | |||||||||||||||
30,349 | Actelion Ltd (Registered) * | 1,753,571 | |||||||||||||
326,382 | Clariant AG (Registered) * | 2,959,977 | |||||||||||||
7,770 | Galenica AG | 2,495,224 | |||||||||||||
72,096 | Petroplus Holdings AG * | 1,775,399 | |||||||||||||
4,989 | Valiant Holding AG (Registered) | 950,984 | |||||||||||||
1,790 | Verwaltungs- und Privat-Bank AG | 194,035 | |||||||||||||
Total Switzerland | 10,129,190 | ||||||||||||||
United Kingdom — 20.9% | |||||||||||||||
1,179,203 | Amlin Plc | 7,047,803 | |||||||||||||
262,653 | ARM Holdings Plc | 555,124 | |||||||||||||
195,565 | Arriva Plc | 1,500,284 | |||||||||||||
124,668 | Autonomy Corp Plc * | 2,629,316 | |||||||||||||
1,661,558 | BBA Aviation Plc | 4,147,077 | |||||||||||||
1,084,867 | Brit Insurance Holdings Plc | 3,822,286 | |||||||||||||
202,026 | Britvic Plc | 1,135,954 | |||||||||||||
265,948 | Cape Plc | 815,947 | |||||||||||||
267,451 | Carillion Plc | 1,280,996 | |||||||||||||
3,362,255 | Central African Mining & Exp * | 965,294 | |||||||||||||
192,700 | Charter International Plc | 1,925,997 | |||||||||||||
170,759 | Close Brothers Group Plc | 2,115,431 | |||||||||||||
509,439 | Cookson Group Plc | 3,250,696 | |||||||||||||
868,669 | Daily Mail and General Trust Plc | 5,477,184 | |||||||||||||
668,234 | Dairy Crest Group Plc | 3,323,197 | |||||||||||||
4,534,254 | Debenhams Plc | 5,837,823 | |||||||||||||
2,372,365 | Dimension Data Holdings Plc | 2,285,350 | |||||||||||||
449,134 | Drax Group Plc | 3,490,213 | |||||||||||||
13,303,485 | DSG International Plc * | 5,986,302 | |||||||||||||
245,841 | EasyJet Airline Co * | 1,272,763 | |||||||||||||
831,313 | Electrocomponents Plc | 2,257,631 | |||||||||||||
1,989,806 | Enterprise Inns Plc | 5,342,459 | |||||||||||||
728,683 | F&C Asset Management Plc | 896,729 | |||||||||||||
749,024 | Game Group Plc | 1,991,376 | |||||||||||||
1,490,419 | GKN Plc * | 2,628,795 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
865,654 | GKN Plc (Deferred) * | — | |||||||||||||
159,375 | Go-Ahead Group Plc | 3,502,433 | |||||||||||||
687,919 | Greene King Plc | 5,336,806 | |||||||||||||
571,769 | Halfords Group Plc | 3,130,998 | |||||||||||||
834,161 | Hiscox Ltd | 4,578,599 | |||||||||||||
1,571,962 | HMV Group Plc | 2,995,034 | |||||||||||||
15,280,757 | Inchcape Plc * | 6,855,463 | |||||||||||||
278,421 | Inmarsat Plc | 2,349,506 | |||||||||||||
528,378 | Intermediate Capital Group Plc | 2,562,828 | |||||||||||||
174,595 | Intertek Group Plc | 3,420,972 | |||||||||||||
423,664 | Jardine Lloyd Thompson Group Plc | 3,318,701 | |||||||||||||
515,932 | JD Wetherspoon Plc | 3,958,284 | |||||||||||||
2,933,885 | Johnston Press Plc | 1,805,224 | |||||||||||||
2,349,413 | Kesa Electricals Plc | 5,346,153 | |||||||||||||
108,357 | Ladbrokes Plc | 341,882 | |||||||||||||
908,739 | Lancashire Holdings Ltd | 6,845,335 | |||||||||||||
2,287,632 | Logica Plc | 4,265,508 | |||||||||||||
324,534 | Luminar Group Holdings Plc | 730,640 | |||||||||||||
1,506,546 | Marston's Plc | 2,616,904 | |||||||||||||
198,533 | McBride Plc | 467,479 | |||||||||||||
1,299,075 | Melrose Plc | 3,388,851 | |||||||||||||
695,598 | Micro Focus International Plc | 4,268,280 | |||||||||||||
797,021 | Misys Plc | 2,395,815 | |||||||||||||
611,582 | Mitchells & Butler Plc * | 2,818,200 | |||||||||||||
432,670 | National Express Group Plc | 2,791,601 | |||||||||||||
2,358,353 | Northern Foods Plc | 2,448,417 | |||||||||||||
254,270 | Petrofac Ltd | 3,618,899 | |||||||||||||
7,640,122 | Premier Foods Plc * | 5,450,801 | |||||||||||||
141,230 | Premier Oil Plc * | 2,951,498 | |||||||||||||
92,959 | Provident Financial Plc | 1,332,359 | |||||||||||||
2,782,063 | Punch Taverns Plc * | 5,915,137 | |||||||||||||
1,519,284 | Regus Plc | 2,542,185 | |||||||||||||
3,412,311 | Rentokil Initial Plc | 6,054,006 | |||||||||||||
286,611 | Rightmove Plc | 2,485,502 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
551,438 | Savills Plc | 3,230,973 | |||||||||||||
236,096 | Segro Plc | 1,372,294 | |||||||||||||
1,898,025 | SIG Plc | 4,311,926 | |||||||||||||
469,085 | Signet Jewelers Ltd | 11,096,046 | |||||||||||||
365,697 | Smith News Plc | 713,148 | |||||||||||||
555,198 | SSL International Plc | 5,026,615 | |||||||||||||
371,388 | Tate & Lyle Plc | 2,425,893 | |||||||||||||
636,816 | Tomkins Plc | 1,836,450 | |||||||||||||
745,485 | Travis Perkins Plc | 9,726,669 | |||||||||||||
2,554,923 | Trinity Mirror Plc | 5,696,622 | |||||||||||||
510,800 | Tullett Prebon Plc | 3,334,043 | |||||||||||||
261,477 | WH Smith Plc | 1,869,206 | |||||||||||||
2,749,753 | William Hill Plc | 8,248,053 | |||||||||||||
7,203,639 | Woolworths Group Plc * (a) (b) | — | |||||||||||||
7,032,925 | Yell Group Plc * | 5,231,265 | |||||||||||||
Total United Kingdom | 248,991,530 | ||||||||||||||
TOTAL COMMON STOCKS (COST $1,083,218,107) | 1,161,179,590 | ||||||||||||||
PREFERRED STOCKS — 0.9% | |||||||||||||||
Germany — 0.9% | |||||||||||||||
30,281 | Biotest AG 0.87% | 1,914,983 | |||||||||||||
34,501 | Draegerwerk AG & Co 1.87% | 975,564 | |||||||||||||
113,916 | Hugo Boss AG 6.40% | 3,659,473 | |||||||||||||
457,180 | ProSiebenSat.1 Media AG 0.32% | 4,230,412 | |||||||||||||
Total Germany | 10,780,432 | ||||||||||||||
TOTAL PREFERRED STOCKS (COST $9,268,294) | 10,780,432 | ||||||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||||||
Greece — 0.0% | |||||||||||||||
2,086,065 | Alapis Holding Industrial and Commercial Rights, Expires 12/31/49 * | 418,682 |
See accompanying notes to the financial statements.
17
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||||||
Singapore — 0.0% | |||||||||||||||
61,000 | Tat Hong Holdings Ltd Warrants, Expires 08/02/13 * | 4,445 | |||||||||||||
TOTAL RIGHTS AND WARRANTS (COST $501,815) | 423,127 | ||||||||||||||
SHORT-TERM INVESTMENTS — 7.6% | |||||||||||||||
USD | 5,000,000 | Allied Irish Bank Time Deposit, 0.03%, due 09/01/09 | 5,000,000 | ||||||||||||
USD | 5,000,000 | Banco Santander Time Deposit, 0.03%, due 09/01/09 | 5,000,000 | ||||||||||||
USD | 5,000,000 | Bank of America Time Deposit, 0.03%, due 09/01/09 | 5,000,000 | ||||||||||||
USD | 4,757,871 | Bank of Ireland Time Deposit, 0.03%, due 09/01/09 | 4,757,871 | ||||||||||||
EUR | 168,736 | Bank of Ireland Time Deposit, 0.06%, due 09/01/09 | 241,900 | ||||||||||||
USD | 93,000 | Bank of Montreal Time Deposit, 0.03%, due 09/01/09 | 93,000 | ||||||||||||
USD | 35,536,101 | Brown Brothers Harriman Time Deposit, 0.03%, due 09/01/09 | 35,536,101 | ||||||||||||
CAD | 11,031 | Brown Brothers Harriman Deposit, 0.04%, due 09/01/09 | 10,076 | ||||||||||||
CHF | 11,462 | Brown Brothers Harriman Time Deposit, 0.02%, due 09/01/09 | 10,825 | ||||||||||||
DKK | 52,350 | Brown Brothers Harriman Time Deposit, 0.30%, due 09/01/09 | 10,083 | ||||||||||||
HKD | 77,511 | Brown Brothers Harriman Time Deposit, 0.01%, due 09/01/09 | 10,001 | ||||||||||||
JPY | 974,120 | Brown Brothers Harriman Time Deposit, 0.01%, due 09/01/09 | 10,469 | ||||||||||||
NOK | 60,807 | Brown Brothers Harriman Time Deposit, 0.35%, due 09/01/09 | 10,105 | ||||||||||||
NZD | 15,343 | Brown Brothers Harriman Time Deposit, 1.50%, due 09/01/09 | 10,529 | ||||||||||||
SEK | 72,128 | Brown Brothers Harriman Time Deposit, 0.01%, due 09/01/09 | 10,133 | ||||||||||||
USD | 5,000,000 | Citibank Time Deposit, 0.03%, due 09/01/09 | 5,000,000 | ||||||||||||
USD | 5,000,000 | Danske Bank Time Deposit, 0.03%, due 09/01/09 | 5,000,000 | ||||||||||||
AUD | 88,345 | Deutsche Bank Time Deposit, 2.17%, due 09/01/09 | 74,669 | ||||||||||||
USD | 5,000,000 | DNB Nor Bank Time Deposit, 0.03%, due 09/01/09 | 5,000,000 | ||||||||||||
USD | 4,884,913 | JPMorgan Chase Time Deposit, 0.03%, due 09/01/09 | 4,884,913 | ||||||||||||
SGD | 165,846 | JPMorgan Chase Time Deposit, 0.01%, due 09/01/09 | 115,095 | ||||||||||||
USD | 5,000,000 | Rabobank Time Deposit, 0.03%, due 09/01/09 | 5,000,000 | ||||||||||||
USD | 5,000,000 | Royal Bank of Canada Time Deposit, 0.03%, due 09/01/09 | 5,000,000 | ||||||||||||
USD | 5,000,000 | Societe Generale Time Deposit, 0.03%, due 09/01/09 | 5,000,000 | ||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $90,785,770) | 90,785,770 | ||||||||||||||
TOTAL INVESTMENTS — 105.9% (Cost $1,183,773,986) | 1,263,168,919 | ||||||||||||||
Other Assets and Liabilities (net) — (5.9%) | (70,591,864 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,192,577,055 |
See accompanying notes to the financial statements.
18
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys † | |||||||||||||||||||
10/23/09 | CHF | 14,745,647 | $ | 13,931,965 | $ | 241,611 | |||||||||||||
10/23/09 | CHF | 14,745,647 | 13,931,965 | 207,641 | |||||||||||||||
10/23/09 | CHF | 15,192,485 | 14,354,145 | 217,919 | |||||||||||||||
10/23/09 | HKD | 24,304,235 | 3,137,129 | (388 | ) | ||||||||||||||
10/23/09 | JPY | 159,941,420 | 1,719,491 | 19,397 | |||||||||||||||
10/23/09 | NZD | 2,101,774 | 1,437,629 | 32,358 | |||||||||||||||
10/23/09 | SEK | 111,562,544 | 15,675,673 | 323,861 | |||||||||||||||
10/23/09 | SEK | 43,580,568 | 6,123,514 | 33,584 | |||||||||||||||
10/23/09 | SEK | 111,562,544 | 15,675,673 | 334,395 | |||||||||||||||
$ | 85,987,184 | $ | 1,410,378 | ||||||||||||||||
Sales # | |||||||||||||||||||
10/23/09 | CAD | 11,885,079 | $ | 10,857,374 | $ | (125,005 | ) | ||||||||||||
10/23/09 | EUR | 9,514,261 | 13,639,950 | (201,799 | ) | ||||||||||||||
10/23/09 | EUR | 12,544,507 | 17,984,209 | (121,082 | ) | ||||||||||||||
10/23/09 | EUR | 9,514,261 | 13,639,951 | (216,679 | ) | ||||||||||||||
10/23/09 | HKD | 24,333,186 | 3,140,866 | 16 | |||||||||||||||
10/23/09 | JPY | 159,941,420 | 1,719,491 | (28,948 | ) | ||||||||||||||
10/23/09 | NOK | 15,289,249 | 2,536,944 | (59,707 | ) | ||||||||||||||
10/23/09 | SGD | 8,443,903 | 5,857,102 | (38,797 | ) | ||||||||||||||
10/23/09 | SGD | 7,765,439 | 5,386,487 | (15,636 | ) | ||||||||||||||
$ | 74,762,374 | $ | (807,637 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
19
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
222 | CAC 40 | September 2009 | $ | 11,661,282 | $ | 789,888 | |||||||||||||
13 | DAX | September 2009 | 2,552,165 | 376,552 | |||||||||||||||
207 | FTSE 100 | September 2009 | 16,455,434 | 2,274,215 | |||||||||||||||
112 | FTSE/MIB | September 2009 | 18,076,433 | 2,385,970 | |||||||||||||||
35 | TOPIX | September 2009 | 3,611,812 | 168,586 | |||||||||||||||
$ | 52,357,126 | $ | 5,995,211 | ||||||||||||||||
Sales | |||||||||||||||||||
10 | IBEX 35 | September 2009 | $ | 1,631,869 | $ | (115,568 | ) | ||||||||||||
98 | OMXS30 | September 2009 | 1,249,651 | (58,114 | ) | ||||||||||||||
244 | S&P Toronto 60 | September 2009 | 29,054,889 | (989,957 | ) | ||||||||||||||
43 | SPI 200 | September 2009 | 4,058,142 | (555,007 | ) | ||||||||||||||
$ | 35,994,551 | $ | (1,718,646 | ) |
As of August 31, 2009, for the futures contracts held, 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
SDR - Swedish Depository Receipt
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(b) Bankrupt issuer.
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krone EUR - Euro 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.
20
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $1,183,773,986) (Note 2) | $ | 1,263,168,919 | |||||
Cash | 183,111 | ||||||
Receivable for investments sold | 3,855,473 | ||||||
Receivable for Fund shares sold | 370,553 | ||||||
Dividends receivable | 999,863 | ||||||
Foreign taxes receivable | 171,040 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 1,410,782 | ||||||
Receivable for foreign currency sold | 406,853 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 8,755,321 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 7,230 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 47,616 | ||||||
Miscellaneous receivable | 37,539 | ||||||
Total assets | 1,279,414,300 | ||||||
Liabilities: | |||||||
Foreign currency due to custodian | 68,881 | ||||||
Payable for investments purchased | 68,398,010 | ||||||
Payable for Fund shares repurchased | 16,653,662 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 526,610 | ||||||
Shareholder service fee | 131,652 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 955 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 808,041 | ||||||
Miscellaneous payable | 37,002 | ||||||
Accrued expenses | 212,432 | ||||||
Total liabilities | 86,837,245 | ||||||
Net assets | $ | 1,192,577,055 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 1,236,245,701 | |||||
Accumulated undistributed net investment income | 7,523,915 | ||||||
Accumulated net realized loss | (135,420,716 | ) | |||||
Net unrealized appreciation | 84,228,155 | ||||||
$ | 1,192,577,055 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 1,192,577,055 | |||||
Shares outstanding: | |||||||
Class III | 173,363,392 | ||||||
Net asset value per share: | |||||||
Class III | $ | 6.88 |
See accompanying notes to the financial statements.
21
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $944,398) | $ | 9,547,275 | |||||
Interest | 9,734 | ||||||
Total investment income | 9,557,009 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 1,977,055 | ||||||
Shareholder service fee – Class III (Note 3) | 494,264 | ||||||
Custodian and fund accounting agent fees | 221,918 | ||||||
Audit and tax fees | 39,928 | ||||||
Transfer agent fees | 13,800 | ||||||
Legal fees | 10,304 | ||||||
Trustees fees and related expenses (Note 3) | 5,222 | ||||||
Registration fees | 1,656 | ||||||
Miscellaneous | 7,082 | ||||||
Total expenses | 2,771,229 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (290,550 | ) | |||||
Expense reductions (Note 2) | (550 | ) | |||||
Net expenses | 2,480,129 | ||||||
Net investment income (loss) | 7,076,880 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (66,240,610 | ) | |||||
Closed futures contracts | (2,527,346 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 1,050,658 | ||||||
Net realized gain (loss) | (67,717,298 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 377,192,386 | ||||||
Open futures contracts | 6,375,727 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 1,458,581 | ||||||
Net unrealized gain (loss) | 385,026,694 | ||||||
Net realized and unrealized gain (loss) | 317,309,396 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 324,386,276 |
See accompanying notes to the financial statements.
22
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 7,076,880 | $ | 15,943,005 | |||||||
Net realized gain (loss) | (67,717,298 | ) | (57,563,603 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 385,026,694 | (311,531,978 | ) | ||||||||
Net increase (decrease) in net assets from operations | 324,386,276 | (353,152,576 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (7,981,098 | ) | (11,541,650 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (26,984,042 | ) | ||||||||
(7,981,098 | ) | (38,525,692 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 486,587,389 | 97,920,776 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 2,768,521 | 1,037,841 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 489,355,910 | 98,958,617 | |||||||||
Total increase (decrease) in net assets | 805,761,088 | (292,719,651 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 386,815,967 | 679,535,618 | |||||||||
End of period (including accumulated undistributed net investment income of $7,523,915 and $8,428,133, respectively) | $ | 1,192,577,055 | $ | 386,815,967 |
See accompanying notes to the financial statements.
23
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 4.20 | $ | 9.29 | $ | 12.22 | $ | 14.93 | $ | 17.84 | $ | 17.09 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.06 | 0.20 | 0.24 | 0.25 | 0.34 | 0.30 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.68 | (4.78 | ) | (0.34 | ) | 2.68 | 3.44 | 3.56 | |||||||||||||||||||
Total from investment operations | 2.74 | (4.58 | ) | (0.10 | ) | 2.93 | 3.78 | 3.86 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.06 | ) | (0.13 | ) | (0.51 | ) | (0.33 | ) | (0.44 | ) | (0.54 | ) | |||||||||||||||
From net realized gains | — | (0.38 | ) | (2.32 | ) | (5.31 | ) | (6.25 | ) | (2.57 | ) | ||||||||||||||||
Total distributions | (0.06 | ) | (0.51 | ) | (2.83 | ) | (5.64 | ) | (6.69 | ) | (3.11 | ) | |||||||||||||||
Net asset value, end of period | $ | 6.88 | $ | 4.20 | $ | 9.29 | $ | 12.22 | $ | 14.93 | $ | 17.84 | |||||||||||||||
Total Return(a) | 65.48 | %** | (51.47 | )% | (2.04 | )% | 23.35 | % | 25.77 | % | 24.45 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,192,577 | $ | 386,816 | $ | 679,536 | $ | 856,471 | $ | 986,602 | $ | 1,517,223 | |||||||||||||||
Net expenses to average daily net assets | 0.75 | %(c)* | 0.75 | %(b) | 0.76 | %(b) | 0.75 | % | 0.75 | % | 0.75 | % | |||||||||||||||
Net investment income to average daily net assets | 2.15 | %* | 2.89 | % | 1.98 | % | 1.79 | % | 2.01 | % | 1.75 | % | |||||||||||||||
Portfolio turnover rate | 23 | %** | 64 | % | 72 | % | 48 | % | 49 | % | 53 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.09 | %* | 0.12 | % | 0.13 | % | 0.09 | % | 0.11 | % | 0.11 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.02 | $ | 0.01 | $ | 0.04 | $ | 0.03 | $ | 0.07 | $ | 0.08 |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
(c) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
24
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO International Small Companies Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 its benchmark, the MSCI EAFE (Europe, Australasia, and Far East) Small Cap Index. 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 the smallest excluded developed country companies ("small companies"). Under normal circumstances, the Fund invests at least 80% of its assets in securities of small companies. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. To the extent the Fund takes tempo rary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the counter derivatives, including options, futures, and swap contracts. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported
25
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sal e, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 95.19% of the net assets of the Fund were valued using fair value prices based on models used by a third party vendor and are classified as u sing Level 2 inputs in the table below.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation or quoted prices for similar securities.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund considered certain bankrupt securities to be worthless. With respect to certain securities for which no current market or bid prices were available, the Fund valued those securities at the most recent available market or bid price.
26
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | — | $ | 37,318,646 | $ | — | $ | 37,318,646 | |||||||||||
Austria | — | 13,103,815 | — | 13,103,815 | |||||||||||||||
Belgium | — | 19,930,193 | — | 19,930,193 | |||||||||||||||
Canada | 36,758,215 | — | — | 36,758,215 | |||||||||||||||
Denmark | — | 1,936,242 | — | 1,936,242 | |||||||||||||||
Finland | — | 19,118,317 | — | 19,118,317 | |||||||||||||||
France | — | 45,776,462 | — | 45,776,462 | |||||||||||||||
Germany | — | 69,030,438 | — | 69,030,438 | |||||||||||||||
Greece | — | 7,084,429 | — | 7,084,429 | |||||||||||||||
Hong Kong | — | 17,793,634 | — | 17,793,634 | |||||||||||||||
Ireland | — | 34,236,852 | — | 34,236,852 | |||||||||||||||
Italy | — | 49,073,652 | — | 49,073,652 | |||||||||||||||
Japan | — | 415,973,629 | — | 415,973,629 | |||||||||||||||
Netherlands | — | 34,358,579 | — | 34,358,579 | |||||||||||||||
New Zealand | — | 3,233,315 | — | 3,233,315 | |||||||||||||||
Norway | — | 13,920,381 | — | 13,920,381 | |||||||||||||||
Portugal | — | 4,221,806 | — | 4,221,806 | |||||||||||||||
Singapore | — | 21,694,073 | — | 21,694,073 | |||||||||||||||
Spain | — | 2,151,372 | — | 2,151,372 | |||||||||||||||
Sweden | — | 55,337,874 | 6,946 | 55,344,820 | |||||||||||||||
Switzerland | — | 10,129,190 | — | 10,129,190 | |||||||||||||||
United Kingdom | — | 248,991,530 | 0 | * | 248,991,530 | ||||||||||||||
TOTAL COMMON STOCKS | 36,758,215 | 1,124,414,429 | 6,946 | 1,161,179,590 | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Germany | — | 10,780,432 | — | 10,780,432 | |||||||||||||||
TOTAL PREFERRED STOCKS | — | 10,780,432 | — | 10,780,432 |
27
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Rights and Warrants | |||||||||||||||||||
Greece | $ | — | $ | 418,682 | $ | — | $ | 418,682 | |||||||||||
Singapore | — | 4,445 | — | 4,445 | |||||||||||||||
TOTAL RIGHTS AND WARRANTS | — | 423,127 | — | 423,127 | |||||||||||||||
Short-Term Investments | 90,785,770 | — | — | 90,785,770 | |||||||||||||||
Total Investments | 127,543,985 | 1,135,617,988 | 6,946 | 1,263,168,919 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | — | 1,410,782 | — | 1,410,782 | |||||||||||||||
Futures Contracts | — | 5,995,211 | — | 5,995,211 | |||||||||||||||
Total | $ | 127,543,985 | $ | 1,143,023,981 | $ | 6,946 | $ | 1,270,574,912 |
* Represents the interest in securities that have no value at August 31, 2009.
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | $ | — | $ | (808,041 | ) | $ | — | $ | (808,041 | ) | |||||||||
Futures Contracts | (989,957 | ) | (728,689 | ) | — | (1,718,646 | ) | ||||||||||||
Total | $ | (989,957 | ) | $ | (1,536,730 | ) | $ | — | $ | (2,526,687 | ) |
The aggregate net value of the Fund's direct investments in securities using Level 3 inputs was less than 0.01% of total net assets.
28
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Common Stocks | |||||||||||||||||||||||||||||||
Sweden | $ | 5,140 | $ | — | $ | — | $ | — | $ | 1,806 | $ | — | $ | 6,946 | |||||||||||||||||
United Kingdom | 125,815 | — | — | — | (125,815 | ) | — | — | |||||||||||||||||||||||
Total | $ | 130,955 | $ | — | $ | — | $ | — | $ | (124,009 | ) | $ | — | $ | 6,946 |
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
29
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because many foreign exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign futures on those exchanges do not reflect events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor based on that vendor's proprietary models. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying
30
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations.
31
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exposure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. The Fund had no swap agreements 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, 2009 (Unaudited)
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. Rights and warrants held by the Fund 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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
33
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $48,125,769.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (16,328,991 | ) | ||||
Total | $ | (16,328,991 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,191,406,928 | $ | 142,638,753 | $ | (70,876,762 | ) | $ | 71,761,991 |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
34
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds.
Brown Brothers Harriman & Co. ("BBH") serves as custodian and fund accounting agent of the Fund. State Street Bank and Trust Company ("State Street") serves as transfer agent of the Fund. BBH and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
As of August 31, 2009, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.50% of the amount invested or redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund wil l not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
35
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Smaller Company Risk — The securities of small companies typically are less widely held, trade less frequently and in lesser quantities, and have market prices that may fluctuate more than those of securities of larger capitalization companies.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. These risks are particularly pronounced for the Fund because it makes equity investments in small companies and may make investments in companies in emerging countries.
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund's securities may not increase to what the Manager believes to be their fundamental value or that the Manager may have overestimated their fundamental value), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Credit and Counterparty Risk (risk of default of a derivatives counterparty or borrower of the Fund's securities), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations b y purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected).
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments
36
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the
37
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
38
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | 423,127 | $ | — | $ | 423,127 | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | 5,995,211 | — | 5,995,211 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 1,410,782 | — | — | — | 1,410,782 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | 1,410,782 | $ | — | $ | 6,418,338 | $ | — | $ | 7,829,120 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | (1,718,646 | ) | — | (1,718,646 | ) | |||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | (808,041 | ) | — | — | — | (808,041 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | (808,041 | ) | $ | — | $ | (1,718,646 | ) | $ | — | $ | (2,526,687 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
39
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (3,044,076 | ) | $ | — | $ | (3,044,076 | ) | |||||||||||||
Futures contracts | — | — | — | (2,527,346 | ) | — | (2,527,346 | ) | |||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 838,619 | — | — | — | 838,619 | |||||||||||||||||||||
Total | $ | — | $ | 838,619 | $ | — | $ | (5,571,422 | ) | $ | — | $ | (4,732,803 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (79,871 | ) | $ | — | $ | (79,871 | ) | |||||||||||||
Futures contracts | — | — | — | 6,375,727 | — | 6,375,727 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 1,479,258 | — | — | — | 1,479,258 | |||||||||||||||||||||
Total | $ | — | $ | 1,479,258 | $ | — | $ | 6,295,856 | $ | — | $ | 7,775,114 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Forwards | Futures | Rights/Warrants | |||||||||||||
Average notional amount outstanding | $ | 151,407,977 | $ | 56,881,586 | $ | 691,444 | |||||||||
Highest notional amount outstanding | 181,633,076 | 88,351,677 | 1,712,751 | ||||||||||||
Lowest notional amount outstanding | 118,931,651 | 37,080,664 | 1,183 |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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
40
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.60% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fun d) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.60% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.60% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $4,118 and $2,300, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $648,613,620 and $146,929,799, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
41
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2009, 26.51% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 0.97% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 52.50% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 86,207,437 | $ | 516,563,603 | 27,018,472 | $ | 144,232,120 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,200,073 | 7,056,428 | 5,410,297 | 37,797,241 | |||||||||||||||
Shares repurchased | (6,096,093 | ) | (37,032,642 | ) | (13,514,910 | ) | (84,108,585 | ) | |||||||||||
Purchase premiums | — | 2,591,525 | — | 671,626 | |||||||||||||||
Redemption fees | — | 176,996 | — | 366,215 | |||||||||||||||
Net increase (decrease) | 81,311,417 | $ | 489,355,910 | 18,913,859 | $ | 98,958,617 |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
42
GMO International Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In
43
GMO International Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefi t 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
44
GMO International Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (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.
Following their review, on June 15, 2009, 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, 2009.
45
GMO International Small Companies Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009, through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | $ | 1,654.80 | $ | 5.02 | |||||||||||
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, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
46
GMO Foreign Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Foreign Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.7 | % | |||||
Short-Term Investments | 2.3 | ||||||
Preferred Stocks | 0.5 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | 0.5 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
Japan | 21.9 | % | |||||
United Kingdom | 21.9 | ||||||
France | 11.8 | ||||||
Italy | 9.0 | ||||||
Germany | 7.3 | ||||||
Finland | 3.7 | ||||||
Hong Kong | 3.3 | ||||||
Switzerland | 3.2 | ||||||
Australia | 2.8 | ||||||
Netherlands | 2.8 | ||||||
Spain | 2.8 | ||||||
Sweden | 2.4 | ||||||
Norway | 1.6 | ||||||
South Korea | 1.1 | ||||||
Greece | 0.9 | ||||||
Belgium | 0.8 | ||||||
Brazil | 0.8 | ||||||
Singapore | 0.6 | ||||||
Taiwan | 0.5 | ||||||
Austria | 0.3 | ||||||
India | 0.1 | ||||||
Ireland | 0.1 | ||||||
Mexico | 0.1 | ||||||
Philippines | 0.1 | ||||||
Turkey | 0.1 | ||||||
Canada | 0.0 | ||||||
New Zealand | 0.0 | ||||||
100.0 | % |
1
GMO Foreign Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Industry Group Summary | % of Equity Investments | ||||||
Banks | 12.5 | % | |||||
Energy | 10.1 | ||||||
Capital Goods | 8.0 | ||||||
Telecommunication Services | 7.1 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 6.7 | ||||||
Food, Beverage & Tobacco | 6.0 | ||||||
Automobiles & Components | 6.0 | ||||||
Materials | 5.9 | ||||||
Utilities | 5.6 | ||||||
Technology Hardware & Equipment | 4.7 | ||||||
Insurance | 4.4 | ||||||
Real Estate | 3.7 | ||||||
Food & Staples Retailing | 2.9 | ||||||
Transportation | 2.6 | ||||||
Software & Services | 2.5 | ||||||
Household & Personal Products | 1.8 | ||||||
Diversified Financials | 1.8 | ||||||
Media | 1.7 | ||||||
Consumer Durables & Apparel | 1.6 | ||||||
Consumer Services | 1.5 | ||||||
Semiconductors & Semiconductor Equipment | 0.9 | ||||||
Health Care Equipment & Services | 0.8 | ||||||
Retailing | 0.7 | ||||||
Commercial & Professional Services | 0.5 | ||||||
100.0 | % |
2
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 96.7% | |||||||||||||||
Australia — 2.7% | |||||||||||||||
982,677 | Aristocrat Leisure Ltd | 3,840,637 | |||||||||||||
2,792,800 | Asciano Group * | 3,759,622 | |||||||||||||
646,020 | Australia and New Zealand Banking Group Ltd | 11,605,630 | |||||||||||||
484,119 | Brambles Ltd | 3,040,731 | |||||||||||||
422,668 | Coca Cola Amatil Ltd | 3,534,171 | |||||||||||||
561,449 | Consolidated Media Holdings Ltd | 1,513,523 | |||||||||||||
1,036,861 | Crown Ltd | 6,929,420 | |||||||||||||
125,808 | CSL Ltd | 3,419,328 | |||||||||||||
3,750,280 | Fairfax Media Ltd | 4,655,367 | |||||||||||||
407,072 | Goodman Group | 213,210 | |||||||||||||
1,885,036 | Insurance Australia Group Ltd | 5,694,163 | |||||||||||||
479,766 | Lend Lease Corp Ltd | 3,826,584 | |||||||||||||
488,270 | Metcash Ltd | 1,761,444 | |||||||||||||
3,110,300 | Mirvac Group | 3,869,981 | |||||||||||||
235,715 | National Australia Bank Ltd | 5,671,601 | |||||||||||||
86,682 | QBE Insurance Group Ltd | 1,675,123 | |||||||||||||
51,765 | Rio Tinto Ltd | 2,460,404 | |||||||||||||
1,578,898 | Stockland (REIT) | 5,024,599 | |||||||||||||
606,644 | TABCORP Holdings Ltd | 3,436,378 | |||||||||||||
1,366,634 | Tatts Group Ltd | 2,863,243 | |||||||||||||
1,866,862 | Telstra Corp Ltd | 5,139,778 | |||||||||||||
282,706 | Westfield Group | 3,018,622 | |||||||||||||
321,947 | Westpac Banking Corp | 6,612,508 | |||||||||||||
83,700 | Woolworths Ltd | 1,978,856 | |||||||||||||
Total Australia | 95,544,923 | ||||||||||||||
Austria — 0.3% | |||||||||||||||
20,223 | Flughafen Wien AG | 856,165 | |||||||||||||
92,634 | OMV AG | 3,657,359 | |||||||||||||
169,290 | Telekom Austria AG | 2,959,597 | |||||||||||||
88,336 | Wienerberger AG * | 2,019,288 | |||||||||||||
Total Austria | 9,492,409 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Belgium — 0.8% | |||||||||||||||
305,660 | Belgacom SA | 11,481,535 | |||||||||||||
74,821 | Delhaize Group | 5,017,622 | |||||||||||||
2,621,800 | Fortis * | 11,184,507 | |||||||||||||
Total Belgium | 27,683,664 | ||||||||||||||
Brazil — 0.6% | |||||||||||||||
670,300 | Hypermarcas SA * | 10,662,489 | |||||||||||||
315,800 | Localiza Rent A Car SA | 2,815,005 | |||||||||||||
48,600 | Lojas Renner SA | 771,019 | |||||||||||||
139,600 | Sul America SA | 2,759,113 | |||||||||||||
118,000 | Totvs SA | 5,128,339 | |||||||||||||
Total Brazil | 22,135,965 | ||||||||||||||
Canada — 0.0% | |||||||||||||||
220,100 | KAP Resources Ltd * (a) (b) | — | |||||||||||||
Finland — 3.6% | |||||||||||||||
452,613 | Fortum Oyj | 11,850,507 | |||||||||||||
255,120 | KCI Konecranes Oyj | 7,237,842 | |||||||||||||
216,570 | Kone Oyj Class B | 7,549,773 | |||||||||||||
3,719,811 | Nokia Oyj | 52,218,062 | |||||||||||||
328,625 | Nokian Renkaat Oyj | 7,407,164 | |||||||||||||
440,660 | Sampo Oyj Class A | 10,562,464 | |||||||||||||
932,144 | Stora Enso Oyj-Class R * | 6,422,509 | |||||||||||||
506,400 | Tieto Oyj | 9,269,436 | |||||||||||||
693,825 | UPM-Kymmene Oyj | 8,355,133 | |||||||||||||
531,651 | YIT Oyj | 7,621,148 | |||||||||||||
Total Finland | 128,494,038 | ||||||||||||||
France — 11.4% | |||||||||||||||
81,900 | Accor SA | 4,323,365 | |||||||||||||
316,231 | Air France-KLM * | 4,838,357 | |||||||||||||
3,077,621 | Alcatel-Lucent * | 11,687,844 | |||||||||||||
287,250 | ArcelorMittal | 10,273,271 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
France — continued | |||||||||||||||
533,161 | AXA | 12,177,677 | |||||||||||||
360,633 | BNP Paribas | 29,078,493 | |||||||||||||
294,523 | Bouygues SA | 14,655,392 | |||||||||||||
224,213 | Cap Gemini SA | 10,878,391 | |||||||||||||
488,150 | Carrefour SA | 23,053,128 | |||||||||||||
8,119 | CNP Assurances | 811,108 | |||||||||||||
99,707 | Compagnie Generale des Etablissements Michelin-Class B | 7,529,500 | |||||||||||||
209,899 | Danone SA | 11,444,036 | |||||||||||||
152,974 | Essilor International SA | 8,276,266 | |||||||||||||
1,055,135 | France Telecom SA | 26,834,260 | |||||||||||||
664,206 | GDF Suez | 28,074,845 | |||||||||||||
118,585 | GDF Suez VVPR Strip * | 170 | |||||||||||||
101,567 | L'Oreal SA | 10,026,429 | |||||||||||||
39,645 | Lafarge SA | 3,378,501 | |||||||||||||
55,146 | Neopost SA | 4,551,450 | |||||||||||||
115,088 | Pernod-Ricard SA | 8,989,914 | |||||||||||||
165,701 | Peugeot SA * | 4,809,532 | |||||||||||||
157,878 | Renault SA * | 7,123,717 | |||||||||||||
595,796 | Sanofi-Aventis | 40,566,394 | |||||||||||||
132,104 | Schneider Electric SA | 12,207,496 | |||||||||||||
82,259 | Societe BIC SA | 5,062,540 | |||||||||||||
143,321 | Societe Generale | 11,584,583 | |||||||||||||
66,129 | Sodexo | 3,813,883 | |||||||||||||
93,822 | Technip SA | 5,818,206 | |||||||||||||
92,369 | Thales SA | 4,248,340 | |||||||||||||
1,015,947 | Total SA | 58,294,757 | |||||||||||||
832,999 | Vivendi Universal SA | 23,778,344 | |||||||||||||
Total France | 408,190,189 | ||||||||||||||
Germany — 6.8% | |||||||||||||||
251,467 | Adidas AG | 11,860,118 | |||||||||||||
254,529 | Allianz SE (Registered) | 29,490,902 | |||||||||||||
55,261 | Axel Springer AG | 4,849,714 | |||||||||||||
182,129 | BASF AG | 9,518,250 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Germany — continued | |||||||||||||||
277,898 | Bayer AG | 17,089,474 | |||||||||||||
153,891 | Bayerische Motoren Werke AG | 7,023,876 | |||||||||||||
104,102 | Beiersdorf AG | 5,284,837 | |||||||||||||
298,917 | Commerzbank AG * | 2,763,704 | |||||||||||||
582,261 | Daimler AG (Registered) | 26,364,209 | |||||||||||||
50,872 | Deutsche Bank AG (Registered) | 3,455,081 | |||||||||||||
152,000 | Deutsche Lufthansa AG (Registered) | 2,445,685 | |||||||||||||
120,269 | Deutsche Post AG (Registered) | 2,079,297 | |||||||||||||
928,924 | Deutsche Telekom AG (Registered) | 12,368,552 | |||||||||||||
669,095 | E.ON AG | 28,350,724 | |||||||||||||
72,514 | Fraport AG | 3,670,762 | |||||||||||||
96,500 | Gerresheimer AG | 2,721,704 | |||||||||||||
201,620 | Heidelberger Druckmaschinen AG * | 1,766,469 | |||||||||||||
185,121 | MAN SE | 14,191,744 | |||||||||||||
37,666 | Merck KGaA | 3,418,935 | |||||||||||||
58,262 | Muenchener Rueckversicherungs-Gesellschaft AG (Registered) | 8,705,773 | |||||||||||||
165,649 | RWE AG | 15,360,047 | |||||||||||||
297,814 | SAP AG | 14,541,561 | |||||||||||||
177,893 | Siemens AG (Registered) | 15,454,707 | |||||||||||||
Total Germany | 242,776,125 | ||||||||||||||
Greece — 0.8% | |||||||||||||||
4,172,613 | Alapis Holding Industrial & Commercial SA | 3,589,151 | |||||||||||||
514,828 | EFG Eurobank Ergasias * | 7,228,793 | |||||||||||||
320,344 | National Bank of Greece SA * | 10,061,772 | |||||||||||||
351,242 | OPAP SA | 8,578,800 | |||||||||||||
Total Greece | 29,458,516 | ||||||||||||||
Hong Kong — 3.2% | |||||||||||||||
912,500 | Cheung Kong Holdings Ltd | 10,802,632 | |||||||||||||
1,423,000 | CLP Holdings Ltd | 9,521,318 | |||||||||||||
4,074,622 | Great Eagle Holdings Ltd | 8,772,173 | |||||||||||||
775,000 | Hang Seng Bank Ltd | 11,005,688 | |||||||||||||
1,699,000 | Hutchison Whampoa Ltd | 11,931,921 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Hong Kong — continued | |||||||||||||||
7,737,232 | Link (REIT) | 17,054,418 | |||||||||||||
3,446,500 | MTR Corp Ltd | 11,607,801 | |||||||||||||
8,082,887 | New World Development Co Ltd | 16,309,039 | |||||||||||||
4,016,000 | Wharf Holdings Ltd (The) | 17,895,971 | |||||||||||||
Total Hong Kong | 114,900,961 | ||||||||||||||
India — 0.1% | |||||||||||||||
98,500 | Infosys Technologies Ltd Sponsored ADR | 4,258,155 | |||||||||||||
Ireland — 0.1% | |||||||||||||||
95,700 | Bank of Ireland * | 337,133 | |||||||||||||
200,800 | C&C Group Plc | 749,627 | |||||||||||||
139,046 | CRH Plc | 3,557,616 | |||||||||||||
7,119 | DCC Plc | 172,662 | |||||||||||||
Total Ireland | 4,817,038 | ||||||||||||||
Italy — 8.7% | |||||||||||||||
646,160 | Alleanza Assicurazioni SPA | 5,317,542 | |||||||||||||
639,993 | Assicurazioni Generali SPA | 15,973,561 | |||||||||||||
141,308 | Atlantia SPA | 3,154,207 | |||||||||||||
265,100 | Autogrill SPA * | 2,990,825 | |||||||||||||
6,479,439 | Banca Monte dei Paschi di Siena SPA | 13,643,589 | |||||||||||||
317,673 | Banca Popolare di Milano Scarl | 2,398,738 | |||||||||||||
269,507 | Buzzi Unicem SPA | 4,619,089 | |||||||||||||
6,607,627 | Enel SPA | 39,049,921 | |||||||||||||
2,351,150 | ENI SPA | 55,864,645 | |||||||||||||
654,280 | Fiat SPA * | 7,773,435 | |||||||||||||
820,593 | Finmeccanica SPA | 13,132,494 | |||||||||||||
194,200 | Fondiaria-Sai SPA | 3,742,358 | |||||||||||||
5,615,753 | Intesa San Paolo * | 24,401,964 | |||||||||||||
2,495,714 | Intesa Sanpaolo-Di RISP | 8,156,412 | |||||||||||||
514,017 | Italcementi SPA-Di RISP | 3,990,444 | |||||||||||||
282,526 | Lottomatica SPA | 6,368,988 | |||||||||||||
1,198,917 | Mediaset SPA | 7,903,327 |
See accompanying notes to the financial statements.
7
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Italy — continued | |||||||||||||||
528,734 | Mediobanca SPA | 7,262,766 | |||||||||||||
2,021,031 | Pirelli & C SPA * | 970,117 | |||||||||||||
353,991 | Prysmian SPA | 6,631,849 | |||||||||||||
745,496 | Snam Rete Gas SPA | 3,467,493 | |||||||||||||
12,046,429 | Telecom Italia SPA | 19,522,359 | |||||||||||||
13,557,018 | Telecom Italia SPA-Di RISP | 15,402,022 | |||||||||||||
6,940,175 | UniCredit SPA * | 25,210,644 | |||||||||||||
760,814 | Unione di Banche Italiane ScpA | 11,512,240 | |||||||||||||
Total Italy | 308,461,029 | ||||||||||||||
Japan — 21.3% | |||||||||||||||
485,700 | Aisin Seiki Co Ltd | 12,144,641 | |||||||||||||
323,600 | Asahi Breweries Ltd | 5,615,064 | |||||||||||||
992,000 | Asahi Glass Co Ltd | 8,628,225 | |||||||||||||
413,500 | Astellas Pharma Inc | 16,527,523 | |||||||||||||
782,500 | Bridgestone Corp | 14,280,229 | |||||||||||||
767,700 | Canon Inc | 29,346,612 | |||||||||||||
239,200 | Circle K Sunkus Co Ltd | 3,886,449 | |||||||||||||
328,500 | Denso Corp | 9,560,021 | |||||||||||||
468,600 | East Japan Railway Co | 30,601,945 | |||||||||||||
174,800 | Electric Power Development Co Ltd | 5,301,561 | |||||||||||||
1,512,000 | Fujitsu Ltd | 10,152,362 | |||||||||||||
985,000 | Furukawa Electric Co Ltd (The) | 4,352,896 | |||||||||||||
1,679,000 | Honda Motor Co Ltd | 52,645,973 | |||||||||||||
640,100 | Hoya Corp | 14,422,777 | |||||||||||||
1,362,000 | Itochu Corp | 9,640,306 | |||||||||||||
679 | Japan Real Estate Investment Corp | 5,533,687 | |||||||||||||
4,689 | Japan Tobacco Inc | 13,595,660 | |||||||||||||
516,100 | JSR Corp | 9,075,680 | |||||||||||||
6,096 | Jupiter Telecommunications Co Ltd | 5,306,947 | |||||||||||||
772,000 | Kao Corp | 19,552,702 | |||||||||||||
888,000 | Kirin Holdings Co Ltd | 12,982,349 | |||||||||||||
390,700 | Konami Corp | 7,684,110 | |||||||||||||
361,900 | Lawson Inc | 15,670,002 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
3,628,000 | Mazda Motor Corp | 10,069,210 | |||||||||||||
157,900 | Miraca Holdings Inc | 4,552,957 | |||||||||||||
590,300 | Mitsubishi Corp | 11,932,854 | |||||||||||||
2,727,000 | Mitsubishi Electric Corp | 20,263,080 | |||||||||||||
1,786,000 | Mitsubishi Materials Corp | 5,445,541 | |||||||||||||
2,628,600 | Mitsubishi UFJ Financial Group Inc | 16,710,712 | |||||||||||||
1,929,900 | Mitsui & Co Ltd | 25,096,428 | |||||||||||||
4,724,900 | Mizuho Financial Group Inc | 11,495,235 | |||||||||||||
728,000 | Nichirei Corp | 2,812,058 | |||||||||||||
196,200 | Nidec Corp | 14,111,862 | |||||||||||||
30,700 | Nintendo Co Ltd | 8,320,411 | |||||||||||||
598 | Nippon Building Fund Inc | 5,264,247 | |||||||||||||
4,074,000 | Nippon Steel Corp | 15,972,348 | |||||||||||||
433,000 | Nissan Chemical Industries Ltd | 6,339,746 | |||||||||||||
3,819,000 | Nissan Motor Co Ltd | 26,646,495 | |||||||||||||
188,800 | Nissin Foods Holding Co Ltd | 6,219,681 | |||||||||||||
1,385,800 | Nomura Holdings Inc | 12,279,932 | |||||||||||||
933 | Nomura Real Estate Office Fund (REIT) | 6,461,003 | |||||||||||||
288,200 | Nomura Research Institute Ltd | 6,862,881 | |||||||||||||
5,088 | NTT Data Corp | 17,308,414 | |||||||||||||
18,453 | NTT Docomo Inc | 28,410,545 | |||||||||||||
184,710 | ORIX Corp | 14,153,462 | |||||||||||||
462 | ORIX JREIT Inc (REIT) | 2,402,104 | |||||||||||||
1,961,900 | Panasonic Corp | 31,316,512 | |||||||||||||
620,000 | Ricoh Company Ltd | 8,919,491 | |||||||||||||
1,028,000 | Sekisui Chemical Co Ltd | 6,556,411 | |||||||||||||
139,900 | Shin-Etsu Chemical Co Ltd | 8,261,238 | |||||||||||||
811,600 | Shionogi & Co Ltd | 19,842,200 | |||||||||||||
994,000 | Sompo Japan Insurance Inc | 6,764,560 | |||||||||||||
337,300 | Stanley Electric Co Ltd | 6,797,996 | |||||||||||||
42,600 | Sugi Holdings Co Ltd | 974,208 | |||||||||||||
924,300 | Sumitomo Corp | 9,456,483 | |||||||||||||
1,288,200 | Sumitomo Electric Industries Ltd | 16,620,504 | |||||||||||||
457,100 | Sumitomo Mitsui Financial Group Inc | 19,639,801 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
589,000 | Sumitomo Realty & Development Co Ltd | 12,367,704 | |||||||||||||
707,000 | Tokai Carbon Co Ltd | 3,627,116 | |||||||||||||
298,000 | Toyo Suisan Kaisha Ltd | 7,584,094 | |||||||||||||
94,300 | Tsumura & Co | 3,342,932 | |||||||||||||
Total Japan | 757,710,177 | ||||||||||||||
Mexico — 0.1% | |||||||||||||||
70,200 | Grupo Aeroportuario del Sureste SAB de CV ADR | 2,885,220 | |||||||||||||
Netherlands — 2.7% | |||||||||||||||
403,100 | Aegon NV * | 3,038,947 | |||||||||||||
62,370 | Akzo Nobel NV | 3,540,841 | |||||||||||||
129,600 | ASML Holding NV | 3,563,821 | |||||||||||||
233,144 | Fugro NV | 12,579,526 | |||||||||||||
79,938 | Heineken NV | 3,381,412 | |||||||||||||
936,427 | ING Groep NV * | 14,119,407 | |||||||||||||
1,035,135 | Koninklijke Ahold NV | 12,156,294 | |||||||||||||
703,812 | Koninklijke KPN NV | 10,832,711 | |||||||||||||
194,380 | Koninklijke Philips Electronics NV | 4,394,248 | |||||||||||||
191,836 | Koninklijke Ten Cate NV | 4,063,447 | |||||||||||||
325,861 | TNT NV | 8,069,397 | |||||||||||||
562,390 | Unilever NV | 15,756,912 | |||||||||||||
Total Netherlands | 95,496,963 | ||||||||||||||
New Zealand — 0.0% | |||||||||||||||
90,009 | Air New Zealand | 77,080 | |||||||||||||
282,663 | Telecom Corp of New Zealand | 530,835 | |||||||||||||
Total New Zealand | 607,915 | ||||||||||||||
Norway — 1.6% | |||||||||||||||
388,500 | Aker Solutions ASA | 3,828,061 | |||||||||||||
782,000 | DnB NOR ASA * | 8,028,598 | |||||||||||||
1,795,000 | DNO International ASA * | 1,891,812 | |||||||||||||
3,274,500 | Dockwise Ltd * | 3,740,229 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Norway — continued | |||||||||||||||
543,200 | Norsk Hydro ASA * | 3,263,345 | |||||||||||||
4,307,470 | Prosafe ASA | 21,063,385 | |||||||||||||
3,796,454 | Prosafe Production Public Ltd * | 7,984,531 | |||||||||||||
255,650 | Yara International ASA | 6,976,918 | |||||||||||||
Total Norway | 56,776,879 | ||||||||||||||
Philippines — 0.1% | |||||||||||||||
31,072,000 | Alliance Global Group Inc * | 3,237,521 | |||||||||||||
Singapore — 0.6% | |||||||||||||||
4,012,000 | Ascendas Real Estate Investment Trust (REIT) | 4,598,521 | |||||||||||||
3,913,030 | ComfortDelgro Corp Ltd | 4,211,549 | |||||||||||||
666,130 | DBS Group Holdings Ltd | 5,849,728 | |||||||||||||
549,300 | Singapore Airlines Ltd | 4,906,851 | |||||||||||||
400,989 | Singapore Airport Terminal Services Ltd | 688,035 | |||||||||||||
Total Singapore | 20,254,684 | ||||||||||||||
South Korea — 1.1% | |||||||||||||||
136,973 | KB Financial Group Inc * | 5,623,858 | |||||||||||||
65,100 | KT&G Corp | 3,506,082 | |||||||||||||
81,500 | Samsung Card Co Ltd | 3,323,654 | |||||||||||||
35,990 | Samsung Electronics Co Ltd | 22,192,313 | |||||||||||||
8,600 | Shinsegae Co Ltd | 3,562,616 | |||||||||||||
Total South Korea | 38,208,523 | ||||||||||||||
Spain — 2.7% | |||||||||||||||
597,280 | Banco Bilbao Vizcaya Argentaria SA | 10,619,225 | |||||||||||||
1,544,325 | Banco Santander SA | 23,775,109 | |||||||||||||
1,573,416 | Iberdrola SA | 14,608,928 | |||||||||||||
79,711 | Red Electrica de Espana | 3,744,762 | |||||||||||||
279,218 | Repsol YPF SA | 6,940,160 | |||||||||||||
20,478 | Tecnicas Reunidas SA | 1,115,787 | |||||||||||||
1,456,755 | Telefonica SA | 36,834,030 | |||||||||||||
Total Spain | 97,638,001 |
See accompanying notes to the financial statements.
11
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Sweden — 2.4% | |||||||||||||||
298,884 | Assa Abloy AB Class B | 4,801,542 | |||||||||||||
199,796 | Elekta AB Class B | 3,532,773 | |||||||||||||
672,090 | Ericsson LM B Shares | 6,449,152 | |||||||||||||
307,449 | Getinge AB Class B | 5,285,217 | |||||||||||||
131,800 | Hennes & Mauritz AB Class B | 7,318,121 | |||||||||||||
70,100 | Millicom International Cellular SA SDR * | 4,922,309 | |||||||||||||
1,185,249 | Nordea Bank AB | 12,431,945 | |||||||||||||
847,000 | Skandinaviska Enskilda Banken AB Class A * | 5,973,308 | |||||||||||||
468,200 | Skanska AB Class B | 6,797,031 | |||||||||||||
359,232 | Svenska Cellulosa AB Class B | 4,695,850 | |||||||||||||
231,900 | Svenska Handelsbanken AB Class A | 6,094,487 | |||||||||||||
301,300 | Tele2 AB Class B | 4,195,871 | |||||||||||||
996,442 | TeliaSonera AB | 6,483,497 | |||||||||||||
658,700 | Volvo AB Class B | 5,783,646 | |||||||||||||
Total Sweden | 84,764,749 | ||||||||||||||
Switzerland — 3.1% | |||||||||||||||
30,669 | Baloise Holding Ltd | 2,783,765 | |||||||||||||
88,721 | Bank Sarasin & Cie AG Class B (Registered) * | 3,287,819 | |||||||||||||
60,358 | Energiedienst Holding AG (Registered) | 3,078,331 | |||||||||||||
69,400 | Lonza Group AG (Registered) | 6,826,422 | |||||||||||||
705,747 | Nestle SA (Registered) | 29,382,420 | |||||||||||||
606,660 | Novartis AG (Registered) | 28,181,246 | |||||||||||||
69,355 | Roche Holding AG (Non Voting) | 11,046,568 | |||||||||||||
660 | Sika AG | 840,216 | |||||||||||||
70,500 | Sulzer AG | 5,469,397 | |||||||||||||
26,091 | Swisscom AG (Registered) | 9,040,878 | |||||||||||||
100,000 | UBS AG (Registered) * | 1,840,943 | |||||||||||||
34,703 | Zurich Financial Services AG | 7,647,933 | |||||||||||||
Total Switzerland | 109,425,938 | ||||||||||||||
Taiwan — 0.5% | |||||||||||||||
2,204,830 | Acer Inc | 5,015,103 | |||||||||||||
192,146 | Chunghwa Telecom Co Ltd ADR 144A | 3,285,697 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Taiwan — continued | |||||||||||||||
2,672,460 | Quanta Computer Inc | 5,530,935 | |||||||||||||
2,874,299 | Taiwan Semiconductor Manufacturing Co Ltd | 5,164,622 | |||||||||||||
Total Taiwan | 18,996,357 | ||||||||||||||
Turkey — 0.1% | |||||||||||||||
721,300 | Turkiye Halk Bankasi AS | 3,899,080 | |||||||||||||
United Kingdom — 21.3% | |||||||||||||||
153,475 | AMEC Plc | 1,873,240 | |||||||||||||
260,525 | Amlin Plc | 1,557,093 | |||||||||||||
449,444 | Anglo American Plc * | 14,610,073 | |||||||||||||
258,433 | Associated British Foods Plc | 3,350,673 | |||||||||||||
667,324 | AstraZeneca Plc | 30,966,967 | |||||||||||||
1,162,075 | Aviva Plc | 7,610,017 | |||||||||||||
2,990,597 | BAE Systems Plc | 15,109,097 | |||||||||||||
3,177,980 | Barclays Plc * | 19,453,158 | |||||||||||||
65,427 | Berkeley Group Holdings Plc (Unit Shares) * | 1,003,708 | |||||||||||||
1,481,372 | BG Group Plc | 24,305,062 | |||||||||||||
909,607 | BHP Billiton Plc | 23,693,475 | |||||||||||||
7,742,842 | BP Plc | 66,360,787 | |||||||||||||
568,928 | British American Tobacco Plc | 17,287,042 | |||||||||||||
180,669 | British Sky Broadcasting Group Plc | 1,596,860 | |||||||||||||
173,407 | Bunzl Plc | 1,651,096 | |||||||||||||
261,078 | Capita Group Plc | 2,885,123 | |||||||||||||
97,870 | Carnival Plc | 2,985,510 | |||||||||||||
1,633,747 | Centrica Plc | 6,676,873 | |||||||||||||
685,204 | Cobham Plc | 2,245,074 | |||||||||||||
797,648 | Compass Group Plc | 4,212,900 | |||||||||||||
801,626 | Diageo Plc | 12,405,243 | |||||||||||||
402,597 | Experian Plc | 3,369,113 | |||||||||||||
79,754 | Fresnillo Plc | 804,502 | |||||||||||||
2,262,953 | GlaxoSmithKline Plc | 44,190,472 | |||||||||||||
433,541 | Group 4 Securicor Plc | 1,567,211 | |||||||||||||
188,531 | Hiscox Ltd | 1,034,822 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
873,350 | Home Retail Group Plc | 4,402,770 | |||||||||||||
7,539,818 | HSBC Holdings Plc | 81,496,270 | |||||||||||||
121,995 | ICAP Plc | 845,996 | |||||||||||||
808,617 | Imperial Tobacco Group Plc | 22,680,332 | |||||||||||||
1,037,191 | International Power Plc | 4,730,680 | |||||||||||||
531,120 | J Sainsbury Plc | 2,801,721 | |||||||||||||
95,527 | Jardine Lloyd Thompson Group Plc | 748,295 | |||||||||||||
547,186 | John Wood Group Plc | 2,644,416 | |||||||||||||
138,307 | Johnson Matthey Plc | 3,171,764 | |||||||||||||
246,142 | Kazakhmys Plc | 3,906,306 | |||||||||||||
761,514 | Lamprell Plc | 1,940,323 | |||||||||||||
42,330 | Lancashire Holdings Ltd | 318,863 | |||||||||||||
486,118 | Land Securities Group Plc | 4,854,210 | |||||||||||||
3,235,291 | Legal & General Group Plc | 4,023,705 | |||||||||||||
4,383,328 | Lloyds Banking Group Plc | 7,848,852 | |||||||||||||
66,580 | Lonmin Plc * | 1,569,334 | |||||||||||||
118,200 | Man Group Plc | 512,015 | |||||||||||||
1,070,255 | Marks & Spencer Group Plc | 5,887,392 | |||||||||||||
708,924 | National Grid Plc | 6,805,900 | |||||||||||||
240,888 | Next Plc | 6,389,646 | |||||||||||||
220,343 | Pearson Plc | 2,680,325 | |||||||||||||
654,647 | Prudential Plc | 5,662,843 | |||||||||||||
585,160 | Punch Taverns Plc * | 1,244,149 | |||||||||||||
252,520 | Reckitt Benckiser Group Plc | 11,675,889 | |||||||||||||
582,112 | Reed Elsevier Plc | 4,210,969 | |||||||||||||
601,645 | Rio Tinto Plc | 23,306,875 | |||||||||||||
270,005 | Rolls-Royce Group Plc * | 1,977,395 | |||||||||||||
2,587,461 | Royal Bank of Scotland Group Plc | 2,396,328 | |||||||||||||
1,347,527 | Royal Dutch Shell Plc A Shares (London) | 37,270,427 | |||||||||||||
1,216,754 | Royal Dutch Shell Plc B Shares (London) | 32,828,671 | |||||||||||||
887,058 | RSA Insurance Group Plc | 1,874,197 | |||||||||||||
322,863 | SABMiller Plc | 7,445,660 | |||||||||||||
403,287 | Sage Group Plc | 1,442,013 | |||||||||||||
69,582 | Schroders Plc | 1,216,379 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
439,750 | Scottish & Southern Energy Plc | 7,982,595 | |||||||||||||
255,387 | Segro Plc | 1,484,422 | |||||||||||||
322,150 | Serco Group Plc | 2,446,039 | |||||||||||||
173,823 | Severn Trent (Ordinary Shares) | 2,758,667 | |||||||||||||
138,898 | Shire Plc | 2,298,457 | |||||||||||||
584,424 | Smith & Nephew Plc | 4,948,191 | |||||||||||||
95,347 | Smiths Group Plc | 1,236,950 | |||||||||||||
514,351 | Standard Chartered Plc | 11,609,685 | |||||||||||||
98,400 | Tate & Lyle Plc | 642,745 | |||||||||||||
3,113,625 | Tesco Plc | 18,953,368 | |||||||||||||
138,747 | Travis Perkins Plc | 1,810,293 | |||||||||||||
636,186 | Unilever Plc | 17,384,381 | |||||||||||||
22,521,001 | Vodafone Group Plc | 48,731,480 | |||||||||||||
1,444,392 | William Morrison Supermarkets Plc | 6,476,084 | |||||||||||||
18,140 | Wolseley Plc * | 424,493 | |||||||||||||
99,728 | Wolseley Plc (Deferred) * | — | |||||||||||||
223,678 | WPP Plc | 1,869,455 | |||||||||||||
887,738 | Xstrata Plc | 11,777,940 | |||||||||||||
Total United Kingdom | 758,451,346 | ||||||||||||||
TOTAL COMMON STOCKS (COST $3,395,520,078) | 3,444,566,365 | ||||||||||||||
PREFERRED STOCKS — 0.5% | |||||||||||||||
Brazil — 0.1% | |||||||||||||||
159,700 | Companhia Energetica de Minas Gerais 2.79% | 2,351,396 | |||||||||||||
195,400 | Tam SA * | 2,493,431 | |||||||||||||
Total Brazil | 4,844,827 | ||||||||||||||
Germany — 0.3% | |||||||||||||||
175,700 | Henkel AG & Co KGaA 1.85% | 6,944,004 | |||||||||||||
47,176 | Volkswagen AG 3.04% | 4,427,814 | |||||||||||||
Total Germany | 11,371,818 |
See accompanying notes to the financial statements.
15
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||||||
Italy — 0.1% | |||||||||||||||
73,061 | Exor SPA 5.65% | 732,424 | |||||||||||||
157,650 | Fiat SPA * | 1,066,110 | |||||||||||||
Total Italy | 1,798,534 | ||||||||||||||
TOTAL PREFERRED STOCKS (COST $14,725,568) | 18,015,179 | ||||||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||||||
Greece — 0.0% | |||||||||||||||
4,172,613 | Alapis Holding Industrial and Commercial Rights, Expires 12/31/49 * | 837,460 | |||||||||||||
Italy — 0.0% | |||||||||||||||
497,700 | UBI Banca Scpa Warrants, Expires 06/30/11 * | 49,374 | |||||||||||||
Switzerland — 0.0% | |||||||||||||||
106,610 | Bank Sarasin & Cie AG Warrants, Expires 09/15/09 * | 110,748 | |||||||||||||
TOTAL RIGHTS AND WARRANTS (COST $1,077,056) | 997,582 | ||||||||||||||
SHORT-TERM INVESTMENTS — 2.3% | |||||||||||||||
EUR | 9,988,989 | Allied Irish Bank Time Deposit, 0.06%, due 09/01/09 | 14,320,215 | ||||||||||||
USD | 95,299 | Allied Irish Bank Time Deposit, 0.03%, due 09/01/09 | 95,299 | ||||||||||||
EUR | 16,725,321 | Bank of Ireland Time Deposit, 0.06%, due 09/01/09 | 23,977,421 | ||||||||||||
USD | 13,500,000 | BNP Paribas Time Deposit, 0.18%, due 09/01/09 | 13,500,000 | ||||||||||||
HKD | 106 | Brown Brothers Harriman Time Deposit, 0.01%, due 09/01/09 | 16 | ||||||||||||
JPY | 478,571,240 | HSBC Bank (Hong Kong) Time Deposit, 0.01%, due 09/01/09 | 5,143,162 | ||||||||||||
USD | 24,000,000 | Societe Generale Time Deposit, 0.13%, due 09/01/09 | 24,000,000 | ||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $81,036,113) | 81,036,113 | ||||||||||||||
TOTAL INVESTMENTS — 99.5% (Cost $3,492,358,815) | 3,544,615,239 | ||||||||||||||
Other Assets and Liabilities (net) — 0.5% | 19,346,328 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 3,563,961,567 |
See accompanying notes to the financial statements.
16
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (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
REIT - Real Estate Investment Trust
SDR - Swedish Depository Receipt
* 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).
Currency Abbreviations:
EUR - Euro
HKD - Hong Kong Dollar
JPY - Japanese Yen
USD - United States Dollar
See accompanying notes to the financial statements.
17
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $3,492,358,815) (Note 2) | $ | 3,544,615,239 | |||||
Cash | 5,745,888 | ||||||
Foreign currency, at value (cost $6,508,197) (Note 2) | 6,456,557 | ||||||
Receivable for investments sold | 32,025,585 | ||||||
Receivable for Fund shares sold | 1,700,819 | ||||||
Dividends and interest receivable | 8,156,117 | ||||||
Foreign taxes receivable | 2,596,945 | ||||||
Receivable for foreign currency sold | 34,071 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 106,113 | ||||||
Miscellaneous receivable | 2,016,132 | ||||||
Total assets | 3,603,453,466 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 18,216,557 | ||||||
Payable for Fund shares repurchased | 16,351,195 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 1,800,674 | ||||||
Shareholder service fee | 467,568 | ||||||
Administration fee – Class M | 881 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 8,301 | ||||||
Payable for 12b-1 fee – Class M | 2,120 | ||||||
Miscellaneous payable | 1,776,860 | ||||||
Accrued expenses | 867,743 | ||||||
Total liabilities | 39,491,899 | ||||||
Net assets | $ | 3,563,961,567 |
See accompanying notes to the financial statements.
18
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 4,296,892,927 | |||||
Accumulated undistributed net investment income | 55,874,385 | ||||||
Accumulated net realized loss | (841,096,627 | ) | |||||
Net unrealized appreciation | 52,290,882 | ||||||
$ | 3,563,961,567 | ||||||
Net assets attributable to: | |||||||
Class II shares | $ | 794,751,934 | |||||
Class III shares | $ | 1,734,420,911 | |||||
Class IV shares | $ | 1,029,583,674 | |||||
Class M shares | $ | 5,205,048 | |||||
Shares outstanding: | |||||||
Class II | 70,245,582 | ||||||
Class III | 152,466,690 | ||||||
Class IV | 88,421,968 | ||||||
Class M | 458,019 | ||||||
Net asset value per share: | |||||||
Class II | $ | 11.31 | |||||
Class III | $ | 11.38 | |||||
Class IV | $ | 11.64 | |||||
Class M | $ | 11.36 |
See accompanying notes to the financial statements.
19
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $8,424,154) | $ | 80,154,975 | |||||
Interest | 332,422 | ||||||
Total investment income | 80,487,397 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 10,084,435 | ||||||
Shareholder service fee – Class II (Note 3) | 876,690 | ||||||
Shareholder service fee – Class III (Note 3) | 1,709,076 | ||||||
Shareholder service fee – Class IV (Note 3) | 126,511 | ||||||
12b-1 fee – Class M (Note 3) | 5,732 | ||||||
Administration fee – Class M (Note 3) | 4,587 | ||||||
Custodian and fund accounting agent fees | 791,364 | ||||||
Legal fees | 69,184 | ||||||
Audit and tax fees | 47,104 | ||||||
Trustees fees and related expenses (Note 3) | 35,807 | ||||||
Transfer agent fees | 35,236 | ||||||
Registration fees | 16,652 | ||||||
Miscellaneous | 47,564 | ||||||
Total expenses | 13,849,942 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (987,784 | ) | |||||
Expense reductions (Note 2) | (1,483 | ) | |||||
Net expenses | 12,860,675 | ||||||
Net investment income (loss) | 67,626,722 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of foreign capital gains tax of $120,683) (Note 2) | (472,154,896 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 9,605,002 | ||||||
Net realized gain (loss) | (462,549,894 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 1,630,808,311 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 664,462 | ||||||
Net unrealized gain (loss) | 1,631,472,773 | ||||||
Net realized and unrealized gain (loss) | 1,168,922,879 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 1,236,549,601 |
See accompanying notes to the financial statements.
20
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 67,626,722 | $ | 222,653,366 | |||||||
Net realized gain (loss) | (462,549,894 | ) | (363,356,742 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 1,631,472,773 | (3,272,777,591 | ) | ||||||||
Net increase (decrease) in net assets from operations | 1,236,549,601 | (3,413,480,967 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class II | (18,230,535 | ) | (15,392,810 | ) | |||||||
Class III | (56,211,753 | ) | (74,322,210 | ) | |||||||
Class IV | — | (49,698,946 | ) | ||||||||
Class M | (107,098 | ) | (136,270 | ) | |||||||
Total distributions from net investment income | (74,549,386 | ) | (139,550,236 | ) | |||||||
Net realized gains | |||||||||||
Class II | — | (30,952,457 | ) | ||||||||
Class III | — | (153,074,862 | ) | ||||||||
Class IV | — | (132,725,396 | ) | ||||||||
Class M | — | (278,249 | ) | ||||||||
Total distributions from net realized gains | — | (317,030,964 | ) | ||||||||
(74,549,386 | ) | (456,581,200 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class II | (198,334,686 | ) | 328,041,113 | ||||||||
Class III | (1,129,270,179 | ) | (98,648,505 | ) | |||||||
Class IV | 571,820,303 | (1,707,487,765 | ) | ||||||||
Class M | (129,474 | ) | 237,607 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (755,914,036 | ) | (1,477,857,550 | ) | |||||||
Total increase (decrease) in net assets | 406,086,179 | (5,347,919,717 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 3,157,875,388 | 8,505,795,105 | |||||||||
End of period (including accumulated undistributed net investment income of $55,874,385 and $62,797,049, respectively) | $ | 3,563,961,567 | $ | 3,157,875,388 |
See accompanying notes to the financial statements.
21
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.03 | $ | 16.52 | $ | 18.56 | $ | 16.70 | $ | 15.13 | $ | 13.29 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.19 | 0.45 | 0.40 | 0.38 | 0.28 | 0.26 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 3.32 | (7.95 | ) | (0.36 | ) | 3.06 | 2.46 | 2.28 | |||||||||||||||||||
Total from investment operations | 3.51 | (7.50 | ) | 0.04 | 3.44 | 2.74 | 2.54 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.23 | ) | (0.33 | ) | (0.44 | ) | (0.43 | ) | (0.33 | ) | (0.34 | ) | |||||||||||||||
From net realized gains | — | (0.66 | ) | (1.64 | ) | (1.15 | ) | (0.84 | ) | (0.36 | ) | ||||||||||||||||
Total distributions | (0.23 | ) | (0.99 | ) | (2.08 | ) | (1.58 | ) | (1.17 | ) | (0.70 | ) | |||||||||||||||
Net asset value, end of period | $ | 11.31 | $ | 8.03 | $ | 16.52 | $ | 18.56 | $ | 16.70 | $ | 15.13 | |||||||||||||||
Total Return(a) | 44.26 | %** | (47.49 | )% | (0.78 | )% | 21.21 | % | 19.01 | % | 19.40 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 794,752 | $ | 765,201 | $ | 848,359 | $ | 1,018,021 | $ | 1,213,447 | $ | 808,149 | |||||||||||||||
Net expenses to average daily net assets | 0.82 | %(b)* | 0.82 | %(c) | 0.82 | %(c) | 0.82 | % | 0.82 | % | 0.82 | % | |||||||||||||||
Net investment income to average daily net assets | 3.90 | %* | 3.42 | % | 2.10 | % | 2.17 | % | 1.82 | % | 1.92 | % | |||||||||||||||
Portfolio turnover rate | 34 | %** | 39 | % | 29 | % | 23 | % | 25 | % | 23 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % | 0.06 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
22
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.07 | $ | 16.59 | $ | 18.64 | $ | 16.76 | $ | 15.18 | $ | 13.34 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.19 | 0.47 | 0.41 | 0.38 | 0.30 | 0.26 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 3.35 | (7.99 | ) | (0.36 | ) | 3.09 | 2.45 | 2.30 | |||||||||||||||||||
Total from investment operations | 3.54 | (7.52 | ) | 0.05 | 3.47 | 2.75 | 2.56 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.23 | ) | (0.34 | ) | (0.46 | ) | (0.44 | ) | (0.33 | ) | (0.36 | ) | |||||||||||||||
From net realized gains | — | (0.66 | ) | (1.64 | ) | (1.15 | ) | (0.84 | ) | (0.36 | ) | ||||||||||||||||
Total distributions | (0.23 | ) | (1.00 | ) | (2.10 | ) | (1.59 | ) | (1.17 | ) | (0.72 | ) | |||||||||||||||
Net asset value, end of period | $ | 11.38 | $ | 8.07 | $ | 16.59 | $ | 18.64 | $ | 16.76 | $ | 15.18 | |||||||||||||||
Total Return(a) | 44.42 | %** | (47.42 | )% | (0.75 | )% | 21.36 | % | 19.07 | % | 19.41 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,734,421 | $ | 2,054,885 | $ | 4,078,545 | $ | 4,556,742 | $ | 3,800,326 | $ | 3,663,370 | |||||||||||||||
Net expenses to average daily net assets | 0.75 | %(b)* | 0.75 | %(c) | 0.75 | %(c) | 0.75 | % | 0.75 | % | 0.75 | % | |||||||||||||||
Net investment income to average daily net assets | 3.98 | %* | 3.51 | % | 2.16 | % | 2.11 | % | 1.97 | % | 1.87 | % | |||||||||||||||
Portfolio turnover rate | 34 | %** | 39 | % | 29 | % | 23 | % | 25 | % | 23 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % | 0.06 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
23
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.07 | $ | 16.59 | $ | 18.64 | $ | 16.77 | $ | 15.18 | $ | 13.34 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.23 | 0.51 | 0.40 | 0.36 | 0.31 | 0.28 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 3.34 | (8.02 | ) | (0.34 | ) | 3.11 | 2.47 | 2.28 | |||||||||||||||||||
Total from investment operations | 3.57 | (7.51 | ) | 0.06 | 3.47 | 2.78 | 2.56 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.35 | ) | (0.47 | ) | (0.45 | ) | (0.35 | ) | (0.36 | ) | ||||||||||||||||
From net realized gains | — | (0.66 | ) | (1.64 | ) | (1.15 | ) | (0.84 | ) | (0.36 | ) | ||||||||||||||||
Total distributions | — | (1.01 | ) | (2.11 | ) | (1.60 | ) | (1.19 | ) | (0.72 | ) | ||||||||||||||||
Net asset value, end of period | $ | 11.64 | $ | 8.07 | $ | 16.59 | $ | 18.64 | $ | 16.77 | $ | 15.18 | |||||||||||||||
Total Return(a) | 44.24 | %** | (47.39 | )% | (0.68 | )% | 21.36 | % | 19.22 | % | 19.47 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,029,584 | $ | 334,003 | $ | 3,571,516 | $ | 3,424,024 | $ | 2,007,037 | $ | 1,169,805 | |||||||||||||||
Net expenses to average daily net assets | 0.69 | %(b)* | 0.69 | %(c) | 0.69 | %(c) | 0.69 | % | 0.69 | % | 0.69 | % | |||||||||||||||
Net investment income to average daily net assets | 4.75 | %* | 3.70 | % | 2.08 | % | 2.04 | % | 1.98 | % | 2.00 | % | |||||||||||||||
Portfolio turnover rate | 34 | %** | 39 | % | 29 | % | 23 | % | 25 | % | 23 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % | 0.06 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
24
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class M share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.07 | $ | 16.58 | $ | 18.63 | $ | 16.75 | $ | 15.19 | $ | 13.25 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.18 | 0.41 | 0.35 | 0.30 | 0.24 | 0.30 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 3.34 | (7.96 | ) | (0.36 | ) | 3.12 | 2.46 | 2.21 | |||||||||||||||||||
Total from investment operations | 3.52 | (7.55 | ) | (0.01 | ) | 3.42 | 2.70 | 2.51 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.23 | ) | (0.30 | ) | (0.40 | ) | (0.39 | ) | (0.30 | ) | (0.21 | ) | |||||||||||||||
From net realized gains | — | (0.66 | ) | (1.64 | ) | (1.15 | ) | (0.84 | ) | (0.36 | ) | ||||||||||||||||
Total distributions | (0.23 | ) | (0.96 | ) | (2.04 | ) | (1.54 | ) | (1.14 | ) | (0.57 | ) | |||||||||||||||
Net asset value, end of period | $ | 11.36 | $ | 8.07 | $ | 16.58 | $ | 18.63 | $ | 16.75 | $ | 15.19 | |||||||||||||||
Total Return(a) | 44.10 | %** | (47.58 | )% | (1.05 | )% | 21.04 | % | 18.66 | % | 19.18 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 5,205 | $ | 3,786 | $ | 7,375 | $ | 8,258 | $ | 5,673 | $ | 3,508 | |||||||||||||||
Net expenses to average daily net assets | 1.05 | %(b)* | 1.05 | %(c) | 1.05 | %(c) | 1.05 | % | 1.05 | % | 1.05 | % | |||||||||||||||
Net investment income to average daily net assets | 3.57 | %* | 3.11 | % | 1.81 | % | 1.69 | % | 1.56 | % | 2.24 | % | |||||||||||||||
Portfolio turnover rate | 34 | %** | 39 | % | 29 | % | 23 | % | 25 | % | 23 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % | 0.06 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
25
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Foreign Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the MSCI EAFE Index (Europe, Australasia, and Far East). The Fund typically makes equity investments in companies tied economically to non-U.S. countries, including companies that issue stocks included in the MSCI international developed country universe (the universe of securities from which the MSCI EAFE Index, a developed markets index, is constructed) and companies whose stocks are traded in the securities markets of the world's non-developed countries ("emerging countries"). Under normal circumstances, the Fund invests at least 80% of its assets in investments tied economically to countries outside the U.S. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions. The Fund, however, may hold up to 10% of its total assets in cash and cash equivalents to manage cash inflows and outflows as a result of shareholder purc hases and redemptions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. The Fund typically invests in emerging countries, but these investments generally represent 10% or less of the Fund's total assets. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter derivatives, including, without limitation, futures and options. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
Throughout the period ended August 31, 2009, 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 they bear.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
26
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 95.35% of the net assets of the Fund were valued using fair value prices base d on models used by a third party vendor and are classified as using Level 2 inputs in the table below.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation or quoted prices for similar securities.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund considered certain bankrupt securities to be worthless.
27
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | — | $ | 95,544,923 | $ | — | $ | 95,544,923 | |||||||||||
Austria | — | 9,492,409 | — | 9,492,409 | |||||||||||||||
Belgium | — | 27,683,664 | — | 27,683,664 | |||||||||||||||
Brazil | 22,135,965 | — | — | 22,135,965 | |||||||||||||||
Canada | — | — | 0 | * | 0 | ||||||||||||||
Finland | — | 128,494,038 | — | 128,494,038 | |||||||||||||||
France | 26,834,260 | 381,355,929 | — | 408,190,189 | |||||||||||||||
Germany | — | 242,776,125 | — | 242,776,125 | |||||||||||||||
Greece | — | 29,458,516 | — | 29,458,516 | |||||||||||||||
Hong Kong | — | 114,900,961 | — | 114,900,961 | |||||||||||||||
India | 4,258,155 | — | — | 4,258,155 | |||||||||||||||
Ireland | — | 4,817,038 | — | 4,817,038 | |||||||||||||||
Italy | — | 308,461,029 | — | 308,461,029 | |||||||||||||||
Japan | — | 757,710,177 | — | 757,710,177 | |||||||||||||||
Mexico | 2,885,220 | — | — | 2,885,220 | |||||||||||||||
Netherlands | — | 95,496,963 | — | 95,496,963 | |||||||||||||||
New Zealand | — | 607,915 | — | 607,915 | |||||||||||||||
Norway | — | 56,776,879 | — | 56,776,879 | |||||||||||||||
Philippines | — | 3,237,521 | — | 3,237,521 | |||||||||||||||
Singapore | — | 20,254,684 | — | 20,254,684 | |||||||||||||||
South Korea | — | 38,208,523 | — | 38,208,523 | |||||||||||||||
Spain | — | 97,638,001 | — | 97,638,001 | |||||||||||||||
Sweden | — | 84,764,749 | — | 84,764,749 | |||||||||||||||
Switzerland | — | 109,425,938 | — | 109,425,938 | |||||||||||||||
Taiwan | 3,285,697 | 15,710,660 | — | 18,996,357 | |||||||||||||||
Turkey | — | 3,899,080 | — | 3,899,080 | |||||||||||||||
United Kingdom | — | 758,451,346 | — | 758,451,346 | |||||||||||||||
TOTAL COMMON STOCKS | 59,399,297 | 3,385,167,068 | 0 | 3,444,566,365 |
28
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Brazil | $ | 4,844,827 | $ | — | $ | — | $ | 4,844,827 | |||||||||||
Germany | — | 11,371,818 | — | 11,371,818 | |||||||||||||||
Italy | — | 1,798,534 | — | 1,798,534 | |||||||||||||||
TOTAL PREFERRED STOCKS | 4,844,827 | 13,170,352 | — | 18,015,179 | |||||||||||||||
Rights and Warrants | |||||||||||||||||||
Greece | — | 837,460 | — | 837,460 | |||||||||||||||
Italy | — | 49,374 | — | 49,374 | |||||||||||||||
Switzerland | — | 110,748 | — | 110,748 | |||||||||||||||
TOTAL RIGHTS AND WARRANTS | — | 997,582 | — | 997,582 | |||||||||||||||
Short-Term Investments | 81,036,113 | — | — | 81,036,113 | |||||||||||||||
Total Investments | 145,280,237 | 3,399,335,002 | — | 3,544,615,239 | |||||||||||||||
Total | $ | 145,280,237 | $ | 3,399,335,002 | $ | 0 | $ | 3,544,615,239 |
* Represents the interest in securities that have no value at August 31, 2009.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Common Stocks | |||||||||||||||||||||||||||||||
Australia | $ | 1,006,270 | $ | 844,164 | $ | — | $ | (1,162,300 | ) | $ | 3,967,233 | $ | (4,655,367 | ) | $ | — | |||||||||||||||
Canada | 1,730 | — | — | — | (1,730 | ) | — | — | |||||||||||||||||||||||
Total | $ | 1,008,000 | $ | 844,164 | $ | — | $ | (1,162,300 | ) | $ | 3,965,503 | $ | (4,655,367 | ) | $ | — |
29
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the
30
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because many foreign exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign futures on those exchanges do not reflect events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor based on that vendor's proprietary models. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
31
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. Rights and warrants held by the Fund 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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if 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. For the period ended August 31, 2009, the Fund incurred $120,683 in capital gains tax, which is included in net realized gain (loss) in the Statement of Operations.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement
32
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $257,668,488.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (72,173,104 | ) | ||||
Total | $ | (72,173,104 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 3,585,450,110 | $ | 298,111,233 | $ | (338,946,104 | ) | $ | (40,834,871 | ) |
For the period ended August 31, 2009, the Fund had net realized losses attributed to redemption in-kind transactions of $44,659,286.
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of
33
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's operations.
Brown Brothers Harriman & Co. ("BBH") serves as custodian and fund accounting agent of the Fund. State Street Bank and Trust Company ("State Street") serves as transfer agent of the Fund. BBH and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the
34
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Market Risk — Value Securities — The Fund purchases some equity securities at prices below what the Manager believes to be their fundamental value. The Fund bears the risk that the price of these securities may not increase to what the Manager believes to be their fundamental value or that the Manager may have overestimated their fundamental value.
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to an OTC derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security, will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations.
Other principal risks of an investment in the Fund include Liquidity Risk (difficulty in selling Fund investments), Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations), and Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates,
35
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by
36
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
37
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | 997,582 | $ | — | $ | 997,582 | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 997,582 | $ | — | $ | 997,582 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
38
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (279,503 | ) | $ | — | $ | (279,503 | ) | |||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | (279,503 | ) | $ | — | $ | (279,503 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (85,564 | ) | $ | — | $ | (85,564 | ) | |||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | (85,564 | ) | $ | — | $ | (85,564 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Rights/Warrants | |||||||
Average notional amount outstanding | $ | 1,074,802 | |||||
Highest notional amount outstanding | 5,135,685 | ||||||
Lowest notional amount outstanding | 14,791 |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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
39
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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.
Holders of Class M shares of the Fund pay GMO an administration fee for support services provided to Class M shareholders. That fee is paid monthly at the annual rate of 0.20% of the average daily net assets of Class M shares. Pursuant to a Rule 12b-1 distribution and service plan adopted by the Fund, holders of Class M shares of the Fund may pay a fee, at the annual rate of up to 1.00% of average daily net assets of Class M shares for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or for the provision of services to Class M shareholders. The Trustees currently limit payments on Class M shares to 0.25% of the Fund's average daily net assets of Class M shares.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.60% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, administration fees, distribution (12b-1) fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an inve stment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.60% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.60% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $28,539 and $16,836, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
40
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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, 2009 aggregated $1,096,715,246 and $1,529,382,563, respectively. Proceeds from sales of securities for in-kind transactions for the period ended August 31, 2009 were $343,570,560.
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, the Fund had no shareholders who individually held more than 10% of the Fund's outstanding shares.
As of August 31, 2009, 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 1.48% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class II: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,205,915 | $ | 11,841,237 | 58,274,223 | $ | 511,976,197 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,497,403 | 14,494,861 | 3,196,851 | 40,987,454 | |||||||||||||||
Shares repurchased | (27,756,379 | ) | (224,670,784 | ) | (17,540,416 | ) | (224,922,538 | ) | |||||||||||
Net increase (decrease) | (25,053,061 | ) | $ | (198,334,686 | ) | 43,930,658 | $ | 328,041,113 |
41
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 10,976,871 | $ | 65,171,586 | 107,907,531 | $ | 953,731,183 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 4,223,561 | 41,095,249 | 15,342,666 | 200,755,062 | |||||||||||||||
Shares repurchased | (117,456,864 | ) | (1,235,537,014 | ) | (114,403,163 | ) | (1,253,134,750 | ) | |||||||||||
Net increase (decrease) | (102,256,432 | ) | $ | (1,129,270,179 | ) | 8,847,034 | $ | (98,648,505 | ) | ||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 88,385,571 | $ | 996,286,516 | 1,297,973 | $ | 19,976,078 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 11,448,393 | 156,652,652 | |||||||||||||||
Shares repurchased | (41,363,438 | ) | (424,466,213 | ) | (186,625,494 | ) | (1,884,116,495 | ) | |||||||||||
Net increase (decrease) | 47,022,133 | $ | 571,820,303 | (173,879,128 | ) | $ | (1,707,487,765 | ) | |||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 29,748 | $ | 286,962 | 70,075 | $ | 896,218 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 11,007 | 107,098 | 32,761 | 414,519 | |||||||||||||||
Shares repurchased | (52,076 | ) | (523,534 | ) | (78,335 | ) | (1,073,130 | ) | |||||||||||
Net increase (decrease) | (11,321 | ) | $ | (129,474 | ) | 24,501 | $ | 237,607 |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
42
GMO Foreign Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The
43
GMO Foreign Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, 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 to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to separate account clients and the impact on the Manager of, and expenses and risks associated with, the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribu tion services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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,
44
GMO Foreign Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
45
GMO Foreign Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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 (12b-1) and/or administration 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, 2009 through August 31, 2009.
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 $35,000,000 account value divided by $1,000 = 35,000), 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.
46
GMO Foreign Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 2009 (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 II | |||||||||||||||||||
1) Actual | 0.82 | % | $ | 1,000.00 | $ | 1,442.60 | $ | 5.05 | |||||||||||
2) Hypothetical | 0.82 | % | $ | 1,000.00 | $ | 1,021.07 | $ | 4.18 | |||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.75 | % | $ | 1,000.00 | $ | 1,444.20 | $ | 4.62 | |||||||||||
2) Hypothetical | 0.75 | % | $ | 1,000.00 | $ | 1,021.42 | $ | 3.82 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.69 | % | $ | 1,000.00 | $ | 1,442.40 | $ | 4.25 | |||||||||||
2) Hypothetical | 0.69 | % | $ | 1,000.00 | $ | 1,021.73 | $ | 3.52 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 1.05 | % | $ | 1,000.00 | $ | 1,441.00 | $ | 6.46 | |||||||||||
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, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
47
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 93.8 | % | |||||
Short-Term Investments | 3.3 | ||||||
Preferred Stocks | 0.2 | ||||||
Debt Obligations | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | 2.7 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
Japan | 20.4 | % | |||||
United Kingdom | 15.6 | ||||||
Italy | 8.3 | ||||||
Germany | 8.1 | ||||||
France | 6.5 | ||||||
Netherlands | 6.3 | ||||||
Switzerland | 4.6 | ||||||
Finland | 4.5 | ||||||
Hong Kong | 3.6 | ||||||
Canada | 2.6 | ||||||
Australia | 2.5 | ||||||
Norway | 2.4 | ||||||
South Korea | 2.4 | ||||||
Sweden | 2.0 | ||||||
Brazil | 1.4 | ||||||
China | 1.4 | ||||||
Singapore | 1.3 | ||||||
Belgium | 1.0 | ||||||
Spain | 1.0 | ||||||
Mexico | 0.8 | ||||||
New Zealand | 0.6 | ||||||
Philippines | 0.6 | ||||||
Taiwan | 0.5 | ||||||
Greece | 0.4 | ||||||
Thailand | 0.4 | ||||||
Austria | 0.3 | ||||||
Indonesia | 0.2 | ||||||
Ireland | 0.2 | ||||||
India | 0.1 | ||||||
Cyprus | 0.0 | ||||||
100.0 | % |
1
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Industry Group Summary | % of Equity Investments | ||||||
Capital Goods | 15.1 | % | |||||
Materials | 9.0 | ||||||
Energy | 7.8 | ||||||
Food, Beverage & Tobacco | 6.4 | ||||||
Software & Services | 5.8 | ||||||
Consumer Durables & Apparel | 5.2 | ||||||
Commercial & Professional Services | 5.1 | ||||||
Retailing | 4.9 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 4.7 | ||||||
Diversified Financials | 4.1 | ||||||
Automobiles & Components | 3.9 | ||||||
Insurance | 3.8 | ||||||
Banks | 3.6 | ||||||
Consumer Services | 3.6 | ||||||
Technology Hardware & Equipment | 3.2 | ||||||
Media | 3.2 | ||||||
Transportation | 2.9 | ||||||
Real Estate | 2.9 | ||||||
Health Care Equipment & Services | 1.5 | ||||||
Utilities | 1.1 | ||||||
Telecommunication Services | 1.0 | ||||||
Household & Personal Products | 1.0 | ||||||
Food & Staples Retailing | 0.2 | ||||||
100.0 | % |
2
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 93.8% | |||||||||||||||
Australia — 2.4% | |||||||||||||||
78,778 | Aristocrat Leisure Ltd | 307,891 | |||||||||||||
350,000 | Asciano Group * | 471,164 | |||||||||||||
132,693 | Australian Vintage Ltd * | 35,906 | |||||||||||||
361,031 | Fairfax Media Ltd | 448,162 | |||||||||||||
130,587 | Goodman Group | 68,397 | |||||||||||||
270,209 | Insurance Australia Group Ltd | 816,225 | |||||||||||||
239,631 | Iress Market Technology Ltd | 1,669,232 | |||||||||||||
101,189 | Metcash Ltd | 365,041 | |||||||||||||
700,000 | Mirvac Group | 870,973 | |||||||||||||
374,814 | Tatts Group Ltd | 785,275 | |||||||||||||
400,000 | Ten Network Holdings Ltd | 420,495 | |||||||||||||
225,000 | WDS Ltd | 372,688 | |||||||||||||
75,177 | West Australian Newspapers Holdings Ltd | 424,940 | |||||||||||||
Total Australia | 7,056,389 | ||||||||||||||
Austria — 0.3% | |||||||||||||||
9,907 | Flughafen Wien AG | 419,425 | |||||||||||||
16,768 | Wienerberger AG * | 383,302 | |||||||||||||
Total Austria | 802,727 | ||||||||||||||
Belgium — 1.0% | |||||||||||||||
14,378 | Bekaert NV | 1,913,021 | |||||||||||||
34,000 | Umicore | 922,682 | |||||||||||||
Total Belgium | 2,835,703 | ||||||||||||||
Brazil — 1.3% | |||||||||||||||
410,100 | Cia Hering | 3,984,152 | |||||||||||||
Canada — 2.4% | |||||||||||||||
112,400 | Flint Energy Services Ltd * | 1,059,573 | |||||||||||||
197,400 | Gammon Gold Inc * | 1,325,316 | |||||||||||||
52,800 | ING Canada Inc | 1,638,862 |
See accompanying notes to the financial statements.
3
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Canada — continued | |||||||||||||||
90,600 | KAP Resources Ltd * (a) (b) | 828 | |||||||||||||
138,400 | Linamar Corp | 1,605,554 | |||||||||||||
400,000 | OPTI Canada Inc 144A * | 617,493 | |||||||||||||
164,800 | Precision Drilling Trust | 940,854 | |||||||||||||
Total Canada | 7,188,480 | ||||||||||||||
China — 1.3% | |||||||||||||||
4,055,000 | Uni-President China Holding Ltd | 2,255,953 | |||||||||||||
4,865,000 | Xingda International Holdings Ltd | 1,713,558 | |||||||||||||
Total China | 3,969,511 | ||||||||||||||
Finland — 4.2% | |||||||||||||||
25,390 | Atria Group Plc | 409,783 | |||||||||||||
24,833 | Hk-Ruokatalo Oyj Class A | 306,059 | |||||||||||||
63,606 | KCI Konecranes Oyj | 1,804,524 | |||||||||||||
38,479 | Marimekko Oyj | 565,236 | |||||||||||||
90,588 | Nokian Renkaat Oyj | 2,041,842 | |||||||||||||
256,270 | Oriola-KD Oyj Class B | 1,306,717 | |||||||||||||
60,000 | Orion Oyj Class B | 1,020,309 | |||||||||||||
161,575 | Tieto Oyj | 2,957,561 | |||||||||||||
156,144 | YIT Oyj | 2,238,304 | |||||||||||||
Total Finland | 12,650,335 | ||||||||||||||
France — 6.1% | |||||||||||||||
100,000 | Air France-KLM * | 1,530,007 | |||||||||||||
65,435 | Boursorama * | 601,098 | |||||||||||||
40,008 | Cap Gemini SA | 1,941,113 | |||||||||||||
8,814 | CNP Assurances | 880,540 | |||||||||||||
3,629 | Damartex SA | 72,925 | |||||||||||||
31,077 | Essilor International SA | 1,681,341 | |||||||||||||
9,341 | Eurazeo | 506,054 | |||||||||||||
60,000 | Faurecia * | 828,336 | |||||||||||||
3,039 | Gaumont SA | 168,931 | |||||||||||||
32,724 | JC Decaux SA * | 709,441 | |||||||||||||
30,851 | Mercialys SA | 1,133,214 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
France — continued | |||||||||||||||
37,500 | Renault SA * | 1,692,062 | |||||||||||||
26,292 | Technip SA | 1,630,452 | |||||||||||||
25,900 | Teleperformance | 892,335 | |||||||||||||
96,712 | TF1 SA | 1,568,871 | |||||||||||||
10,000 | Virbac SA | 904,629 | |||||||||||||
40,031 | Zodiac Aerospace | 1,521,728 | |||||||||||||
Total France | 18,263,077 | ||||||||||||||
Germany — 7.4% | |||||||||||||||
33,107 | Adidas AG | 1,561,449 | |||||||||||||
4,404 | Axel Springer AG | 386,496 | |||||||||||||
39,700 | Beiersdorf AG | 2,015,408 | |||||||||||||
67,386 | Cat Oil AG * | 390,082 | |||||||||||||
13,955 | Celesio AG | 380,259 | |||||||||||||
23,183 | Commerzbank AG * | 214,344 | |||||||||||||
95,828 | Francotyp-Postalia Holdings AG * | 213,122 | |||||||||||||
20,201 | Fraport AG | 1,022,603 | |||||||||||||
61,053 | Gagfah SA | 551,958 | |||||||||||||
80,000 | GEA Group AG | 1,420,893 | |||||||||||||
167,760 | Gerresheimer AG | 4,731,535 | |||||||||||||
71,173 | GFK SE | 2,170,729 | |||||||||||||
36,699 | Heidelberger Druckmaschinen AG * | 321,534 | |||||||||||||
6,133 | MAN SE | 470,168 | |||||||||||||
31,199 | Nemetschek AG * | 624,863 | |||||||||||||
286,133 | Patrizia Immobilien AG * | 1,267,600 | |||||||||||||
150,000 | Praktiker Bau-Und Heimwerkermaerkte Holding AG | 1,940,046 | |||||||||||||
148,722 | Symrise AG | 2,461,620 | |||||||||||||
Total Germany | 22,144,709 | ||||||||||||||
Greece — 0.4% | |||||||||||||||
32,435 | Bank of Cyprus Public Co Ltd | 224,994 | |||||||||||||
42,200 | Metka SA | 533,934 | |||||||||||||
36,350 | Mytilineos Holdings SA | 304,735 | |||||||||||||
Total Greece | 1,063,663 |
See accompanying notes to the financial statements.
5
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Hong Kong — 3.4% | |||||||||||||||
580,600 | Dah Sing Financial Group | 3,130,790 | |||||||||||||
1,998,696 | Hong Kong & Shanghai Hotels | 2,253,994 | |||||||||||||
420,000 | Melco Crown Entertainment Ltd * | 2,574,600 | |||||||||||||
4,204,000 | TPV Technology Ltd | 2,284,637 | |||||||||||||
Total Hong Kong | 10,244,021 | ||||||||||||||
India — 0.1% | |||||||||||||||
56,270 | Welspun Gujarat Stahl Ltd | 269,843 | |||||||||||||
Indonesia — 0.2% | |||||||||||||||
350,000 | United Tractors Tbk PT | 469,572 | |||||||||||||
Ireland — 0.2% | |||||||||||||||
22,789 | DCC Plc | 552,718 | |||||||||||||
Italy — 7.8% | |||||||||||||||
143,657 | Arnoldo Mondadori Editore SPA * | 619,764 | |||||||||||||
150,000 | Autogrill SPA * | 1,692,281 | |||||||||||||
43,328 | Banco Popolare Scarl * | 384,525 | |||||||||||||
63,529 | Brembo SPA | 496,299 | |||||||||||||
72,532 | Buzzi Unicem SPA | 1,243,128 | |||||||||||||
252,411 | Credito Emiliano SPA * | 1,566,324 | |||||||||||||
50,000 | ERG SPA | 715,026 | |||||||||||||
131,773 | Exor SPA | 2,271,454 | |||||||||||||
63,369 | Finmeccanica SPA | 1,014,136 | |||||||||||||
228,200 | Fondiaria-Sai SPA-Di RISP | 2,676,253 | |||||||||||||
119,301 | Grouppo Editoriale L'Espresso * | 258,106 | |||||||||||||
143,882 | Indesit Company SPA * | 988,854 | |||||||||||||
40,458 | Italcementi SPA | 608,749 | |||||||||||||
210,000 | Italcementi SPA-Di RISP | 1,630,283 | |||||||||||||
28,135 | Lottomatica SPA | 634,248 | |||||||||||||
233,456 | Mediaset SPA | 1,538,955 | |||||||||||||
800,000 | Pirelli & C SPA * | 384,009 | |||||||||||||
117,000 | Prysmian SPA | 2,191,938 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Italy — continued | |||||||||||||||
792,655 | Telecom Italia SPA-Di RISP | 900,529 | |||||||||||||
100,428 | Unione di Banche Italiane ScpA | 1,519,624 | |||||||||||||
Total Italy | 23,334,485 | ||||||||||||||
Japan — 19.2% | |||||||||||||||
165,000 | Air Water Inc | 1,894,768 | |||||||||||||
155,100 | Capcom | 3,045,922 | |||||||||||||
370 | EPS Co Ltd | 1,523,116 | |||||||||||||
220,000 | Fuji Oil Co Ltd | 3,087,015 | |||||||||||||
200 | Global One REIT Co Ltd | 1,489,978 | |||||||||||||
140,000 | Hitachi Chemical Co Ltd | 2,885,174 | |||||||||||||
190,000 | Hitachi Koki Co Ltd | 2,012,445 | |||||||||||||
200,000 | Hitachi Transport System Ltd | 2,700,878 | |||||||||||||
150,000 | K's Holdings Corp | 4,600,548 | |||||||||||||
260,000 | Keiyo Bank Ltd (The) | 1,411,559 | |||||||||||||
99,000 | Kyorin Co Ltd | 1,681,717 | |||||||||||||
160,000 | Leopalace21 Corp | 1,447,251 | |||||||||||||
55,380 | Mitsubishi UFJ Lease & Finance Co Ltd | 1,755,027 | |||||||||||||
230,000 | Nabtesco Corp | 2,556,572 | |||||||||||||
325,000 | NHK Spring Co Ltd | 2,394,455 | |||||||||||||
45,000 | Nissha Printing Co Ltd | 2,370,019 | |||||||||||||
270,000 | Nissin Electric Co Ltd | 1,499,199 | |||||||||||||
16,500 | Obic Co Ltd | 2,694,019 | |||||||||||||
94,000 | Rohto Pharmaceutical Co Ltd | 1,204,251 | |||||||||||||
140,700 | Shimachu Co Ltd | 3,315,655 | |||||||||||||
197,000 | Shimadzu Corp | 1,428,378 | |||||||||||||
101,300 | Sumitomo Rubber Industries | 972,143 | |||||||||||||
125,000 | Toei Co Ltd | 709,782 | |||||||||||||
250,000 | Tokuyama Corp | 1,746,074 | |||||||||||||
113,000 | Toyo Suisan Kaisha Ltd | 2,875,848 | |||||||||||||
400,000 | Tsubakimoto Chain Co | 1,741,203 | |||||||||||||
80,000 | Yamato Kogyo Co | 2,383,852 | |||||||||||||
Total Japan | 57,426,848 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Mexico — 0.8% | |||||||||||||||
853,900 | Genomma Lab Internacional SA Class B * | 1,205,311 | |||||||||||||
247,800 | Grupo Continental SAB de CV | 477,814 | |||||||||||||
190,000 | Industrias CH SAB de CV * | 694,453 | |||||||||||||
Total Mexico | 2,377,578 | ||||||||||||||
Netherlands — 5.9% | |||||||||||||||
161,292 | CSM | 3,510,529 | |||||||||||||
35,000 | Fugro NV | 1,888,461 | |||||||||||||
84,662 | Imtech NV | 2,055,442 | |||||||||||||
96,403 | Koninklijke Ten Cate NV | 2,041,997 | |||||||||||||
54,481 | Randstad Holdings NV * | 2,257,332 | |||||||||||||
99,027 | SBM Offshore NV | 2,062,848 | |||||||||||||
382,966 | SNS Reaal NV * | 2,957,773 | |||||||||||||
50,000 | USG People NV * | 810,686 | |||||||||||||
Total Netherlands | 17,585,068 | ||||||||||||||
New Zealand — 0.5% | |||||||||||||||
232,564 | Air New Zealand | 199,157 | |||||||||||||
623,084 | Sky City Entertainment Group Ltd | 1,391,164 | |||||||||||||
Total New Zealand | 1,590,321 | ||||||||||||||
Norway — 2.3% | |||||||||||||||
100,000 | Aker Solutions ASA | 985,344 | |||||||||||||
145,000 | DNO International ASA * | 152,820 | |||||||||||||
1,985,000 | Dockwise Ltd * | 2,267,324 | |||||||||||||
400,000 | Prosafe ASA | 1,955,987 | |||||||||||||
647,885 | Prosafe Production Public Ltd * | 1,362,603 | |||||||||||||
Total Norway | 6,724,078 | ||||||||||||||
Philippines — 0.6% | |||||||||||||||
7,203,000 | Aboitiz Power Corp | 912,976 | |||||||||||||
2,870,000 | Alliance Global Group Inc * | 299,037 | |||||||||||||
13,170,000 | Pepsi-Cola Products Philippines Inc | 576,718 | |||||||||||||
Total Philippines | 1,788,731 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Singapore — 1.2% | |||||||||||||||
1,710,000 | Chemoil Energy Ltd | 905,146 | |||||||||||||
1,584,000 | Financial One Corp * | 329,218 | |||||||||||||
1,660,000 | First Ship Lease Trust | 703,742 | |||||||||||||
500,000 | MobileOne Ltd | 593,606 | |||||||||||||
958,000 | Petra Foods Ltd (a) | 533,760 | |||||||||||||
75,000 | Venture Corp Ltd | 448,203 | |||||||||||||
Total Singapore | 3,513,675 | ||||||||||||||
South Korea — 2.2% | |||||||||||||||
8,440 | Cheil Industries Inc | 345,457 | |||||||||||||
128,039 | Handsome Corp | 1,166,734 | |||||||||||||
1,676 | Hite Brewery Co Ltd | 219,270 | |||||||||||||
28,080 | Korea Electric Terminal Co | 410,830 | |||||||||||||
124,336 | Kortek Corp | 1,013,557 | |||||||||||||
8,497 | Nong Shim Co Ltd | 1,611,628 | |||||||||||||
7,641 | Pulmuone Holdings Co Ltd | 361,077 | |||||||||||||
29,370 | Samsung Card Co Ltd | 1,197,739 | |||||||||||||
19,500 | Youngone Holding Co Ltd | 346,942 | |||||||||||||
Total South Korea | 6,673,234 | ||||||||||||||
Spain — 0.9% | |||||||||||||||
1,000 | Construcciones y Auxiliar de Ferrocarriles SA | 482,548 | |||||||||||||
28,135 | Grifols SA | 495,978 | |||||||||||||
93,535 | Mapfre SA | 385,207 | |||||||||||||
14,630 | Red Electrica de Espana | 687,306 | |||||||||||||
12,379 | Tecnicas Reunidas SA | 674,496 | |||||||||||||
Total Spain | 2,725,535 | ||||||||||||||
Sweden — 1.8% | |||||||||||||||
95,810 | B&B Tools AB | 1,082,276 | |||||||||||||
58,904 | Getinge AB Class B | 1,012,592 | |||||||||||||
10,000 | Millicom International Cellular SA SDR * | 702,184 | |||||||||||||
101,429 | SAAB AB Class B | 1,181,379 | |||||||||||||
1,090,925 | Trigon Agri A/S * | 1,539,906 | |||||||||||||
Total Sweden | 5,518,337 |
See accompanying notes to the financial statements.
9
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Switzerland — 4.4% | |||||||||||||||
4,220 | Banque Cantonale Vaudoise | 1,571,778 | |||||||||||||
260,000 | Clariant AG (Registered) * | 2,357,955 | |||||||||||||
13,798 | Geberit AG (Registered) | 2,127,401 | |||||||||||||
5,790 | Helvetia Patria Holding (Registered) | 1,862,251 | |||||||||||||
85,338 | Kardex AG * | 2,522,441 | |||||||||||||
26,000 | Sulzer AG | 2,017,083 | |||||||||||||
2,473 | Valora Holding AG | 537,144 | |||||||||||||
Total Switzerland | 12,996,053 | ||||||||||||||
Taiwan — 0.5% | |||||||||||||||
120,290 | Catcher Technology Co Ltd | 310,144 | |||||||||||||
148,800 | Giant Manufacturing Co Ltd | 380,089 | |||||||||||||
2,121,280 | Gold Circuit Electronics Ltd | 829,905 | |||||||||||||
Total Taiwan | 1,520,138 | ||||||||||||||
Thailand — 0.4% | |||||||||||||||
5,357,000 | Home Product Center Pcl (Foreign Registered) (a) | 1,103,372 | |||||||||||||
United Kingdom — 14.6% | |||||||||||||||
68,591 | AMEC Plc | 837,188 | |||||||||||||
86,929 | Amlin Plc | 519,553 | |||||||||||||
238,524 | Aquarius Platinum Ltd | 1,029,964 | |||||||||||||
222,272 | Balfour Beatty Plc | 1,213,163 | |||||||||||||
56,270 | Berkeley Group Holdings Plc (Unit Shares) * | 863,231 | |||||||||||||
100,835 | Bodycote Plc | 279,204 | |||||||||||||
80,248 | Bovis Homes Group Plc | 688,772 | |||||||||||||
78,241 | Brit Insurance Holdings Plc | 275,665 | |||||||||||||
246,913 | British Airways Plc * | 764,474 | |||||||||||||
112,540 | Carillion Plc | 539,027 | |||||||||||||
197,260 | Catlin Group Ltd | 1,061,253 | |||||||||||||
43,732 | Chemring Group | 1,482,046 | |||||||||||||
71,944 | Cobham Plc | 235,725 | |||||||||||||
28,135 | Connaught Plc | 171,462 | |||||||||||||
62,350 | Cookson Group Plc | 397,851 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
112,540 | Davis Service Group (Ordinary) | 718,748 | |||||||||||||
47,733 | De La Rue Plc | 674,728 | |||||||||||||
1,056,910 | Dimension Data Holdings Plc | 1,018,144 | |||||||||||||
705,063 | Galliford Try Plc | 674,297 | |||||||||||||
400,000 | GKN Plc * | 705,518 | |||||||||||||
35,336 | Go-Ahead Group Plc | 776,546 | |||||||||||||
124,498 | Group 4 Securicor Plc | 450,049 | |||||||||||||
634,816 | Hays Plc | 1,068,641 | |||||||||||||
123,500 | Healthcare Locums Plc | 453,737 | |||||||||||||
43,384 | Hikma Pharmaceuticals Plc | 326,341 | |||||||||||||
100,000 | Hiscox Ltd | 548,887 | |||||||||||||
43,392 | Homeserve Plc | 1,031,488 | |||||||||||||
65,027 | ICAP Plc | 450,941 | |||||||||||||
1,500,000 | Inchcape Plc * | 672,950 | |||||||||||||
80,728 | Inmarsat Plc | 681,238 | |||||||||||||
93,179 | International Personal Finance Plc | 229,334 | |||||||||||||
257,957 | John Wood Group Plc | 1,246,643 | |||||||||||||
21,210 | Johnson Matthey Plc | 486,404 | |||||||||||||
56,427 | Kazakhmys Plc | 895,504 | |||||||||||||
56,572 | Kier Group Plc | 1,042,228 | |||||||||||||
104,582 | Lamprell Plc | 266,473 | |||||||||||||
256,389 | Mitie Group Plc | 1,081,858 | |||||||||||||
116,559 | N Brown Group | 417,198 | |||||||||||||
41,270 | New Britain Palm Oil Ltd | 251,370 | |||||||||||||
39,833 | Next Plc | 1,056,585 | |||||||||||||
133,948 | Northumbrian Water Group Plc | 514,500 | |||||||||||||
79,863 | Pennon Group Plc | 597,178 | |||||||||||||
80,332 | Petrofac Ltd | 1,143,326 | |||||||||||||
171,936 | Playtech Ltd | 933,894 | |||||||||||||
32,355 | Provident Financial Plc | 463,736 | |||||||||||||
32,600 | Punch Taverns Plc * | 69,313 | |||||||||||||
234,136 | PZ Cussons Plc | 826,020 | |||||||||||||
287,620 | Qinetiq Group Plc | 650,524 | |||||||||||||
372,025 | RM Plc | 1,000,384 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
139,603 | RPS Group Plc | 452,818 | |||||||||||||
87,700 | Sage Group Plc | 313,584 | |||||||||||||
144,742 | Savills Plc | 848,069 | |||||||||||||
80,952 | Segro Plc | 470,529 | |||||||||||||
236,295 | Serco Group Plc | 1,794,154 | |||||||||||||
100,000 | SIG Plc | 227,180 | |||||||||||||
58,160 | Smith News Plc | 113,418 | |||||||||||||
13,390 | Soco International Plc * | 285,556 | |||||||||||||
404,863 | Spice Plc | 468,535 | |||||||||||||
140,675 | Stagecoach Group Plc | 307,224 | |||||||||||||
37,398 | Travis Perkins Plc | 487,948 | |||||||||||||
238,255 | TT Group Plc | 229,176 | |||||||||||||
53,545 | Ultra Electronics Holdings | 1,093,749 | |||||||||||||
124,473 | United Business Media Ltd | 934,712 | |||||||||||||
33,275 | Venture Production (Ordinary Shares) | 455,841 | |||||||||||||
132,606 | VT Group Plc | 1,109,588 | |||||||||||||
100,000 | William Hill Plc | 299,956 | |||||||||||||
19,019 | Wolseley Plc (Deferred) * | — | |||||||||||||
Total United Kingdom | 43,675,340 | ||||||||||||||
TOTAL COMMON STOCKS (COST $255,857,926) | 280,047,693 | ||||||||||||||
PREFERRED STOCKS — 0.2% | |||||||||||||||
Germany — 0.2% | |||||||||||||||
77,439 | ProSiebenSat.1 Media AG 0.32% | 716,564 | |||||||||||||
Italy — 0.0% | |||||||||||||||
4,783 | Exor SPA 5.65% | 47,949 | |||||||||||||
TOTAL PREFERRED STOCKS (COST $296,239) | 764,513 |
See accompanying notes to the financial statements.
12
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 0.0% | |||||||||||||||
Cyprus — 0.0% | |||||||||||||||
35,678 | Bank of Cyprus Ltd, 5.50% , due 06/30/14 | 51,148 | |||||||||||||
TOTAL DEBT OBLIGATIONS (COST $48,685) | 51,148 | ||||||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||||||
Italy — 0.0% | |||||||||||||||
100,428 | UBI Banca Scpa Warrants, Expires 06/30/11 * | 9,963 | |||||||||||||
TOTAL RIGHTS AND WARRANTS (COST $0) | 9,963 | ||||||||||||||
SHORT-TERM INVESTMENTS — 3.3% | |||||||||||||||
EUR | 1,393,777 | Allied Irish Bank Time Deposit, 0.06%, due 09/01/09 | 1,998,118 | ||||||||||||
EUR | 1,393,777 | Bank of Ireland Time Deposit, 0.06%, due 09/01/09 | 1,998,118 | ||||||||||||
USD | 1,800,000 | BNP Paribas Time Deposit, 0.18%, due 09/01/09 | 1,800,000 | ||||||||||||
JPY | 974,120 | Brown Brothers Harriman Time Deposit, 0.01%, due 09/01/09 | 10,470 | ||||||||||||
USD | 41,591 | DnB Nor Bank Time Deposit, 0.03%, due 09/01/09 | 41,591 | ||||||||||||
EUR | 1,311,522 | ING Bank Time Deposit, 0.06%, due 09/01/09 | 1,880,198 | ||||||||||||
USD | 2,000,000 | Societe Generale Time Deposit, 0.13%, due 09/01/09 | 2,000,000 | ||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $9,728,495) | 9,728,495 | ||||||||||||||
TOTAL INVESTMENTS — 97.3% (Cost $265,931,345) | 290,601,812 | ||||||||||||||
Other Assets and Liabilities (net) — 2.7% | 8,015,782 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 298,617,594 |
See accompanying notes to the financial statements.
13
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (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.
Foreign Registered - Shares issued to foreign investors in markets that have foreign ownership limits.
REIT - Real Estate Investment Trust
SDR - Swedish Depository Receipt
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust.
(b) Bankrupt issuer.
Currency Abbreviations:
EUR - Euro
JPY - Japanese Yen
USD - United States Dollar
See accompanying notes to the financial statements.
14
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $265,931,345) (Note 2) | $ | 290,601,812 | |||||
Cash | 5,104,375 | ||||||
Foreign currency, at value (cost $1,991,432) (Note 2) | 2,032,212 | ||||||
Receivable for investments sold | 2,340,406 | ||||||
Dividends and interest receivable | 308,381 | ||||||
Foreign taxes receivable | 100,220 | ||||||
Receivable for foreign currency sold | 4,208 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 19,623 | ||||||
Miscellaneous receivable | 842,742 | ||||||
Total assets | 301,353,979 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 1,629,251 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 172,120 | ||||||
Shareholder service fee | 34,763 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 789 | ||||||
Miscellaneous payable | 657,414 | ||||||
Accrued expenses | 242,048 | ||||||
Total liabilities | 2,736,385 | ||||||
Net assets | $ | 298,617,594 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 453,850,751 | |||||
Accumulated undistributed net investment income | 1,302,846 | ||||||
Accumulated net realized loss | (181,268,586 | ) | |||||
Net unrealized appreciation | 24,732,583 | ||||||
$ | 298,617,594 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 215,714,399 | |||||
Class IV shares | $ | 82,903,195 | |||||
Shares outstanding: | |||||||
Class III | 20,996,875 | ||||||
Class IV | 8,073,696 | ||||||
Net asset value per share: | |||||||
Class III | $ | 10.27 | |||||
Class IV | $ | 10.27 |
See accompanying notes to the financial statements.
15
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $421,032) | $ | 4,463,167 | |||||
Interest | 196,848 | ||||||
Total investment income | 4,660,015 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 893,007 | ||||||
Shareholder service fee – Class III (Note 3) | 175,751 | ||||||
Shareholder service fee – Class IV (Note 3) | 10,405 | ||||||
Custodian and fund accounting agent fees | 183,668 | ||||||
Audit and tax fees | 41,216 | ||||||
Transfer agent fees | 20,240 | ||||||
Trustees fees and related expenses (Note 3) | 10,390 | ||||||
Legal fees | 5,520 | ||||||
Registration fees | 460 | ||||||
Miscellaneous | 4,416 | ||||||
Total expenses | 1,345,073 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (250,920 | ) | |||||
Expense reductions (Note 2) | (200 | ) | |||||
Net expenses | 1,093,953 | ||||||
Net investment income (loss) | 3,566,062 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of foreign capital gains tax of $13,136) (Note 2) | (97,376,837 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 526,813 | ||||||
Net realized gain (loss) | (96,850,024 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 205,368,313 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 248,379 | ||||||
Net unrealized gain (loss) | 205,616,692 | ||||||
Net realized and unrealized gain (loss) | 108,766,668 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 112,332,730 |
See accompanying notes to the financial statements.
16
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 3,566,062 | $ | 19,309,912 | |||||||
Net realized gain (loss) | (96,850,024 | ) | (84,483,562 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 205,616,692 | (365,228,760 | ) | ||||||||
Net increase (decrease) in net assets from operations | 112,332,730 | (430,402,410 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (5,535,606 | ) | ||||||||
Class IV | — | (7,364,331 | ) | ||||||||
Total distributions from net investment income | — | (12,899,937 | ) | ||||||||
Net realized gains | |||||||||||
Class III | — | (17,878,843 | ) | ||||||||
Class IV | — | (33,553,914 | ) | ||||||||
Total distributions from net realized gains | — | (51,432,757 | ) | ||||||||
Return of capital | |||||||||||
Class III | — | (183,326 | ) | ||||||||
Class IV | — | (243,890 | ) | ||||||||
Total distributions from return of capital | — | (427,216 | ) | ||||||||
— | (64,759,910 | ) | |||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (77,971,138 | ) | 18,176,575 | ||||||||
Class IV | (64,656,187 | ) | (199,947,721 | ) | |||||||
Increase (decrease) in net assets resulting from net share transactions | (142,627,325 | ) | (181,771,146 | ) | |||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 17,567 | 14 | |||||||||
Class IV | 32,431 | 27 | |||||||||
Increase in net assets resulting from purchase premiums and redemption fees | 49,998 | 41 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | (142,577,327 | ) | (181,771,105 | ) | |||||||
Total increase (decrease) in net assets | (30,244,597 | ) | (676,933,425 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 328,862,191 | 1,005,795,616 | |||||||||
End of period (including accumulated undistributed net investment income of $1,302,846 and distributions in excess of net investment income of $2,263,216, respectively) | $ | 298,617,594 | $ | 328,862,191 |
See accompanying notes to the financial statements.
17
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.41 | $ | 14.63 | $ | 18.38 | $ | 17.98 | $ | 17.19 | $ | 14.79 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.12 | 0.30 | 0.31 | 0.28 | 0.26 | 0.26 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 3.74 | (7.43 | ) | (0.36 | ) | 4.51 | 3.19 | 3.76 | |||||||||||||||||||
Total from investment operations | 3.86 | (7.13 | ) | (0.05 | ) | 4.79 | 3.45 | 4.02 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.27 | ) | (0.41 | ) | (0.44 | ) | (0.32 | ) | (0.38 | ) | ||||||||||||||||
From net realized gains | — | (0.81 | ) | (3.29 | ) | (3.95 | ) | (2.34 | ) | (1.24 | ) | ||||||||||||||||
Return of capital | — | (0.01 | ) | — | — | — | — | ||||||||||||||||||||
Total distributions | — | (1.09 | ) | (3.70 | ) | (4.39 | ) | (2.66 | ) | (1.62 | ) | ||||||||||||||||
Net asset value, end of period | $ | 10.27 | $ | 6.41 | $ | 14.63 | $ | 18.38 | $ | 17.98 | $ | 17.19 | |||||||||||||||
Total Return(a) | 60.22 | %** | (51.33 | )% | (1.96 | )% | 29.94 | % | 22.32 | % | 28.40 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 215,714 | $ | 185,298 | $ | 338,804 | $ | 375,565 | $ | 364,551 | $ | 426,758 | |||||||||||||||
Net expenses to average daily net assets | 0.86 | %(b)* | 0.85 | %(c) | 0.86 | %(c) | 0.86 | % | 0.85 | % | 0.85 | % | |||||||||||||||
Net investment income to average daily net assets | 2.86 | %* | 2.59 | % | 1.69 | % | 1.53 | % | 1.52 | % | 1.71 | % | |||||||||||||||
Portfolio turnover rate | 40 | %** | 42 | % | 42 | % | 37 | % | 40 | % | 25 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.20 | %* | 0.11 | % | 0.09 | % | 0.09 | % | 0.09 | % | 0.09 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (d) | $ | 0.00 | (d) | — | — | — | — |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions.
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
(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.
18
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19
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Period from August 12, 2009 through August 31, 2009 | Period from March 1, 2009 through March 16, 2009 | ||||||||||
(Unaudited)(a) | (Unaudited)(a) | ||||||||||
Net asset value, beginning of period | $ | 9.84 | $ | 6.42 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)† | 0.00 | 0.01 | |||||||||
Net realized and unrealized gain (loss) | 0.43 | 0.01 | |||||||||
Total from investment operations | 0.43 | 0.02 | |||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | — | — | |||||||||
From net realized gains | — | — | |||||||||
Return of capital | — | — | |||||||||
Total distributions | — | — | |||||||||
Net asset value, end of period | $ | 10.27 | $ | 6.44 | |||||||
Total Return(b) | 4.37 | %** | 0.31 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 82,903 | $ | 144,101 | |||||||
Net expenses to average daily net assets | 0.80 | %(c)* | 0.81 | %(c)* | |||||||
Net investment income to average daily net assets | 0.39 | %* | 3.28 | %* | |||||||
Portfolio turnover rate | 40 | %††** | 40 | %††** | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.08 | %* | 0.22 | %* | |||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (e) | $ | 0.00 | (e) |
(a) The class was inactive from March 17, 2009 to August 12, 2009.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of
reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) The net expense ratio does not include the effect of expense reductions.
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
(e) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover rate of the Fund for the six months ended August 31, 2009.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
20
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Financial Highlights — (Continued)
(For a Class IV share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||
Net asset value, beginning of period | $ | 14.64 | $ | 18.39 | $ | 17.99 | $ | 17.20 | $ | 14.80 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.33 | 0.31 | 0.28 | 0.26 | 0.26 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (7.46 | ) | (0.35 | ) | 4.52 | 3.20 | 3.76 | ||||||||||||||||
Total from investment operations | (7.13 | ) | (0.04 | ) | 4.80 | 3.46 | 4.02 | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.27 | ) | (0.42 | ) | (0.45 | ) | (0.33 | ) | (0.38 | ) | |||||||||||||
From net realized gains | (0.81 | ) | (3.29 | ) | (3.95 | ) | (2.34 | ) | (1.24 | ) | |||||||||||||
Return of capital | (0.01 | ) | — | — | — | — | |||||||||||||||||
Total distributions | (1.09 | ) | (3.71 | ) | (4.40 | ) | (2.67 | ) | (1.62 | ) | |||||||||||||
Net asset value, end of period | $ | 6.42 | $ | 14.64 | $ | 18.39 | $ | 17.99 | $ | 17.20 | |||||||||||||
Total Return(b) | (51.29 | )% | (1.91 | )% | 30.00 | % | 22.37 | % | 28.44 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 143,564 | $ | 666,991 | $ | 740,872 | $ | 638,634 | $ | 567,048 | |||||||||||||
Net expenses to average daily net assets | 0.80 | %(d) | 0.81 | %(d) | 0.81 | % | 0.80 | % | 0.81 | % | |||||||||||||
Net investment income to average daily net assets | 2.74 | % | 1.70 | % | 1.54 | % | 1.55 | % | 1.69 | % | |||||||||||||
Portfolio turnover rate | 42 | % | 42 | % | 37 | % | 40 | % | 25 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.11 | % | 0.09 | % | 0.09 | % | 0.09 | % | 0.09 | % | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (e) | — | — | — | — |
See accompanying notes to the financial statements.
21
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Foreign Small Companies Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the S&P Developed ex-U.S. Small Cap Index (formerly S&P/Citigroup EMI World ex-U.S. Index). The Fund typically makes equity investments in companies tied economically to non-U.S. countries that are in the smallest 25% of companies in a particular country as measured by total float-adjusted market capitalization ("small companies"). Under normal circumstances, the Fund invests at least 80% of its assets in securities of small companies that are tied economically to countries outside the U.S. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions. The Fund, however, may hold up to 10% of its total assets in cash and cash equivalents to manage cash inflows and outflows as a result of shareholder purchases and redemptions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. The Fund typically invests in emerging countries, but these investments (excluding investments in companies from emerging countries included in the Fund's benchmark) generally represent 10% or less of the Fund's total assets. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter derivatives, including, without limitation, futures and options. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
As of August 31, 2009, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder servicing fee.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
22
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 88.09% of the net assets of the Fund were valued using fair value prices base d on models used by a third party vendor and are classified as using Level 2 inputs in the table below.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation or quoted prices for similar securities.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund's securities in Thailand were valued at the local price and subject to a premium adjustment upon exceeding foreign ownership limitations. The Fund considered certain bankrupt securities to be worthless. The Fund valued Petra Foods at the mid-point between the bid and the asked price.
23
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | — | $ | 7,056,389 | $ | — | $ | 7,056,389 | |||||||||||
Austria | — | 802,727 | — | 802,727 | |||||||||||||||
Belgium | — | 2,835,703 | — | 2,835,703 | |||||||||||||||
Brazil | 3,984,152 | — | — | 3,984,152 | |||||||||||||||
Canada | 7,187,652 | — | 828 | 7,188,480 | |||||||||||||||
China | — | 3,969,511 | — | 3,969,511 | |||||||||||||||
Finland | — | 12,650,335 | — | 12,650,335 | |||||||||||||||
France | — | 18,263,077 | — | 18,263,077 | |||||||||||||||
Germany | — | 22,144,709 | — | 22,144,709 | |||||||||||||||
Greece | — | 1,063,663 | — | 1,063,663 | |||||||||||||||
Hong Kong | 2,574,600 | 7,669,421 | — | 10,244,021 | |||||||||||||||
India | — | 269,843 | — | 269,843 | |||||||||||||||
Indonesia | — | 469,572 | — | 469,572 | |||||||||||||||
Ireland | — | 552,718 | — | 552,718 | |||||||||||||||
Italy | — | 23,334,485 | — | 23,334,485 | |||||||||||||||
Japan | — | 57,426,848 | — | 57,426,848 | |||||||||||||||
Mexico | 2,377,578 | — | — | 2,377,578 | |||||||||||||||
Netherlands | — | 17,585,068 | — | 17,585,068 | |||||||||||||||
New Zealand | — | 1,590,321 | — | 1,590,321 | |||||||||||||||
Norway | — | 6,724,078 | — | 6,724,078 | |||||||||||||||
Philippines | — | 1,788,731 | — | 1,788,731 | |||||||||||||||
Singapore | — | 2,979,915 | 533,760 | 3,513,675 | |||||||||||||||
South Korea | — | 6,673,234 | — | 6,673,234 | |||||||||||||||
Spain | — | 2,725,535 | — | 2,725,535 | |||||||||||||||
Sweden | — | 5,518,337 | — | 5,518,337 | |||||||||||||||
Switzerland | — | 12,996,053 | — | 12,996,053 | |||||||||||||||
Taiwan | — | 1,520,138 | — | 1,520,138 | |||||||||||||||
Thailand | — | — | 1,103,372 | 1,103,372 | |||||||||||||||
United Kingdom | — | 43,675,340 | — | 43,675,340 | |||||||||||||||
TOTAL COMMON STOCKS | 16,123,982 | 262,285,751 | 1,637,960 | 280,047,693 |
24
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Germany | $ | — | $ | 716,564 | $ | — | $ | 716,564 | |||||||||||
Italy | — | 47,949 | — | 47,949 | |||||||||||||||
TOTAL PREFERRED STOCKS | — | 764,513 | — | 764,513 | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Cyprus | — | 51,148 | — | 51,148 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 51,148 | — | 51,148 | |||||||||||||||
Rights and Warrants | |||||||||||||||||||
Italy | — | 9,963 | — | 9,963 | |||||||||||||||
TOTAL RIGHTS AND WARRANTS | — | 9,963 | — | 9,963 | |||||||||||||||
Short-Term Investments | 9,728,495 | — | — | 9,728,495 | |||||||||||||||
Total Investments | 25,852,477 | 263,111,375 | 1,637,960 | 290,601,812 | |||||||||||||||
Total | $ | 25,852,477 | $ | 263,111,375 | $ | 1,637,960 | $ | 290,601,812 |
The aggregate net value of the Fund's direct investments in securities using Level 3 inputs was 0.55% of total net assets.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Common Stocks | |||||||||||||||||||||||||||||||
Australia | $ | 165,081 | $ | — | $ | — | $ | — | $ | 283,081 | $ | (448,162 | ) | $ | — | ||||||||||||||||
Canada | 712 | — | — | — | 116 | — | 828 | ||||||||||||||||||||||||
South Korea | 125,060 | (169,258 | ) | — | (87,576 | ) | 131,774 | — | — | ||||||||||||||||||||||
Thailand | 962,474 | (430,400 | ) | — | (95,154 | ) | 666,452 | — | 1,103,372 | ||||||||||||||||||||||
Singapore | — | (161,965 | ) | — | (236,181 | ) | 580,798 | 351,108 | 533,760 | ||||||||||||||||||||||
Total | $ | 1,253,327 | $ | (761,623 | ) | $ | — | $ | (418,911 | ) | $ | 1,662,221 | $ | (97,054 | ) | $ | 1,637,960 |
25
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the
26
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because many foreign exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign futures on those exchanges do not reflect events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor based on that vendor's proprietary models. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
27
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. Rights and warrants held by the Fund 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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if 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. For the period ended August 31, 2009, the Fund paid $13,136 in foreign capital gains tax, which is included in net realized gain (loss) in the Statement of Operations.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing
28
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital and currency losses of $81,517,073 and $1,563,263, respectively.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 267,377,334 | $ | 54,593,956 | $ | (31,369,478 | ) | $ | 23,224,478 |
For the period ended August 31, 2009, the Fund had net realized losses attributed to redemption in-kind transactions of $79,315,452.
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
29
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 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.
Brown Brothers Harriman & Co. ("BBH") serves as custodian and fund accounting agent of the Fund. State Street Bank and Trust Company ("State Street") serves as transfer agent of the Fund. BBH and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
During the six-month period ended August 31, 2009, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.50% of the amount invested or redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the F und's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are r eceived.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
30
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
• Smaller Company Risk — The securities of small companies typically are less widely held, trade less frequently and in lesser quantities, and have market prices that may fluctuate more than those of securities of larger capitalization companies.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Market Risk — Value Securities — The Fund purchases some equity securities at prices below what the Manager believes to be their fundamental value. The Fund bears the risk that the price of these securities may not increase to what the Manager believes to be their fundamental value or that the Manager may have overestimated their fundamental value.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. These risks are particularly pronounced for the Fund because it makes equity investments in small companies and may make investments in companies in emerging countries.
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to an OTC derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security, will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations.
Other principal risks of an investment in the Fund include Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as
31
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected).
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be
32
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictability of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
33
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | 9,963 | $ | — | $ | 9,963 | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 9,963 | $ | — | $ | 9,963 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
34
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (111,631 | ) | $ | — | $ | (111,631 | ) | |||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | (111,631 | ) | $ | — | $ | (111,631 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | 7,999 | $ | — | $ | 7,999 | |||||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 7,999 | $ | — | $ | 7,999 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Rights/Warrants | |||||||
Average notional amount outstanding | $ | 46,005 | |||||
Highest notional amount outstanding | 150,340 | ||||||
Lowest notional amount outstanding | 3,399 |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 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.
35
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.70% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fun d) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.70% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.70% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $9,838 and $1,472, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $97,364,379 and $104,871,245, respectively. Proceeds from sales of securities for in-kind transactions for the period ended August 31, 2009 were $124,666,450.
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 54.61% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
36
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of August 31, 2009, 0.02% of the Fund's shares were held by senior management of the Manager and GMO Trust officers, and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 307,655 | $ | 2,487,499 | 8,133,081 | $ | 54,843,370 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 2,299,029 | 23,448,063 | |||||||||||||||
Shares repurchased | (8,212,156 | ) | (80,458,637 | ) | (4,688,611 | ) | (60,114,858 | ) | |||||||||||
Purchase premiums | — | 12,500 | — | — | |||||||||||||||
Redemption fees | — | 5,067 | — | 14 | |||||||||||||||
Net increase (decrease) | (7,904,501 | ) | $ | (77,953,571 | ) | 5,743,499 | $ | 18,176,589 | |||||||||||
Six Months Ended August 31, 2009 (Unaudited)* | Year Ended February 28, 2009 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 8,073,696 | $ | 79,445,169 | — | $ | — | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 3,578,937 | 39,283,862 | |||||||||||||||
Shares repurchased | (22,361,691 | ) | (144,101,356 | ) | (26,775,273 | ) | (239,231,583 | ) | |||||||||||
Purchase premiums | — | — | — | — | |||||||||||||||
Redemption fees | — | 32,431 | — | 27 | |||||||||||||||
Net increase (decrease) | (14,287,995 | ) | $ | (64,623,756 | ) | (23,196,336 | ) | $ | (199,947,694 | ) |
* The class was inactive from March 17, 2009 to August 12, 2009.
37
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
38
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The
39
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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
40
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
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.
Following their review, on June 15, 2009, 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, 2009.
41
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.86 | % | $ | 1,000.00 | $ | 1,602.20 | $ | 5.64 | * | ||||||||||
2) Hypothetical | 0.86 | % | $ | 1,000.00 | $ | 1,020.87 | $ | 4.38 | * | ||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.80 | % | $ | 1,000.00 | $ | 1,043.70 | $ | 0.43 | (a) | ||||||||||
2) Hypothetical | 0.80 | % | $ | 1,000.00 | $ | 1,021.17 | $ | 4.08 | (b) |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
(a) For the period August 12, 2009 (commencement of operations) through August 31, 2009. Expense is calculated using the Class's annualized net expense ratio for the period ended August 31, 2009, multiplied by the average account value over the period, multiplied by 19 days in the period, divided by 365 days in the year.
(b) For the period March 1, 2009 through August 31, 2009. Expense is calculated using the Class's annualized net expense ratio for the period ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
42
GMO Emerging Markets Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Emerging Markets Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 89.4 | % | |||||
Preferred Stocks | 8.0 | ||||||
Short-Term Investments | 1.2 | ||||||
Private Equity Securities | 0.4 | ||||||
Debt Obligations | 0.4 | ||||||
Investment Funds | 0.3 | ||||||
Convertible Securities | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Mutual Funds | 0.0 | ||||||
Other | 0.2 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
South Korea | 19.2 | % | |||||
Russia | 12.7 | ||||||
Brazil | 11.9 | ||||||
China | 10.5 | ||||||
Taiwan | 10.0 | ||||||
Turkey | 9.6 | ||||||
India | 6.1 | ||||||
Thailand | 5.4 | ||||||
Poland | 3.4 | ||||||
Indonesia | 2.4 | ||||||
South Africa | 2.1 | ||||||
Malaysia | 1.7 | ||||||
Egypt | 1.3 | ||||||
Israel | 0.9 | ||||||
Mexico | 0.8 | ||||||
Philippines | 0.6 | ||||||
Czech Republic | 0.4 | ||||||
Chile | 0.3 | ||||||
Hungary | 0.3 | ||||||
Morocco | 0.2 | ||||||
Argentina | 0.1 | ||||||
United States | 0.1 | ||||||
Lebanon | 0.0 | ||||||
Peru | 0.0 | ||||||
Sri Lanka | 0.0 | ||||||
Ukraine | 0.0 | ||||||
100.0 | % |
1
GMO Emerging Markets Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Industry Group Summary | % of Equity Investments | ||||||
Banks | 19.4 | % | |||||
Energy | 18.0 | ||||||
Materials | 12.9 | ||||||
Telecommunication Services | 8.8 | ||||||
Semiconductors & Semiconductor Equipment | 6.7 | ||||||
Capital Goods | 6.2 | ||||||
Technology Hardware & Equipment | 4.7 | ||||||
Software & Services | 3.5 | ||||||
Food, Beverage & Tobacco | 3.3 | ||||||
Automobiles & Components | 2.9 | ||||||
Utilities | 2.2 | ||||||
Diversified Financials | 2.2 | ||||||
Real Estate | 1.7 | ||||||
Retailing | 1.2 | ||||||
Transportation | 1.2 | ||||||
Consumer Durables & Apparel | 1.0 | ||||||
Media | 0.9 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 0.7 | ||||||
Food & Staples Retailing | 0.6 | ||||||
Household & Personal Products | 0.5 | ||||||
Consumer Services | 0.5 | ||||||
Health Care Equipment & Services | 0.4 | ||||||
Insurance | 0.3 | ||||||
Miscellaneous | 0.2 | ||||||
100.0 | % |
2
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 89.4% | |||||||||||||||
Argentina — 0.1% | |||||||||||||||
886,796 | Petrobras Energia Participaciones SA Sponsored ADR * | 5,879,457 | |||||||||||||
124,800 | Telecom Argentina SA Sponsored ADR * | 1,850,784 | |||||||||||||
Total Argentina | 7,730,241 | ||||||||||||||
Brazil — 5.0% | |||||||||||||||
3,341,400 | Banco do Brasil SA | 46,379,277 | |||||||||||||
6,136,900 | BM&F BOVESPA SA | 37,836,673 | |||||||||||||
1,011,000 | BRF-Brasil Foods SA * | 22,529,846 | |||||||||||||
640,400 | Cia de Saneamento de Minas Gerais-Copasa MG * | 10,231,041 | |||||||||||||
3,926,300 | Companhia Brasileira de Meios de Pagamento | 34,248,619 | |||||||||||||
1,165,102 | Companhia Saneamento Basico Sao Paulo | 21,451,180 | |||||||||||||
334,392 | Electrobras (Centro) | 4,888,046 | |||||||||||||
1,576,400 | Gerdau SA | 14,260,954 | |||||||||||||
319,763 | Itau Unibanco Holding SA ADR | 5,356,030 | |||||||||||||
300,200 | MRV Engenharia e Participacoes SA | 5,437,909 | |||||||||||||
1,861,500 | Natura Cosmeticos SA | 30,114,679 | |||||||||||||
1,357,100 | Petroleo Brasileiro SA (Petrobras) | 27,023,910 | |||||||||||||
1,507,490 | Petroleo Brasileiro SA (Petrobras) ADR | 59,756,904 | |||||||||||||
1,575,900 | Redecard SA | 21,572,781 | |||||||||||||
359,004 | Souza Cruz SA | 11,398,525 | |||||||||||||
443,000 | Tele Norte Leste Participacoes SA | 8,299,639 | |||||||||||||
391,350 | Usinas Siderurgicas de Minas Gerais SA | 9,227,778 | |||||||||||||
3,770,200 | Vale SA | 73,375,570 | |||||||||||||
337,120 | Vale SA Sponsored ADR | 6,476,075 | |||||||||||||
Total Brazil | 449,865,436 | ||||||||||||||
Chile — 0.3% | |||||||||||||||
110,480 | AFP Provida SA Sponsored ADR * | 3,604,962 | |||||||||||||
69,130 | Banco Santander Chile SA ADR | 3,537,382 | |||||||||||||
201,788 | Compania Cervecerias Unidas ADR | 6,566,182 | |||||||||||||
1,416 | Embotelladora Andina SA ADR A Shares | 20,560 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Chile — continued | |||||||||||||||
174,340 | Embotelladora Andina SA ADR B Shares | 2,988,188 | |||||||||||||
822,567 | Lan Airlines SA Sponsored ADR | 9,747,419 | |||||||||||||
Total Chile | 26,464,693 | ||||||||||||||
China — 10.2% | |||||||||||||||
9,897,990 | Advanced Semiconductor Manufacturing Co Class H * | 357,705 | |||||||||||||
14,764,000 | Air China Ltd Class H * | 8,698,733 | |||||||||||||
181,778,000 | Bank of China Ltd Class H | 88,412,882 | |||||||||||||
3,764,000 | C C Land Holdings Ltd | 1,914,229 | |||||||||||||
13,644,000 | China Agri-Industries Holdings Ltd | 9,577,472 | |||||||||||||
22,196,000 | China Coal Energy Co Class H | 28,279,132 | |||||||||||||
20,600,000 | China Communication Services Corp Ltd Class H | 11,532,744 | |||||||||||||
70,436,000 | China Construction Bank Class H | 53,082,359 | |||||||||||||
12,575,400 | China Merchants Bank Co Ltd Class H | 27,415,143 | |||||||||||||
10,393,942 | China Mobile Ltd | 102,066,101 | |||||||||||||
6,978,000 | China National Building Material Co Ltd Class H | 14,696,437 | |||||||||||||
26,728,000 | China Oilfield Services Ltd Class H | 23,235,822 | |||||||||||||
41,881,351 | China Petroleum & Chemical Corp Class H | 35,086,121 | |||||||||||||
6,688,000 | China Resources Land Ltd | 14,033,168 | |||||||||||||
84,736,000 | China Telecom Corp Ltd Class H | 43,683,770 | |||||||||||||
29,366,000 | China Ting Group Holding Ltd | 4,542,880 | |||||||||||||
4,257,500 | China Vanke Co Ltd Class B | 4,943,588 | |||||||||||||
6,938,000 | China Zhongwang Holdings Ltd * | 7,573,171 | |||||||||||||
10,932,271 | Cosco Pacific Ltd | 16,356,524 | |||||||||||||
27,426,000 | Denway Motors Ltd | 12,387,637 | |||||||||||||
32,082,000 | Dongfeng Motor Group Co Ltd | 33,309,808 | |||||||||||||
8,340,000 | Guangdong Investments Ltd | 4,252,918 | |||||||||||||
594,000 | Hengan International Group Co Ltd | 3,296,731 | |||||||||||||
16,574,000 | Huaneng Power International Inc Class H | 11,570,666 | |||||||||||||
121,654,000 | Industrial and Commercial Bank of China Ltd Class H | 83,051,660 | |||||||||||||
7,148,500 | Kingboard Chemical Holdings Ltd | 22,702,141 | |||||||||||||
2,543,600 | Lee & Man Paper Manufacturing Ltd | 4,130,278 | |||||||||||||
28,987,000 | Maoye International Holdings | 7,029,699 | |||||||||||||
16,254,000 | Parkson Retail Group Ltd | 24,026,673 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
China — continued | |||||||||||||||
6,356,172 | Peace Mark Holdings Ltd * (a) (b) | — | |||||||||||||
662,930 | Perfect World Co Ltd ADR * | 25,290,780 | |||||||||||||
27,457,101 | PetroChina Co Ltd Class H | 30,313,653 | |||||||||||||
38,268,789 | Pico Far East Holdings Ltd | 5,685,819 | |||||||||||||
447,738 | Shanda Interactive Entertainment Ltd Sponsored ADR * | 21,921,252 | |||||||||||||
3,153,500 | Shandong Chenming Paper Holdings Ltd Class H | 2,189,837 | |||||||||||||
706,000 | Shandong Weigao Group Medical Polymer Co Ltd Class H | 1,914,249 | |||||||||||||
27,218,000 | Shenzhen Investment Ltd | 9,765,796 | |||||||||||||
5,862,000 | Shimao Property Holdings Ltd | 8,706,114 | |||||||||||||
21,868,000 | Sino-Ocean Land Holdings Ltd | 19,935,303 | |||||||||||||
4,994,000 | Techtronic Industries Co Ltd | 4,906,765 | |||||||||||||
2,166,000 | Tencent Holdings Ltd | 32,317,156 | |||||||||||||
2,506,000 | Tingyi (Cayman Islands) Holding Corp | 4,509,620 | |||||||||||||
504,040 | VisionChina Media Inc ADR * | 2,842,786 | |||||||||||||
3,523,200 | Wilmar International Ltd | 16,002,208 | |||||||||||||
10,824,000 | Zhejiang Expressway Co Ltd Class H | 10,324,987 | |||||||||||||
3,608,000 | Zhuzhou CSR Times Electric Co Ltd Class H | 6,136,055 | |||||||||||||
25,430,000 | Zijin Mining Group Co Ltd Class H | 21,355,940 | |||||||||||||
Total China | 925,364,512 | ||||||||||||||
Czech Republic — 0.4% | |||||||||||||||
206,820 | CEZ AS | 10,823,074 | |||||||||||||
32,500 | Komercni Banka AS | 6,223,666 | |||||||||||||
144,830 | Pegas Nonwovens SA | 3,680,458 | |||||||||||||
6,810 | Philip Morris CR AS | 3,186,099 | |||||||||||||
188,460 | Telefonica 02 Czech Republic AS | 5,233,857 | |||||||||||||
425,670 | Unipetrol AS * | 3,153,057 | |||||||||||||
Total Czech Republic | 32,300,211 | ||||||||||||||
Egypt — 1.3% | |||||||||||||||
528,477 | Alexandria Mineral Oils Co | 4,690,986 | |||||||||||||
3,398,335 | Commercial International Bank | 33,263,963 | |||||||||||||
1,060,200 | EFG-Hermes Holding SAE | 5,390,197 | |||||||||||||
453,661 | Egyptian Co for Mobile Services | 17,768,868 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Egypt — continued | |||||||||||||||
21,032 | El Ezz Aldekhela Steel Alexa Co | 2,918,680 | |||||||||||||
248,230 | Orascom Construction Industries | 10,442,098 | |||||||||||||
2,770,909 | Orascom Telecom Holding SAE | 18,103,406 | |||||||||||||
2,356,570 | Sidi Kerir Petrochemicals Co | 4,903,303 | |||||||||||||
4,301,300 | Talaat Moustafa Group * | 4,895,093 | |||||||||||||
5,199,559 | Telecom Egypt | 17,403,988 | |||||||||||||
Total Egypt | 119,780,582 | ||||||||||||||
Hungary — 0.3% | |||||||||||||||
13,590 | Egis Gyogyszergyar Nyrt | 1,426,551 | |||||||||||||
30,660 | MOL Hungarian Oil and Gas Nyrt * | 2,410,901 | |||||||||||||
725,550 | OTP Bank Nyrt * | 18,745,675 | |||||||||||||
25,950 | Richter Gedeon Nyrt | 5,208,019 | |||||||||||||
Total Hungary | 27,791,146 | ||||||||||||||
India — 5.8% | |||||||||||||||
167,800 | Aban Offshore Ltd | 5,577,160 | |||||||||||||
37,800 | Adani Enterprises Ltd | 553,603 | |||||||||||||
514,900 | Axis Bank Ltd | 9,537,300 | |||||||||||||
128,200 | Bajaj Auto Ltd | 3,197,628 | |||||||||||||
1,875,137 | Bank of Baroda | 16,626,419 | |||||||||||||
375,100 | Bharat Heavy Electricals Ltd | 17,743,076 | |||||||||||||
1,616,400 | Canara Bank Ltd | 8,851,541 | |||||||||||||
11,896,352 | CBAY Systems Holdings Ltd * (c) | 11,329,499 | |||||||||||||
178,128 | Century Textiles & Industries Ltd | 1,677,723 | |||||||||||||
1,203,043 | Cipla Ltd | 6,685,003 | |||||||||||||
209,189 | Grasim Industries Ltd | 11,479,150 | |||||||||||||
3,995,600 | GVK Power & Infrastructure Ltd * | 3,948,722 | |||||||||||||
205,242 | Hero Honda Motors Ltd | 6,370,561 | |||||||||||||
729,500 | Housing Development Finance Corp Ltd | 36,896,486 | |||||||||||||
665,385 | ICICI Bank Ltd | 10,243,083 | |||||||||||||
485,060 | ICICI Bank Ltd Sponsored ADR | 14,804,031 | |||||||||||||
5,896,010 | IFCI Ltd * | 6,759,602 | |||||||||||||
883,300 | India Infoline Ltd | 2,455,043 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
India — continued | |||||||||||||||
7,799,500 | Industrial Development Bank of India Ltd | 16,555,133 | |||||||||||||
1,045,250 | Infosys Technologies Ltd | 45,633,322 | |||||||||||||
737,100 | Infosys Technologies Ltd Sponsored ADR | 31,864,833 | |||||||||||||
928,147 | Jindal Steel & Power Ltd | 59,460,105 | |||||||||||||
793,246 | KSK Energy Ventures Ltd * | 3,375,467 | |||||||||||||
343,900 | Larsen & Toubro Ltd | 11,019,474 | |||||||||||||
418,386 | Mahindra & Mahindra Ltd | 7,413,537 | |||||||||||||
539,400 | Nagarjuna Construction Co | 1,497,575 | |||||||||||||
741,250 | Punjab National Bank Ltd | 10,377,849 | |||||||||||||
2,469,600 | Reliance Communications Ltd | 13,166,671 | |||||||||||||
765,380 | Reliance Energy Ltd | 17,923,139 | |||||||||||||
380,900 | Reliance Industries Ltd * | 15,602,374 | |||||||||||||
2,249,189 | Satyam Computer Services Ltd | 5,610,160 | |||||||||||||
1,620,100 | Sesa Goa Ltd | 7,032,226 | |||||||||||||
637,500 | State Bank of India | 22,799,771 | |||||||||||||
1,003,800 | Sterlite Industries India Ltd | 13,811,816 | |||||||||||||
454,910 | Sterlite Industries India Ltd ADR | 6,091,245 | |||||||||||||
2,395,000 | Tata Consultancy Services Ltd | 26,040,420 | |||||||||||||
354,000 | Tata Steel Ltd | 3,077,116 | |||||||||||||
1,231,301 | Union Bank of India | 5,397,928 | |||||||||||||
1,691,580 | Unitech Ltd | 3,658,385 | |||||||||||||
109,100 | United Spirits Ltd | 2,129,949 | |||||||||||||
1,843,200 | Wipro Ltd | 20,795,319 | |||||||||||||
Total India | 525,069,444 | ||||||||||||||
Indonesia — 2.4% | |||||||||||||||
8,920,000 | Astra International Tbk PT | 26,692,022 | |||||||||||||
52,550,500 | Bakrie Sumatera Plantations Tbk PT | 4,590,281 | |||||||||||||
16,729,500 | Bank Central Asia Tbk PT | 7,045,551 | |||||||||||||
4,889,000 | Bank Danamon Indonesia Tbk PT | 2,279,798 | |||||||||||||
45,365,000 | Bank Negara Indonesia (Persero) Tbk PT | 8,726,841 | |||||||||||||
26,559,500 | Bank Rakyat Tbk PT | 20,033,326 | |||||||||||||
310,072,500 | Bumi Resources Tbk PT | 88,976,640 | |||||||||||||
3,921,500 | Gudang Garam Tbk PT | 5,567,954 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Indonesia — continued | |||||||||||||||
42,280,000 | Indah Kiat Pulp and Paper Corp Tbk PT * | 7,422,196 | |||||||||||||
1,706,000 | Indo Tambangraya Megah PT | 4,131,382 | |||||||||||||
17,069,500 | Indofood Sukses Makmur Tbk PT | 4,233,312 | |||||||||||||
10,805,000 | International Nickel Indonesia Tbk PT * | 4,530,428 | |||||||||||||
44,724,500 | Kalbe Farma Tbk PT | 5,642,696 | |||||||||||||
16,121,100 | Matahari Putra Prima Tbk PT * | 1,392,717 | |||||||||||||
33,243,500 | Perusahaan Gas Negara PT | 11,469,092 | |||||||||||||
3,332,000 | Tambang Batubara Bukit Asam Tbk PT | 4,298,001 | |||||||||||||
7,510,500 | Telekomunikasi Indonesia Tbk PT | 6,218,126 | |||||||||||||
20,775,500 | Timah Tbk PT | 4,276,110 | |||||||||||||
Total Indonesia | 217,526,473 | ||||||||||||||
Israel — 0.8% | |||||||||||||||
4,816,630 | Bank Hapoalim BM * | 15,491,921 | |||||||||||||
3,317,230 | Bezeq Israeli Telecommunication Corp Ltd | 6,931,666 | |||||||||||||
51,085 | Delek Group Ltd | 8,523,238 | |||||||||||||
76,450 | Elbit Systems Ltd | 4,970,566 | |||||||||||||
879,128 | Jerusalem Economy Ltd * | 6,652,099 | |||||||||||||
322,530 | Mizrahi Tefahot Bank Ltd * | 2,452,984 | |||||||||||||
637,416 | Phoenix Holdings Ltd (The) * | 1,599,321 | |||||||||||||
574,730 | Teva Pharmaceutical Industries Ltd Sponsored ADR | 29,598,595 | |||||||||||||
Total Israel | 76,220,390 | ||||||||||||||
Lebanon — 0.0% | |||||||||||||||
8,700 | Banque Libanaise pour le Commerce Sal * (a) (b) | — | |||||||||||||
Malaysia — 1.6% | |||||||||||||||
6,578,592 | Berjaya Sports Toto Berhad | 7,991,169 | |||||||||||||
646,478 | British American Tobacco Malaysia Berhad | 8,416,038 | |||||||||||||
6,011,600 | CIMB Group Holdings Berhad | 16,905,100 | |||||||||||||
4,818,700 | IOI Corp Berhad | 6,949,158 | |||||||||||||
45,417,200 | KNM Group Berhad | 9,583,358 | |||||||||||||
4,255,306 | Lion Diversified Holdings | 659,266 | |||||||||||||
4,758,303 | Lion Industries Corp Berhad | 2,090,828 | |||||||||||||
1,064,000 | PPB Group Berhad | 4,637,422 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Malaysia — continued | |||||||||||||||
21,520,841 | Resorts World Berhad | 16,979,855 | |||||||||||||
17,080,480 | RHB Capital Berhad | 22,857,077 | |||||||||||||
8,522,400 | Shangri-La Hotels Berhad | 4,222,076 | |||||||||||||
9,424,680 | Sime Darby Berhad | 21,993,280 | |||||||||||||
11,622,265 | Sunway City Berhad | 11,142,500 | |||||||||||||
2,516,178 | Tanjong Plc | 10,929,398 | |||||||||||||
3,735,321 | WCT Engineering Berhad | 2,838,099 | |||||||||||||
Total Malaysia | 148,194,624 | ||||||||||||||
Mexico — 0.7% | |||||||||||||||
2,591,500 | Alfa SA de CV Class A | 11,323,288 | |||||||||||||
429,900 | America Movil SAB de CV Class L ADR | 19,409,985 | |||||||||||||
4,191,847 | Cemex SA de CV CPO * | 5,549,683 | |||||||||||||
4,601,200 | Consorcio ARA SAB de CV * | 2,670,259 | |||||||||||||
2,752,000 | Corporacion GEO SA de CV Series B * | 6,501,720 | |||||||||||||
4,282,850 | Grupo Financiero Banorte SAB de CV Class O | 12,632,792 | |||||||||||||
29,720 | Grupo Mexico SA Class B * | 42,730 | |||||||||||||
1,475,200 | Sare Holding SA de CV Class B * | 585,474 | |||||||||||||
490,080 | Telefonos de Mexico SAB de CV Class L Sponsored ADR | 9,110,587 | |||||||||||||
Total Mexico | 67,826,518 | ||||||||||||||
Morocco — 0.2% | |||||||||||||||
76,980 | Attijariwafa Bank | 2,692,263 | |||||||||||||
1,695 | Compagnie Generale Immobiliere | 408,304 | |||||||||||||
28,840 | Credit Immobilier et Hotelier | 1,467,140 | |||||||||||||
77,150 | Douja Promotion Groupe Addoha SA | 1,306,403 | |||||||||||||
435,915 | Maroc Telecom | 7,839,873 | |||||||||||||
5,420 | Societe Nationale De Siderurgie | 1,551,920 | |||||||||||||
Total Morocco | 15,265,903 | ||||||||||||||
Peru — 0.0% | |||||||||||||||
9,268 | Sociedad Minera Cerro Verde SA | 217,334 | |||||||||||||
2,111,957 | Volcan Compania Minera SA Class B * | 1,987,220 | |||||||||||||
Total Peru | 2,204,554 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Philippines — 0.6% | |||||||||||||||
71,804,100 | Benpres Holdings Corp * | 5,417,689 | |||||||||||||
22,788,800 | Energy Development Corp | 2,094,875 | |||||||||||||
168,711,042 | Filinvest Land Inc | 3,584,772 | |||||||||||||
6,310,500 | First Gen Corp * | 2,771,183 | |||||||||||||
924,600 | Manila Electric Co | 3,793,463 | |||||||||||||
212,997,487 | Megaworld Corp | 7,024,827 | |||||||||||||
103,996 | Philippine Long Distance Telephone Co | 5,343,218 | |||||||||||||
115,496,710 | Robinsons Land Corp | 26,029,455 | |||||||||||||
Total Philippines | 56,059,482 | ||||||||||||||
Poland — 2.7% | |||||||||||||||
54,396 | Central European Distribution Corp. * | 1,751,551 | |||||||||||||
1,326,083 | Cyfrowy Polsat SA | 7,324,961 | |||||||||||||
3,940,740 | Getin Holding SA * | 12,249,099 | |||||||||||||
1,855,240 | Globe Trade Centre SA * | 16,584,473 | |||||||||||||
2,952,150 | KGHM Polska Miedz SA | 88,655,454 | |||||||||||||
3,345,450 | Polski Koncern Naftowy Orlen SA * | 34,260,213 | |||||||||||||
4,850,320 | Powszechna Kasa Oszczednosci Bank Polski SA | 59,856,933 | |||||||||||||
1,979,950 | Telekomunikacja Polska SA | 11,163,068 | |||||||||||||
2,367,840 | TVN SA | 11,857,356 | |||||||||||||
Total Poland | 243,703,108 | ||||||||||||||
Russia — 12.1% | |||||||||||||||
3,393,304 | Cherepovets MK Severstal GDR (Registered Shares) | 24,877,764 | |||||||||||||
1,845,420 | Gazprom Neft Class S | 6,660,942 | |||||||||||||
363,300 | Gazprom Neft Sponsored ADR | 6,462,630 | |||||||||||||
2,955,790 | Lukoil Sponsored ADR | 148,201,277 | |||||||||||||
2,794,032 | Magnit OJSC Sponsored GDR (Registered Shares) | 31,855,784 | |||||||||||||
1,266,300 | Magnitogorsk Iron & Steel Works Sponsored GDR (Registered Shares) * | 11,033,811 | |||||||||||||
1,077,980 | Mechel Sponsored ADR | 13,162,136 | |||||||||||||
4,292,500 | MMC Norilsk Nickel JSC ADR * | 47,214,036 | |||||||||||||
2,551,060 | Mobile Telesystems Sponsored ADR | 110,664,983 | |||||||||||||
1,178,300 | NovaTek OAO Sponsored GDR (Registered Shares) | 46,477,784 | |||||||||||||
872,968 | Novolipetsk Steel GDR (Registered Shares) * | 20,753,788 | |||||||||||||
17,234,000 | OAO Gazprom Sponsored GDR | 361,658,489 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Russia — continued | |||||||||||||||
1,060,383 | OAO Tatneft Sponsored GDR (Registered Shares) | 26,281,776 | |||||||||||||
258,818 | Polyus Gold Sponsored ADR | 5,194,723 | |||||||||||||
8,894,600 | Rosneft OJSC GDR | 56,769,793 | |||||||||||||
193,200 | Rostelecom Sponsored ADR | 5,838,504 | |||||||||||||
447,595,760 | RusHydro Class S * | 15,665,852 | |||||||||||||
135,000 | Russia Petroleum * (a) | 1,796,113 | |||||||||||||
11,994,560 | Sberbank RF | 17,900,729 | |||||||||||||
703,011 | Sistema JSFC Sponsored GDR * | 11,177,410 | |||||||||||||
10,627,956 | Surgutneftegaz Sponsored ADR | 90,604,685 | |||||||||||||
926,310 | Vimpelcom Sponsored ADR * | 14,302,227 | |||||||||||||
1,152,947 | X5 Retail Group NV GDR (Registered Shares) * | 22,145,957 | |||||||||||||
Total Russia | 1,096,701,193 | ||||||||||||||
South Africa — 2.1% | |||||||||||||||
167,175 | Absa Group Ltd | 2,723,066 | |||||||||||||
1,045,846 | Adcock Ingram Holdings Ltd | 6,241,645 | |||||||||||||
1,619,632 | Aveng Ltd | 8,578,475 | |||||||||||||
312,500 | Exxaro Resources Ltd | 3,709,373 | |||||||||||||
3,421,200 | FirstRand Ltd | 6,985,607 | |||||||||||||
806,800 | Foschini Ltd | 6,321,652 | |||||||||||||
832,300 | Gold Fields Ltd | 10,065,625 | |||||||||||||
2,039,216 | Grindrod Ltd | 4,481,013 | |||||||||||||
981,940 | Harmony Gold Mining Co Ltd * | 9,204,896 | |||||||||||||
1,043,800 | Impala Platinum Holdings Ltd | 24,398,537 | |||||||||||||
1,516,053 | JD Group Ltd | 8,280,683 | |||||||||||||
704,488 | Naspers Ltd Class N | 23,051,673 | |||||||||||||
1,603,888 | Remgro Ltd | 17,735,021 | |||||||||||||
640,838 | Reunert Ltd | 4,193,140 | |||||||||||||
2,104,000 | RMB Holdings Ltd | 7,142,560 | |||||||||||||
2,498,400 | Steinhoff International Holdings Ltd | 5,589,412 | |||||||||||||
3,149,600 | Telkom South Africa Ltd | 17,567,191 | |||||||||||||
800,332 | Tiger Brands Ltd | 15,984,004 | |||||||||||||
626,022 | Vodacom Group (Pty) Ltd * | 4,635,114 | |||||||||||||
Total South Africa | 186,888,687 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
South Korea — 18.1% | |||||||||||||||
14,290 | Amorepacific Corp | 8,326,134 | |||||||||||||
152,986 | Boryung Pharmaceutical Co Ltd (c) | 5,168,637 | |||||||||||||
1,378,940 | Busan Bank | 12,392,476 | |||||||||||||
47,730 | CJ O Shopping Co Ltd | 2,867,134 | |||||||||||||
1,011,620 | Daegu Bank | 11,762,156 | |||||||||||||
1,406,852 | Daehan Pulp Co Ltd * (c) | 5,843,763 | |||||||||||||
517,926 | Daelim Industrial Co Ltd | 29,834,913 | |||||||||||||
14,046 | Daesun Shipbuilding * | 853,314 | |||||||||||||
727,240 | Daewoo Engineering & Construction Co Ltd | 8,137,373 | |||||||||||||
876,140 | Daewoo Securities Co Ltd | 16,060,848 | |||||||||||||
801,463 | Dongbu Insurance Co Ltd | 24,318,766 | |||||||||||||
322,873 | Dongkuk Steel Mill Co Ltd | 7,534,509 | |||||||||||||
147,110 | Doosan Infracore Co Ltd | 2,067,244 | |||||||||||||
4,336,899 | Edu Ark Co Ltd * (a) (c) | 648,727 | |||||||||||||
1,380,098 | Finetex EnE Inc * | 2,789,194 | |||||||||||||
351,220 | GS Engineering & Construction Corp | 26,867,146 | |||||||||||||
646,520 | GS Holdings Corp | 17,056,751 | |||||||||||||
1,202,899 | Hana Financial Group Inc | 31,455,330 | |||||||||||||
230,982 | Hanjin Heavy Industries & Construction Co Ltd | 5,094,435 | |||||||||||||
278,974 | Hanjin Heavy Industries & Construction Holdings Co Ltd | 3,265,812 | |||||||||||||
2,112,770 | Hanwha Chemical Corp | 21,938,736 | |||||||||||||
315,520 | Hanwha Corp | 11,036,352 | |||||||||||||
39,775 | Hite Brewery Co Ltd | 5,203,754 | |||||||||||||
362,684 | Honam Petrochemical Corp | 27,192,346 | |||||||||||||
24,300 | Hyosung Corp | 1,753,563 | |||||||||||||
247,260 | Hyundai Department Store Co Ltd | 18,901,420 | |||||||||||||
750,920 | Hyundai Development Co | 27,372,472 | |||||||||||||
144,830 | Hyundai Heavy Industries Co Ltd | 22,051,763 | |||||||||||||
235,887 | Hyundai Mipo Dockyard | 23,292,456 | |||||||||||||
936,024 | Hyundai Mobis | 99,171,066 | |||||||||||||
664,440 | Hyundai Motor Co | 56,317,640 | |||||||||||||
2,946,629 | In the F Co Ltd * (c) | 3,417,453 | |||||||||||||
2,405,390 | Industrial Bank of Korea * | 25,946,563 | |||||||||||||
1,342,390 | Kangwon Land Inc | 17,715,598 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
South Korea — continued | |||||||||||||||
1,473,238 | KB Financial Group Inc * | 60,488,423 | |||||||||||||
42,331 | KB Financial Group Inc ADR * | 1,725,835 | |||||||||||||
502,901 | Keangnam Enterprises Ltd * | 6,784,840 | |||||||||||||
1,320,080 | Korea Exchange Bank | 11,759,301 | |||||||||||||
607,790 | Korea Investment Holdings Co Ltd | 17,383,648 | |||||||||||||
216,529 | Korea Zinc Co Ltd | 23,618,196 | |||||||||||||
61,000 | Korean Air Lines Co Ltd * | 2,039,261 | |||||||||||||
720,629 | KT Corp | 22,448,760 | |||||||||||||
221,850 | KT Corp Sponsored ADR | 3,454,204 | |||||||||||||
1,360,111 | KT&G Corp | 73,251,310 | |||||||||||||
256,820 | LG Chem Ltd | 38,695,907 | |||||||||||||
430,850 | LG Corp | 26,201,815 | |||||||||||||
794,320 | LG Display Co Ltd | 23,193,789 | |||||||||||||
116,540 | LG Fashion Corp | 2,036,100 | |||||||||||||
14,660 | LG Household & Health Care Ltd | 2,538,941 | |||||||||||||
1,857,730 | LG Telecom Ltd | 11,595,019 | |||||||||||||
131,420 | Lotte Shopping Co Ltd | 29,899,058 | |||||||||||||
496,757 | Maeil Dairy Industry | 6,255,613 | |||||||||||||
131,610 | Mirae Asset Securities Co Ltd | 7,681,044 | |||||||||||||
153,100 | NCSoft Corp | 16,772,202 | |||||||||||||
228,740 | NHN Corp * | 31,096,939 | |||||||||||||
231,659 | POSCO | 85,007,158 | |||||||||||||
726,680 | Pumyang Construction Co Ltd (c) | 5,228,091 | |||||||||||||
406,701 | Samsung Electronics Co Ltd | 250,790,471 | |||||||||||||
288,310 | Samsung Engineering Co Ltd | 18,703,688 | |||||||||||||
303,090 | Samsung Techwin Co Ltd | 18,855,684 | |||||||||||||
343,890 | Seoul Semiconductor Co Ltd * | 12,152,756 | |||||||||||||
1,719,822 | Shinhan Financial Group Co Ltd * | 56,181,375 | |||||||||||||
6,300 | Shinsegae Co Ltd | 2,609,824 | |||||||||||||
113,710 | SK Chemicals Co Ltd | 5,515,957 | |||||||||||||
327,623 | SK Energy Co Ltd | 26,317,388 | |||||||||||||
684,694 | SK Holdings Co Ltd | 57,472,441 | |||||||||||||
1,234,800 | SK Networks Co Ltd | 12,141,722 | |||||||||||||
2,391,790 | SK Securities Co Ltd | 5,596,469 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
South Korea — continued | |||||||||||||||
299,885 | SK Telecom Co Ltd | 41,913,944 | |||||||||||||
295,170 | STX Engine Co Ltd | 5,675,270 | |||||||||||||
811,290 | STX Pan Ocean Co Ltd | 7,195,365 | |||||||||||||
133,880 | STX Shipping Co Ltd | 1,589,971 | |||||||||||||
1,222,670 | Tong Yang Securities Inc | 15,867,847 | |||||||||||||
619,980 | Woori Finance Holdings Co Ltd * | 6,955,948 | |||||||||||||
724,536 | Youngone Corp * | 4,513,484 | |||||||||||||
4 | Youngone Holding Co Ltd | 71 | |||||||||||||
Total South Korea | 1,642,860,973 | ||||||||||||||
Sri Lanka — 0.0% | |||||||||||||||
262,774 | Lanka Walltile Ltd | 97,386 | |||||||||||||
Taiwan — 9.9% | |||||||||||||||
3,402,510 | Asia Optical Co Inc | 5,110,415 | |||||||||||||
11,722,946 | Asustek Computer Inc | 18,622,110 | |||||||||||||
24,339,930 | AU Optronics Corp | 24,240,813 | |||||||||||||
3,389,000 | Catcher Technology Co Ltd | 8,737,870 | |||||||||||||
23,713,000 | Chi Mei Optoelectronics Corp * | 11,612,595 | |||||||||||||
30,998,000 | China Bills Finance Corp | 8,556,087 | |||||||||||||
32,476,350 | China Steel Corp | 29,453,853 | |||||||||||||
64,179,000 | Chinatrust Financial Holding Co Ltd | 35,628,319 | |||||||||||||
16,192,771 | Chunghwa Telecom Co Ltd | 27,727,070 | |||||||||||||
17,203,817 | Compal Electronics Inc | 17,320,512 | |||||||||||||
2,201,656 | DFI Inc | 2,562,882 | |||||||||||||
11,882,502 | Dimerco Express Taiwan Corp (c) | 7,865,272 | |||||||||||||
5,039,000 | Epistar Corp | 14,777,156 | |||||||||||||
10,864,473 | Far Eastern Textile Co Ltd | 10,805,108 | |||||||||||||
12,305,500 | Far Eastone Telecommunications Co Ltd | 13,876,503 | |||||||||||||
18,241,650 | First Financial Holding Co Ltd | 9,869,152 | |||||||||||||
11,047,864 | Formosa Chemicals & Fibre Co | 19,333,943 | |||||||||||||
20,632,780 | Formosa Plastics Corp | 37,059,444 | |||||||||||||
72,814,000 | HannStar Display Corp * | 15,232,406 | |||||||||||||
3,980,430 | High Tech Computer Corp | 39,952,557 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Taiwan — continued | |||||||||||||||
25,630,014 | Hon Hai Precision Industry Co Ltd | 86,294,177 | |||||||||||||
9,717,040 | Innolux Display Corp | 10,857,421 | |||||||||||||
3,584,896 | Les Enphants Co Ltd | 2,858,789 | |||||||||||||
20,793,426 | Lite-On Technology Corp | 23,267,560 | |||||||||||||
17,642,228 | Macronix International Co Ltd | 8,377,407 | |||||||||||||
8,053,389 | MediaTek Inc | 116,736,381 | |||||||||||||
13,201,000 | Mitac International Corp | 5,364,062 | |||||||||||||
14,346,697 | Nan Ya Plastics Corp | 19,956,069 | |||||||||||||
5,862,658 | Novatek Microelectronics Corp Ltd | 13,738,123 | |||||||||||||
11,277,500 | Powertech Technology Inc | 30,756,984 | |||||||||||||
21,235,290 | Quanta Computer Inc | 43,948,650 | |||||||||||||
2,452,970 | Radiant Opto-Electronics Corp | 3,121,506 | |||||||||||||
16,057,652 | Siliconware Precision Industries Co | 19,903,990 | |||||||||||||
1,378,120 | Silitech Technology Corp | 3,180,900 | |||||||||||||
5,651,000 | Sincere Navigation Corp | 6,427,257 | |||||||||||||
17,586,400 | Synnex Technology International Corp | 30,672,514 | |||||||||||||
20,277,000 | Taishin Financial Holding Co Ltd * | 6,703,502 | |||||||||||||
663 | Taiwan Cement Corp | 718 | |||||||||||||
7,518,288 | Taiwan Mobile Co Ltd | 11,796,921 | |||||||||||||
36,967,697 | Taiwan Semiconductor Manufacturing Co Ltd | 66,424,611 | |||||||||||||
14,897,667 | Wistron Corp | 28,832,285 | |||||||||||||
Total Taiwan | 897,563,894 | ||||||||||||||
Thailand — 5.3% | |||||||||||||||
17,805,590 | Advanced Info Service Pcl (Foreign Registered) (a) | 45,150,412 | |||||||||||||
18,091,000 | Asian Property Development Pcl (Foreign Registered) (a) | 2,978,818 | |||||||||||||
2,307,720 | Asian Property Development Pcl NVDR (a) | 379,943 | |||||||||||||
1,979,000 | Bangkok Bank Pcl (a) | 6,399,064 | |||||||||||||
6,593,010 | Bangkok Bank Pcl NVDR (a) | 21,318,391 | |||||||||||||
29,175,800 | Bangkok Dusit Medical Service Pcl (Foreign Registered) (a) | 21,284,922 | |||||||||||||
16,673,450 | Bank of Ayudhya Pcl NVDR (a) | 8,720,386 | |||||||||||||
1,707,170 | Banpu Pcl (Foreign Registered) (a) | 20,032,523 | |||||||||||||
479,630 | Banpu Pcl NVDR (a) | 5,628,144 | |||||||||||||
30,289,820 | BEC World Pcl (Foreign Registered) (a) | 16,658,511 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Thailand — continued | |||||||||||||||
17,754,880 | Home Product Center Pcl (Foreign Registered) (a) | 3,656,943 | |||||||||||||
153,686,800 | IRPC Pcl (Foreign Registered) (a) | 17,361,448 | |||||||||||||
14,867,460 | Kasikornbank Pcl (Foreign Registered) (a) | 32,976,825 | |||||||||||||
3,330,540 | Kasikornbank Pcl NVDR (a) | 7,093,781 | |||||||||||||
83,094,000 | Krung Thai Bank Pcl (Foreign Registered) (a) | 21,006,190 | |||||||||||||
6,828,000 | PTT Chemical Pcl (Foreign Registered) (a) | 13,260,608 | |||||||||||||
6,388,140 | PTT Exploration & Production Pcl (Foreign Registered) (a) | 26,026,279 | |||||||||||||
847,860 | PTT Exploration & Production Pcl NVDR (a) | 3,454,314 | |||||||||||||
14,075,270 | PTT Pcl (Foreign Registered) (a) | 101,001,525 | |||||||||||||
15,394,870 | Robinson Department Store Pcl (Foreign Registered) (a) | 4,614,331 | |||||||||||||
3,410,793 | Robinson Department Store Pcl NVDR (a) | 1,022,323 | |||||||||||||
12,901,400 | Saha Pathana International Holding Pcl (Foreign Registered) (a) | 6,255,800 | |||||||||||||
3,699,138 | Siam Cement Pcl (Foreign Registered) (a) | 21,484,407 | |||||||||||||
1,438,990 | Siam Cement Pcl NVDR (a) | 8,209,472 | |||||||||||||
14,104,000 | Siam Commercial Bank Pcl (Foreign Registered) (a) | 31,915,888 | |||||||||||||
785,080 | Siam Commercial Bank Pcl NVDR (a) | 1,776,555 | |||||||||||||
3,108,050 | Star Block Co Ltd (Foreign Registered) * (a) (b) (c) | — | |||||||||||||
20,710,320 | Thai Oil Pcl (Foreign Registered) (a) | 24,659,403 | |||||||||||||
10,230,000 | Thoresen Thai Agencies Pcl (Foreign Registered) (a) | 6,948,339 | |||||||||||||
Total Thailand | 481,275,545 | ||||||||||||||
Turkey — 9.5% | |||||||||||||||
10,635,505 | Akbank TAS | 61,126,340 | |||||||||||||
2,758,340 | Anadolu Efes Biracilik ve Malt Sanayii AS | 30,131,239 | |||||||||||||
4,673,750 | Arcelik AS * | 13,412,204 | |||||||||||||
13,521,600 | Asya Katilim Bankasi AS * | 25,044,480 | |||||||||||||
13,260,774 | Dogan Sirketler Grubu Holdings AS * | 12,442,338 | |||||||||||||
3,316,531 | Enka Insaat ve Sanayi AS | 13,386,095 | |||||||||||||
1,063,900 | Ford Otomotiv Sanayi AS | 6,320,940 | |||||||||||||
1,731,600 | Gubre Fabrikalari TAS * | 9,356,977 | |||||||||||||
6,865,531 | Haci Omer Sabanci Holding AS | 26,570,246 | |||||||||||||
28,413,000 | Kardemir Karabuk Demir Celik Sanayi ve Ticaret AS Class D * | 11,767,293 | |||||||||||||
24,192,519 | KOC Holding AS * | 64,290,898 | |||||||||||||
42,150 | Medya Holding AS * (a) (b) | — |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Turkey — continued | |||||||||||||||
6,781,550 | Sekerbank TAS * | 11,012,883 | |||||||||||||
2,087,320 | Tupras-Turkiye Petrol Rafineriler AS | 31,308,787 | |||||||||||||
8,900,850 | Turk Ekonomi Bankasi AS * | 10,832,283 | |||||||||||||
14,269,900 | Turk Hava Yollari Anonim Ortakligi | 27,430,551 | |||||||||||||
8,896,919 | Turk Sise ve Cam Fabrikalari AS * | 9,434,393 | |||||||||||||
7,657,770 | Turk Telekomunikasyon AS | 23,384,878 | |||||||||||||
12,193,985 | Turkcell Iletisim Hizmet AS | 78,930,508 | |||||||||||||
50,324,240 | Turkiye Garanti Bankasi * | 186,260,891 | |||||||||||||
8,095,200 | Turkiye Halk Bankasi AS | 43,759,642 | |||||||||||||
14,639,660 | Turkiye IS Bankasi Class C | 58,075,134 | |||||||||||||
12,737,874 | Turkiye Sinai Kalkinma Bankasi AS * | 10,612,234 | |||||||||||||
21,274,760 | Turkiye Vakiflar Bankasi TAO Class D * | 47,095,179 | |||||||||||||
6,285,900 | Vestel Elektronik Sanayi AS * | 9,686,312 | |||||||||||||
17,038,433 | Yapi ve Kredi Bankasi AS * | 35,932,478 | |||||||||||||
Total Turkey | 857,605,203 | ||||||||||||||
TOTAL COMMON STOCKS (COST $6,915,762,914) | 8,104,360,198 | ||||||||||||||
PREFERRED STOCKS — 8.0% | |||||||||||||||
Brazil — 6.8% | |||||||||||||||
4,729,600 | Banco Bradesco SA 0.57% | 77,166,233 | |||||||||||||
1,007,600 | Centrais Eletricas Brasileiras SA Class B 6.90% | 13,231,867 | |||||||||||||
561,206 | Companhia de Bebidas das Americas 1.04% | 41,985,486 | |||||||||||||
1,289,955 | Companhia Energetica de Minas Gerais 2.79% | 18,993,077 | |||||||||||||
1,168,000 | Companhia Paranaense de Energia Class B 0.45% | 18,176,601 | |||||||||||||
2,072,000 | Duratex SA 1.25% | 31,629,140 | |||||||||||||
588,000 | Eletropaulo Metropolitana SA 5.67% | 10,910,150 | |||||||||||||
1,292,900 | Fertilizantes Fosfatados SA * | 12,107,861 | |||||||||||||
1,168,800 | Gerdau Metalurgica SA 1.48% | 17,128,591 | |||||||||||||
1,384,362 | Gerdau SA 0.74% | 16,203,654 | |||||||||||||
238,672 | Itau Unibanco Holding SA 0.42% | 4,049,839 | |||||||||||||
5,472,471 | Itausa-Investimentos Itau SA 0.59% | 28,107,136 | |||||||||||||
859,865 | Net Servicos de Comunicacoa SA * | 9,047,128 |
See accompanying notes to the financial statements.
17
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Brazil — continued | |||||||||||||||
6,887,604 | Petroleo Brasileiro SA (Petrobras) 1.11% | 114,677,675 | |||||||||||||
1,143,520 | Petroleo Brasileiro SA Sponsored ADR 1.14% | 37,964,864 | |||||||||||||
1,466,530 | Tele Norte Leste Participacoes ADR 6.99% | 23,376,488 | |||||||||||||
280,500 | Telecomunicacoes de Sao Paulo SA 4.48% | 6,472,619 | |||||||||||||
176,200 | Telemar Norte Leste SA Class A 7.14% | 4,833,416 | |||||||||||||
1,230,800 | Usinas Siderrurgicas de Minas Gerais SA Class A 1.14% | 28,930,037 | |||||||||||||
4,957,308 | Vale SA Preference A 2.87% | 86,536,549 | |||||||||||||
834,240 | Vale SA Sponsored ADR 2.83% | 14,357,270 | |||||||||||||
Total Brazil | 615,885,681 | ||||||||||||||
Russia — 0.4% | |||||||||||||||
50,615 | Transneft 1.20% | 32,542,436 | |||||||||||||
South Korea — 0.8% | |||||||||||||||
314,460 | Hyundai Motor Co 1.98% | 11,003,412 | |||||||||||||
164,939 | Samsung Electronics Co Ltd (Non Voting) 1.15% | 64,850,464 | |||||||||||||
Total South Korea | 75,853,876 | ||||||||||||||
TOTAL PREFERRED STOCKS (COST $513,030,669) | 724,281,993 | ||||||||||||||
PRIVATE EQUITY SECURITIES — 0.4% | |||||||||||||||
Poland — 0.4% | |||||||||||||||
11,558,754 | TRI Media Equity Linked Note * (a) (d) | 30,937,658 | |||||||||||||
Russia — 0.0% | |||||||||||||||
46,624 | Divot Holdings NV, Convertible Securities-Class F * (a) (d) (e) | 466 | |||||||||||||
90,000 | Divot Holdings NV, Private Equity Securities-Class D * (a) (d) (e) | 900 | |||||||||||||
124,330 | Divot Holdings NV, Private Equity Securities-Class E * (a) (d) (e) | 1,244 | |||||||||||||
Total Russia | 2,610 | ||||||||||||||
Sri Lanka — 0.0% | |||||||||||||||
2,545,869 | Millenium Information Technology * (a) (c) (d) | 3,014,309 | |||||||||||||
TOTAL PRIVATE EQUITY SECURITIES (COST $31,161,139) | 33,954,577 |
See accompanying notes to the financial statements.
18
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
INVESTMENT FUNDS — 0.3% | |||||||||||||||
China — 0.1% | |||||||||||||||
250,446 | Martin Currie China A Share Fund Ltd Class B * (a) (d) | 8,508,896 | |||||||||||||
25,045 | Martin Currie China A Share Fund Ltd Class S * (a) (d) | 1,511,015 | |||||||||||||
Total China | 10,019,911 | ||||||||||||||
India — 0.1% | |||||||||||||||
11,514 | Fire Capital Mauritius Private Fund * (a) (d) (f) | 9,037,232 | |||||||||||||
170 | SPG Infinity Technology Fund I * (a) (d) (e) | 5,582 | |||||||||||||
1,371,900 | TDA India Technology Fund II LP * (a) (d) | 1,096,025 | |||||||||||||
Total India | 10,138,839 | ||||||||||||||
Poland — 0.0% | |||||||||||||||
1,749,150 | The Emerging European Fund II LP * (a) (d) | 298,031 | |||||||||||||
Russia — 0.1% | |||||||||||||||
9,500,000 | NCH Eagle Fund LP * (a) (d) | 6,841,900 | |||||||||||||
2,769 | Steep Rock Russia Fund LP * (a) (d) | 955,211 | |||||||||||||
Total Russia | 7,797,111 | ||||||||||||||
Ukraine — 0.0% | |||||||||||||||
16,667 | Societe Generale Thalmann Ukraine Fund * (a) (d) (e) | 4,000 | |||||||||||||
TOTAL INVESTMENT FUNDS (COST $27,535,138) | 28,257,892 | ||||||||||||||
DEBT OBLIGATIONS — 0.4% | |||||||||||||||
Poland — 0.3% | |||||||||||||||
PLZ | 100,677,888 | TRI Media Secured Term Note, 4.65%, due 02/07/13* (a) (d) | 26,407,332 | ||||||||||||
United States — 0.1% | |||||||||||||||
9,478,429 | U.S. Treasury Inflation Indexed Bonds, 0.88% , due 04/15/10 (g) | 9,460,657 | |||||||||||||
TOTAL DEBT OBLIGATIONS (COST $38,783,636) | 35,867,989 |
See accompanying notes to the financial statements.
19
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||||||
Malaysia — 0.0% | |||||||||||||||
4,851,866 | Sunway City Warrants, Expires 10/04/17 * | 647,559 | |||||||||||||
3,740,700 | WCT Engineering Warrants, Expires 04/22/13 * | 669,215 | |||||||||||||
Total Malaysia | 1,316,774 | ||||||||||||||
TOTAL RIGHTS AND WARRANTS (COST $1,233,958) | 1,316,774 | ||||||||||||||
MUTUAL FUNDS — 0.0% | |||||||||||||||
United States — 0.0% | |||||||||||||||
Affiliated Issuers | |||||||||||||||
8,064 | GMO Special Purpose Holding Fund (h) | 5,645 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $0) | 5,645 | ||||||||||||||
CONVERTIBLE SECURITIES — 0.1% | |||||||||||||||
India — 0.1% | |||||||||||||||
3,380,000 | Adani Enterprises Ltd, 6.00%, 01/27/12 | 3,464,500 | |||||||||||||
4,000,000 | Housing Development Finance Corp, Zero Coupon, 09/27/10 | 6,435,480 | |||||||||||||
Total India | 9,899,980 | ||||||||||||||
TOTAL CONVERTIBLE SECURITIES (COST $8,254,679) | 9,899,980 |
See accompanying notes to the financial statements.
20
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 1.2% | |||||||||||||||
50,100,000 | BNP Paribas Time Deposit, 0.18%, due 09/01/09 | 50,100,000 | |||||||||||||
65,000,000 | Commerzbank Time Deposit, 0.15%, due 09/01/09 | 65,000,000 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $115,100,000) | 115,100,000 | ||||||||||||||
TOTAL INVESTMENTS — 99.8% (Cost $7,650,862,133) | 9,053,045,048 | ||||||||||||||
Other Assets and Liabilities (net) — 0.2% | 14,176,875 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 9,067,221,923 |
See accompanying notes to the financial statements.
21
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Additional information on each restricted security is as follows:
Issuer Description | Acquisition Date | Acquisition Cost | Value as a Percentage of Fund's Net Assets | Value as of August 31, 2009 | |||||||||||||||
Divot Holdings NV, Convertible Securities-Class F | 3/27/02 | $ | 46,624 | 0.00 | % | $ | 466 | ||||||||||||
Divot Holdings NV, Private Equity Securities-Class D | 6/26/00 | 1,502,100 | 0.00 | % | 900 | ||||||||||||||
Divot Holdings NV, Private Equity Securities-Class E | 9/21/01 | 124,330 | 0.00 | % | 1,244 | ||||||||||||||
Fire Capital Mauritius Private Fund | 9/06/06-3/30/09 | 11,552,300 | 0.10 | % | 9,037,232 | ||||||||||||||
Martin Currie China A Share Fund Ltd Class B | 1/20/06 | 2,710,928 | 0.09 | % | 8,508,896 | ||||||||||||||
Martin Currie China A Share Fund Ltd Class S | 10/14/08 | — | 0.02 | % | 1,511,015 | ||||||||||||||
Millenium Information Technology | 10/21/99 | 2,252,570 | 0.03 | % | 3,014,309 | ||||||||||||||
NCH Eagle Fund LP | 1/8/03 | 9,500,000 | 0.08 | % | 6,841,900 | ||||||||||||||
SPG Infinity Technology Fund I | 12/23/99 | 62,449 | 0.00 | % | 5,582 | ||||||||||||||
Societe Generale Thalmann Ukraine Fund | 7/15/97 | 199,943 | 0.00 | % | 4,000 | ||||||||||||||
Steep Rock Russia Fund LP | 12/22/06-5/13/09 | 2,250,000 | 0.01 | % | 955,211 | ||||||||||||||
TDA India Technology Fund II LP | 2/23/00-3/23/04 | 787,800 | 0.01 | % | 1,096,025 | ||||||||||||||
TRI Media Equity Linked Note | 8/7/09 | 27,235,515 | 0.34 | % | 30,937,658 | ||||||||||||||
TRI Media Secured Term Note | 8/7/09 | 29,505,475 | 0.29 | % | 26,407,332 | ||||||||||||||
The Emerging European Fund II LP | 12/5/97-6/24/02 | 471,720 | 0.00 | % | 298,031 | ||||||||||||||
$ | 88,619,801 |
See accompanying notes to the financial statements.
22
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Notes to Schedule of Investments:
ADR - American Depositary Receipt
CPO - Ordinary Participation Certificate (Certificado de Participacion Ordinares), representing a bundle of shares of the multiple series of one issuer that trade together as a unit.
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).
(b) Bankrupt issuer.
(c) Affiliated Company (Note 8).
(d) Direct placement securities are restricted as to resale.
(e) The security is currently in full liquidation.
(f) The Fund is committed to additional capital contributions in the amount of $8,486,044 to this investment.
(g) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic.
(h) Underlying investment represents interests in defaulted securities.
Currency Abbreviations:
PLZ - Polish Zloty | |||
See accompanying notes to the financial statements.
23
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $7,595,657,339) (Note 2) | $ | 9,010,522,738 | |||||
Investments in affiliated issuers, at value (cost $55,204,794) (Notes 2 and 8) | 42,522,310 | ||||||
Cash | 4,191,069 | ||||||
Foreign currency, at value (cost $24,236,650) (Note 2) | 24,170,612 | ||||||
Receivable for investments sold | 6,192,823 | ||||||
Receivable for Fund shares sold | 10,532,341 | ||||||
Dividends and interest receivable | 38,191,643 | ||||||
Foreign taxes receivable | 3,423,578 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 224,841 | ||||||
Miscellaneous receivable | 3,007,277 | ||||||
Total assets | 9,142,979,232 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 15,881,095 | ||||||
Payable for Fund shares repurchased | 44,377,733 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 6,151,433 | ||||||
Shareholder service fee | 920,590 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 16,051 | ||||||
Payable for foreign currency purchased | 9,130 | ||||||
Miscellaneous payable | 4,147,843 | ||||||
Accrued expenses | 4,253,434 | ||||||
Total liabilities | 75,757,309 | ||||||
Net assets | $ | 9,067,221,923 |
See accompanying notes to the financial statements.
24
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 10,215,207,727 | |||||
Accumulated undistributed net investment income | 37,094,266 | ||||||
Accumulated net realized loss | (2,587,819,108 | ) | |||||
Net unrealized appreciation | 1,402,739,038 | ||||||
$ | 9,067,221,923 | ||||||
Net assets attributable to: | |||||||
Class II shares | $ | 2,479,966,091 | |||||
Class III shares | $ | 772,876,511 | |||||
Class IV shares | $ | 1,920,218,374 | |||||
Class V shares | $ | 257,896,112 | |||||
Class VI shares | $ | 3,636,264,835 | |||||
Shares outstanding: | |||||||
Class II | 231,969,522 | ||||||
Class III | 72,291,070 | ||||||
Class IV | 180,423,881 | ||||||
Class V | 24,271,805 | ||||||
Class VI | 341,418,744 | ||||||
Net asset value per share: | |||||||
Class II | $ | 10.69 | |||||
Class III | $ | 10.69 | |||||
Class IV | $ | 10.64 | |||||
Class V | $ | 10.63 | |||||
Class VI | $ | 10.65 |
See accompanying notes to the financial statements.
25
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $18,654,535) | $ | 152,170,246 | |||||
Interest | 653,894 | ||||||
Dividends from affiliated issuers (net of withholding taxes of $47,400) | 237,000 | ||||||
Total investment income | 153,061,140 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 32,738,092 | ||||||
Shareholder service fee – Class II (Note 3) | 291,424 | ||||||
Shareholder service fee – Class III (Note 3) | 2,254,604 | ||||||
Shareholder service fee – Class IV (Note 3) | 953,601 | ||||||
Shareholder service fee – Class V (Note 3) | 454,280 | ||||||
Shareholder service fee – Class VI (Note 3) | 550,654 | ||||||
Custodian and fund accounting agent fees | 4,274,362 | ||||||
Legal fees | 257,508 | ||||||
Trustees fees and related expenses (Note 3) | 75,449 | ||||||
Audit and tax fees | 72,864 | ||||||
Transfer agent fees | 31,832 | ||||||
Registration fees | 16,652 | ||||||
Miscellaneous | 98,922 | ||||||
Total expenses | 42,070,244 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (534,912 | ) | |||||
Expense reductions (Note 2) | (14,884 | ) | |||||
Net expenses | 41,520,448 | ||||||
Net investment income (loss) | 111,540,692 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers (net of foreign capital gains tax refund of $229,036) (Note 2) | (433,425,754 | ) | |||||
Investments in affiliated issuers | 3,042,857 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (4,713,259 | ) | |||||
Net realized gain (loss) | (435,096,156 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers (net of change in foreign capital gains tax refund of (1,041,963 $)) (Note 2) | 4,286,903,090 | ||||||
Investments in affiliated issuers | 16,942,506 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 1,932,430 | ||||||
Net unrealized gain (loss) | 4,305,778,026 | ||||||
Net realized and unrealized gain (loss) | 3,870,681,870 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 3,982,222,562 |
See accompanying notes to the financial statements.
26
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 111,540,692 | $ | 173,363,460 | |||||||
Net realized gain (loss) | (435,096,156 | ) | (1,470,249,400 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 4,305,778,026 | (5,999,536,475 | ) | ||||||||
Net increase (decrease) in net assets from operations | 3,982,222,562 | (7,296,422,415 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (8,800,329 | ) | (28,336,721 | ) | |||||||
Class IV | (4,882,160 | ) | (18,273,132 | ) | |||||||
Class V | (3,235,392 | ) | (14,786,743 | ) | |||||||
Class VI | (4,974,703 | ) | (51,906,362 | ) | |||||||
Total distributions from net investment income | (21,892,584 | ) | (113,302,958 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (617,696,497 | ) | ||||||||
Class IV | — | (460,831,288 | ) | ||||||||
Class V | — | (246,543,395 | ) | ||||||||
Class VI | — | (1,056,552,888 | ) | ||||||||
Total distributions from net realized gains | — | (2,381,624,068 | ) | ||||||||
(21,892,584 | ) | (2,494,927,026 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class II | 2,462,793,096 | — | |||||||||
Class III | (3,133,926,148 | ) | 1,497,926,107 | ||||||||
Class IV | (311,819,164 | ) | 219,935,401 | ||||||||
Class V | (1,099,062,429 | ) | 593,348,669 | ||||||||
Class VI | 1,503,278,311 | (398,899,272 | ) | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (578,736,334 | ) | 1,912,310,905 | ||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class II | 797,937 | — | |||||||||
Class III | 3,542,599 | 7,610,631 | |||||||||
Class IV | 1,686,062 | 5,069,941 | |||||||||
Class V | 444,216 | 3,612,956 | |||||||||
Class VI | 2,451,167 | 22,495,973 | |||||||||
Increase in net assets resulting from purchase premiums and redemption fees | 8,921,981 | 38,789,501 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | (569,814,353 | ) | 1,951,100,406 | ||||||||
Total increase (decrease) in net assets | 3,390,515,625 | (7,840,249,035 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | $ | 5,676,706,298 | $ | 13,516,955,333 | |||||||
End of period (including accumulated undistributed net investment income of $37,094,266 and distributions in excess of net investment income of $52,553,842, respectively) | $ | 9,067,221,923 | $ | 5,676,706,298 |
See accompanying notes to the financial statements.
27
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout the period)
Period from August 12, 2009 through August 31, 2009 (Unaudited) | |||||||
Net asset value, beginning of period | $ | 10.62 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)† | 0.01 | ||||||
Net realized and unrealized gain (loss) | 0.06 | ||||||
Total from investment operations | 0.07 | ||||||
Net asset value, end of period | $ | 10.69 | |||||
Total Return(a) | 0.66 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 2,479,966 | |||||
Net expenses to average daily net assets | 1.02 | %*(b) | |||||
Net investment income to average daily net assets | 0.93 | %* | |||||
Portfolio turnover rate | 75 | %**†† | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* | |||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 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 net expense ratio does not include the effect of expense reductions.
(c) Purchase premiums and redemption fees per share were less than $0.01.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the six months ended August 31, 2009.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
28
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.30 | $ | 20.48 | $ | 20.67 | $ | 22.49 | $ | 19.05 | $ | 15.78 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.13 | 0.23 | 0.25 | 0.41 | 0.37 | 0.34 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 4.28 | (10.65 | ) | 5.94 | 3.00 | 6.24 | 4.40 | ||||||||||||||||||||
Total from investment operations | 4.41 | (10.42 | ) | 6.19 | 3.41 | 6.61 | 4.74 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.02 | ) | (0.13 | ) | (0.31 | ) | (0.54 | ) | (0.43 | ) | (0.32 | ) | |||||||||||||||
From net realized gains | — | (3.63 | ) | (6.07 | ) | (4.69 | ) | (2.74 | ) | (1.15 | ) | ||||||||||||||||
Total distributions | (0.02 | ) | (3.76 | ) | (6.38 | ) | (5.23 | ) | (3.17 | ) | (1.47 | ) | |||||||||||||||
Net asset value, end of period | $ | 10.69 | $ | 6.30 | $ | 20.48 | $ | 20.67 | $ | 22.49 | $ | 19.05 | |||||||||||||||
Total Return(a) | 70.11 | %** | (58.62 | )% | 28.38 | % | 17.05 | % | 37.99 | % | 31.45 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 772,877 | $ | 2,309,057 | $ | 3,402,343 | $ | 4,276,782 | $ | 4,788,395 | $ | 4,433,098 | |||||||||||||||
Net expenses to average daily net assets | 1.07 | %(b)* | 1.10 | %(c) | 1.09 | %(c) | 1.07 | % | 1.10 | % | 1.11 | % | |||||||||||||||
Net investment income to average daily net assets | 2.86 | %* | 1.77 | % | 1.04 | % | 1.87 | % | 1.88 | % | 2.17 | % | |||||||||||||||
Portfolio turnover rate | 75 | %** | 99 | % | 60 | % | 44 | % | 41 | % | 57 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.00 | %(d) | 0.01 | % | 0.01 | % | 0.01 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.04 | $ | 0.04 | $ | 0.02 | $ | 0.01 | $ | 0.01 |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions.
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
(d) Ratio is less than 0.01%.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
29
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.27 | $ | 20.40 | $ | 20.62 | $ | 22.45 | $ | 19.02 | $ | 15.75 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.12 | 0.25 | 0.23 | 0.42 | 0.40 | 0.34 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 4.27 | (10.62 | ) | 5.95 | 2.99 | 6.20 | 4.41 | ||||||||||||||||||||
Total from investment operations | 4.39 | (10.37 | ) | 6.18 | 3.41 | 6.60 | 4.75 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.02 | ) | (0.13 | ) | (0.33 | ) | (0.55 | ) | (0.43 | ) | (0.33 | ) | |||||||||||||||
From net realized gains | — | (3.63 | ) | (6.07 | ) | (4.69 | ) | (2.74 | ) | (1.15 | ) | ||||||||||||||||
Total distributions | (0.02 | ) | (3.76 | ) | (6.40 | ) | (5.24 | ) | (3.17 | ) | (1.48 | ) | |||||||||||||||
Net asset value, end of period | $ | 10.64 | $ | 6.27 | $ | 20.40 | $ | 20.62 | $ | 22.45 | $ | 19.02 | |||||||||||||||
Total Return(a) | 70.13 | %** | (58.59 | )% | 28.38 | % | 17.10 | % | 38.05 | % | 31.59 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,920,218 | $ | 1,345,811 | $ | 3,021,319 | $ | 2,599,002 | $ | 3,081,021 | $ | 3,255,865 | |||||||||||||||
Net expenses to average daily net assets | 1.02 | %(b)* | 1.06 | %(c) | 1.05 | %(c) | 1.03 | % | 1.05 | % | 1.06 | % | |||||||||||||||
Net investment income to average daily net assets | 2.74 | %* | 1.86 | % | 0.98 | % | 1.94 | % | 2.03 | % | 2.13 | % | |||||||||||||||
Portfolio turnover rate | 75 | %** | 99 | % | 60 | % | 44 | % | 41 | % | 57 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.00 | %(d) | 0.01 | % | 0.01 | % | 0.01 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.04 | $ | 0.02 | $ | 0.02 | $ | 0.01 | $ | 0.00 | (e) |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions.
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
(d) Ratio is less than 0.01%.
(e) 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.
30
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31
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
Net asset value, beginning of period | $ | 6.26 | $ | 20.39 | $ | 20.61 | $ | 22.44 | $ | 19.02 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.13 | 0.22 | 0.23 | 0.43 | 0.22 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 4.26 | (10.58 | ) | 5.96 | 2.98 | 6.39 | |||||||||||||||||
Total from investment operations | 4.39 | (10.36 | ) | 6.19 | 3.41 | 6.61 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.02 | ) | (0.14 | ) | (0.34 | ) | (0.55 | ) | (0.45 | ) | |||||||||||||
From net realized gains | — | (3.63 | ) | (6.07 | ) | (4.69 | ) | (2.74 | ) | ||||||||||||||
Total distributions | (0.02 | ) | (3.77 | ) | (6.41 | ) | (5.24 | ) | (3.19 | ) | |||||||||||||
Net asset value, end of period | $ | 10.63 | $ | 6.26 | $ | 20.39 | $ | 20.61 | $ | 22.44 | |||||||||||||
Total Return(c) | 70.24 | % | (58.59 | )% | 28.43 | % | 17.11 | % | 38.12 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 257,896 | $ | 795,586 | $ | 1,190,887 | $ | 679,988 | $ | 1,447,059 | |||||||||||||
Net expenses to average daily net assets | 1.00 | %(d)* | 1.03 | %(e) | 1.03 | %(e) | 1.01 | % | 1.04 | % | |||||||||||||
Net investment income to average daily net assets | 2.93 | %* | 1.81 | % | 0.98 | % | 1.97 | % | 1.06 | % | |||||||||||||
Portfolio turnover rate | 75 | %** | 99 | % | 60 | % | 44 | % | 41 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.00 | (g) | 0.01 | % | 0.01 | % | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (h) | $ | 0.05 | $ | 0.05 | $ | 0.03 | $ | 0.02 |
(a) The class was inactive from October 27, 2004 to February 10, 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 during the periods shown and assumes the effect
of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(d) The net expense ratio does not include the effect of expense reductions.
(e) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending
transactions.
(f) 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.
(g) Ratio is less than 0.01%.
(h) Purchase premiums and redemption fees were less than $0.01 per share.
† 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.
See accompanying notes to the financial statements.
32
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights — (Continued)
(For a Class V share outstanding throughout each period)
Period from February 11, 2005 (commencement of operations) through | Period from March 1, 2004 through | ||||||||||
February 28, 2005(a) | October 26, 2004(a) | ||||||||||
Net asset value, beginning of period | $ | 17.88 | $ | 15.77 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)† | (0.01 | ) | 0.25 | ||||||||
Net realized and unrealized gain (loss) | 1.15 | (0.09 | ) | ||||||||
Total from investment operations | 1.14 | 0.16 | |||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | — | (0.07 | ) | ||||||||
From net realized gains | — | (0.00 | )(b) | ||||||||
Total distributions | — | (0.07 | ) | ||||||||
Net asset value, end of period | $ | 19.02 | $ | 15.86 | |||||||
Total Return(c) | 6.38 | %** | 1.10 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 38,564 | $ | 116,417 | |||||||
Net expenses to average daily net assets | 1.03 | %* | 1.05 | %* | |||||||
Net investment income to average daily net assets | (0.05 | )%(f)** | 1.70 | %(f)** | |||||||
Portfolio turnover rate | 57 | %*** | 57 | %*** | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.01 | %* | |||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | — | — |
See accompanying notes to the financial statements.
33
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.27 | $ | 20.42 | $ | 20.63 | $ | 22.45 | $ | 19.03 | $ | 15.76 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.12 | 0.23 | 0.25 | 0.42 | 0.38 | 0.34 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 4.28 | (10.61 | ) | 5.95 | 3.01 | 6.23 | 4.41 | ||||||||||||||||||||
Total from investment operations | 4.40 | (10.38 | ) | 6.20 | 3.43 | 6.61 | 4.75 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.02 | ) | (0.14 | ) | (0.34 | ) | (0.56 | ) | (0.45 | ) | (0.33 | ) | |||||||||||||||
From net realized gains | — | (3.63 | ) | (6.07 | ) | (4.69 | ) | (2.74 | ) | (1.15 | ) | ||||||||||||||||
Total distributions | (0.02 | ) | (3.77 | ) | (6.41 | ) | (5.25 | ) | (3.19 | ) | (1.48 | ) | |||||||||||||||
Net asset value, end of period | $ | 10.65 | $ | 6.27 | $ | 20.42 | $ | 20.63 | $ | 22.45 | $ | 19.03 | |||||||||||||||
Total Return(a) | 70.28 | % | (58.61 | )% | 28.49 | % | 17.20 | % | 38.07 | % | 31.63 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 3,636,265 | $ | 1,226,252 | $ | 5,902,406 | $ | 5,116,565 | $ | 3,203,435 | $ | 2,083,376 | |||||||||||||||
Net expenses to average daily net assets | 0.95 | %(b)* | 1.00 | %(c) | 1.00 | %(c) | 0.98 | % | 1.00 | % | 1.01 | % | |||||||||||||||
Net investment income to average daily net assets | 2.67 | %* | 1.83 | % | 1.05 | % | 1.93 | % | 1.94 | % | 2.15 | % | |||||||||||||||
Portfolio turnover rate | 75 | %** | 99 | % | 60 | % | 44 | % | 41 | % | 57 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.01 | % | 0.00 | %(d) | 0.01 | % | 0.01 | % | 0.01 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.07 | $ | 0.03 | $ | 0.02 | $ | 0.02 | $ | 0.03 |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions.
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
(d) Ratio is less than 0.01%.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
34
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Emerging Markets Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, 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 ("emerging markets"). Under normal circumstances, the Fund invests at least 80% of its assets in investments tied economically to emerging markets. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the counter derivatives (including options, futures, warrants, and swap contracts) and may invest in exchange-traded funds ("ETFs"). The Fund has entered into an agreement with ETFs that allows the Fund to invest in an ETF beyond 1940 Act statutory limitations, provided that the Fund complies with the terms and conditions of the relevant ETF's exemptive order. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
As of August 31, 2009, the Fund had five classes of shares outstanding: Class II, Class III, Class IV, Class V and Class VI. Class II shares commenced operations on August 12, 2009. Each class of shares bears a different shareholder service fee.
The financial statements of the series of the Trust in which the Fund invests ("underlying fund") 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). As of August 31, 2009, shares of GMO Special Purpose Holding Fund were not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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
35
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
in the financial statements. Actual results could differ from those estimates. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a t hird party vendor using that vendor's proprietary models. As of August 31, 2009, 74.33% of the net assets of the Fund were valued using fair value prices based on models used by a third party vendor and are classified as using Level 2 inputs in the table below.
Indian regulators alleged in 2003 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 represents less than 0.1% of the Fund's net assets as of August 31, 2009. The valuation of this possible claim and all matters relating to the Fund's response to these allegations are subject to the supervision and control of the Trustees, and all costs in respect of this matter are being borne by the Fund.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities
36
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation or quoted prices for similar securities.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund's securities in Thailand were valued at the local price and subject to a premium adjustment upon exceeding foreign ownership limitations. The Fund valued various investment funds based on valuations provided by fund sponsors and adjusted the values for liquidity considerations as well as the timing of the receipt of information. The Fund valued certain equity securities based on values of underlying securities to which the securities are linked, and certain other equity securities based on the last traded exchange price adjusted for the movement in a related index . The Fund considered certain bankrupt securities to be worthless.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Argentina | $ | 7,730,241 | $ | — | $ | — | $ | 7,730,241 | |||||||||||
Brazil | 449,865,436 | — | — | 449,865,436 | |||||||||||||||
Chile | 26,464,693 | — | — | 26,464,693 | |||||||||||||||
China | 57,627,989 | 867,736,523 | 0 | * | 925,364,512 | ||||||||||||||
Czech Republic | — | 32,300,211 | — | 32,300,211 | |||||||||||||||
Egypt | 119,780,582 | — | — | 119,780,582 | |||||||||||||||
Hungary | — | 27,791,146 | — | 27,791,146 | |||||||||||||||
India | 64,089,608 | 460,979,836 | — | 525,069,444 | |||||||||||||||
Indonesia | — | 217,526,473 | — | 217,526,473 | |||||||||||||||
Israel | 29,598,595 | 46,621,795 | — | 76,220,390 | |||||||||||||||
Lebanon | — | — | 0 | * | 0 | ||||||||||||||
Malaysia | — | 148,194,624 | — | 148,194,624 |
37
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mexico | $ | 67,826,518 | $ | — | $ | — | $ | 67,826,518 | |||||||||||
Morocco | — | 15,265,903 | — | 15,265,903 | |||||||||||||||
Peru | 2,204,554 | — | — | 2,204,554 | |||||||||||||||
Philippines | 2,094,875 | 53,964,607 | — | 56,059,482 | |||||||||||||||
Poland | 1,751,551 | 241,951,557 | — | 243,703,108 | |||||||||||||||
Russia | 143,967,850 | 950,937,230 | 1,796,113 | 1,096,701,193 | |||||||||||||||
South Africa | 4,635,114 | 182,253,573 | — | 186,888,687 | |||||||||||||||
South Korea | 11,760,767 | 1,630,451,479 | 648,727 | 1,642,860,973 | |||||||||||||||
Sri Lanka | — | 97,386 | — | 97,386 | |||||||||||||||
Taiwan | — | 897,563,894 | — | 897,563,894 | |||||||||||||||
Thailand | — | — | 481,275,545 | 481,275,545 | |||||||||||||||
Turkey | — | 857,605,203 | 0 | * | 857,605,203 | ||||||||||||||
TOTAL COMMON STOCKS | 989,398,373 | 6,631,241,440 | 483,720,385 | 8,104,360,198 | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Brazil | 615,885,681 | — | — | 615,885,681 | |||||||||||||||
Russia | — | 32,542,436 | — | 32,542,436 | |||||||||||||||
South Korea | — | 75,853,876 | — | 75,853,876 | |||||||||||||||
TOTAL PREFERRED STOCKS | 615,885,681 | 108,396,312 | — | 724,281,993 | |||||||||||||||
Private Equity Securities | |||||||||||||||||||
Poland | — | — | 30,937,658 | 30,937,658 | |||||||||||||||
Russia | — | — | 2,610 | 2,610 | |||||||||||||||
Sri Lanka | — | — | 3,014,309 | 3,014,309 | |||||||||||||||
TOTAL PRIVATE EQUITY SECURITIES | — | — | 33,954,577 | 33,954,577 | |||||||||||||||
Investment Funds | |||||||||||||||||||
China | — | — | 10,019,911 | 10,019,911 | |||||||||||||||
India | — | — | 10,138,839 | 10,138,839 | |||||||||||||||
Poland | — | — | 298,031 | 298,031 | |||||||||||||||
Russia | — | — | 7,797,111 | 7,797,111 | |||||||||||||||
Ukraine | — | — | 4,000 | 4,000 | |||||||||||||||
TOTAL INVESTMENT FUNDS | — | — | 28,257,892 | 28,257,892 |
38
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Poland | $ | — | $ | — | $ | 26,407,332 | $ | 26,407,332 | |||||||||||
United States | — | 9,460,657 | — | 9,460,657 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 9,460,657 | 26,407,332 | 35,867,989 | |||||||||||||||
Rights and Warrants | |||||||||||||||||||
Malaysia | — | 1,316,774 | — | 1,316,774 | |||||||||||||||
TOTAL RIGHTS AND WARRANTS | — | 1,316,774 | — | 1,316,774 | |||||||||||||||
Mutual Funds | |||||||||||||||||||
United States | — | 5,645 | — | 5,645 | |||||||||||||||
TOTAL MUTUAL FUNDS | — | 5,645 | — | 5,645 | |||||||||||||||
Convertible Securities | |||||||||||||||||||
India | — | 9,899,980 | — | 9,899,980 | |||||||||||||||
TOTAL CONVERTIBLE SECURITIES | — | 9,899,980 | — | 9,899,980 | |||||||||||||||
Short-Term Investments | 115,100,000 | — | — | 115,100,000 | |||||||||||||||
Total Investments | 1,720,384,054 | 6,760,320,808 | 572,340,186 | 9,053,045,048 | |||||||||||||||
Total | $ | 1,720,384,054 | $ | 6,760,320,808 | $ | 572,340,186 | $ | 9,053,045,048 |
* Represents the interest in securities that have no value at August 31, 2009.
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities using Level 3 inputs were 6.31% of total net assets.
39
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchase/ Sales | Accrued Discounts/ Premiums | Total Realized Gain/Loss | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Common Stock | |||||||||||||||||||||||||||||||
China | $ | — | $ | — | $ | — | $ | — | $ | (1,229,394 | ) | $ | 1,229,394 | $ | — | ||||||||||||||||
India | 59,482 | — | — | — | (59,482 | ) | — | — | |||||||||||||||||||||||
Lebanon | 35,695 | — | — | — | (35,695 | ) | — | — | |||||||||||||||||||||||
Russia | 917,112 | — | — | — | 879,001 | — | 1,796,113 | ||||||||||||||||||||||||
South Korea | — | (7,709 | ) | — | (143,477 | ) | 136,988 | 662,925 | 648,727 | ||||||||||||||||||||||
Thailand | 265,406,178 | 68,284,709 | — | (51,009,291 | ) | 198,593,949 | — | 481,275,545 | |||||||||||||||||||||||
Turkey | 248 | — | — | — | (248 | ) | — | — | |||||||||||||||||||||||
Total Common Stock | 266,418,715 | 68,277,000 | — | (51,152,768 | ) | 198,285,119 | 1,892,319 | 483,720,385 | |||||||||||||||||||||||
Private Equity Securities | |||||||||||||||||||||||||||||||
Poland | 33,454,416 | (29,505,475 | ) | — | 56,740,987 | (29,752,270 | ) | — | 30,937,658 | ||||||||||||||||||||||
Russia | 2,610 | — | — | — | — | — | 2,610 | ||||||||||||||||||||||||
Sri Lanka | 787,469 | — | — | — | 2,226,840 | — | 3,014,309 | ||||||||||||||||||||||||
Total Private Equity Securities | 34,244,495 | (29,505,475 | ) | — | 56,740,987 | (27,525,430 | ) | — | 33,954,577 | ||||||||||||||||||||||
Investment Funds | |||||||||||||||||||||||||||||||
China | 8,299,762 | — | — | — | 1,720,149 | — | 10,019,911 | ||||||||||||||||||||||||
India | 7,530,572 | 592,437 | — | — | 2,015,830 | — | 10,138,839 | ||||||||||||||||||||||||
Poland | 767,055 | (652,528 | ) | — | — | 183,504 | — | 298,031 | |||||||||||||||||||||||
Russia | 6,291,343 | 250,000 | — | — | 1,255,768 | — | 7,797,111 | ||||||||||||||||||||||||
Ukraine | 4,000 | — | — | — | — | — | 4,000 | ||||||||||||||||||||||||
Total Investment Funds | 22,892,732 | 189,909 | — | — | 5,175,251 | — | 28,257,892 | ||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||
Poland | — | 29,505,475 | — | — | (3,098,143 | ) | — | 26,407,332 | |||||||||||||||||||||||
Mutual Funds | |||||||||||||||||||||||||||||||
United States | 5,887 | — | — | — | (242 | ) | (5,645 | ) | — | ||||||||||||||||||||||
Total | $ | 323,561,829 | $ | 68,466,909 | $ | — | $ | 5,588,219 | $ | 172,836,555 | $ | 1,886,674 | $ | 572,340,186 |
40
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the
41
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because many foreign exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign futures on those exchanges do not reflect events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor based on that vendor's proprietary models. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
42
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
43
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. Rights and warrants held by the Fund at the end of the period are listed in the Fund's Schedule of Investments.
44
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if 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. For the period ended August 31, 2009, the Fund received $229,036 in foreign capital gains tax refund, which is included in net realized gain (loss) in the Statement of Operations.
The Fund is currently subject to a Taiwanese security transaction tax of 0.30% of the transaction amount on equities, which must be paid by the Fund upon the sale or transfer of any portfolio securities subject to that tax.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $1,670,327,437.
45
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 8,236,775,737 | $ | 1,136,865,432 | $ | (320,596,121 | ) | $ | 816,269,311 |
For the period ended August 31, 2009, the Fund had net realized losses attributed to redemption in-kind transactions of $30,109,409.
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 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 incurs fees and expenses indirectly as a shareholder in the underlying fund (See Note 3).
46
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Brown Brothers Harriman & Co. ("BBH") serves as custodian and fund accounting agent of the Fund. State Street Bank and Trust Company ("State Street") serves as transfer agent of the Fund. BBH and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
As of August 31, 2009, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.80% of the amount invested or redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund wil l not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
47
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements ��� (Continued)
August 31, 2009 (Unaudited)
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund may need to maintain a license to invest in some foreign markets (e.g., Brazil, India, Russia, South Korea, and Taiwan). Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging markets, which tend to be more volatile than developed markets.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. These risks are particularly pronounced for the Fund because it typically makes equity investments in companies in emerging markets and may make investments in companies with smaller market capitalizations. In addition, the Fund may buy securities that are less liquid than those in its benchmark.
• Smaller Company Risk — The securities of companies with smaller market capitalizations typically are less widely held, trade less frequently and in lesser quantities, and have market prices that may fluctuate more than those of securities of larger capitalization companies. The Fund may buy securities that have smaller market capitalizations than those in its benchmark.
Other principal risks of an investment in the Fund include Credit and Counterparty Risk (risk of default of a derivatives counterparty or borrower of the Fund's securities), Focused Investment Risk (increased risk from the Fund's focus on investments in a limited number of countries and geographic regions), Market Risk — Value Securities (risk that the price of the Fund's securities may not increase to what the Manager believes to be their fundamental value or that the Manager ma y have overestimated their fundamental value), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds (including ETFs) in which the Fund invests will not perform as expected). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if t he Fund were diversified.
48
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms
49
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
(e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictability of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
50
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | 1,316,774 | $ | — | $ | 1,316,774 | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 1,316,774 | $ | — | $ | 1,316,774 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
51
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 322,948 | — | — | — | 322,948 | |||||||||||||||||||||
Total | $ | — | $ | 322,948 | $ | — | $ | — | $ | — | $ | 322,948 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | 1,947,590 | $ | — | $ | 1,947,590 | |||||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 1,904,936 | — | — | — | 1,904,936 | |||||||||||||||||||||
Total | $ | — | $ | 1,904,936 | $ | — | $ | 1,947,590 | $ | — | $ | 3,852,526 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Forwards | Rights/ Warrants | ||||||||||
Average notional amount outstanding | $ | 21,775,637 | $ | 1,486,234 | |||||||
Highest notional amount outstanding | 97,770,897 | 3,225,572 | |||||||||
Lowest notional amount outstanding | — | 826,012 |
52
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Other matters
GMO Special Purpose Holding Fund ("SPHF"), an investment of the Fund, has litigation pending against various entities related to the 2002 default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the period ended August 31, 2009, the Fund received no distributions through SPHF in connection with settlement agreements related to that litigation.
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. Effective August 12, 2009, that fee is paid monthly at the annual rate of 0.75% of average daily net assets. Before August 12, 2009, the management fee was 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 average daily net assets of each class at the annual rate of 0.22% for Class II shares, 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 each class of the Fund for expenses incurred by the class through at least June 30, 2010 to the extent the class's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed the following amounts of the class's average daily net assets: 0.95% for Class II shares, 0.90% for Class III shares, 0.85% for Class IV shares, 0.80% for Class V shares, and 0.77% for Class VI shares. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), and custodial fees. In addition, the Manager has contractually agreed to reimburse each class of the Fund through at least June 30, 2010 to the extent that the sum of (a) the class's total annual operating expenses (excluding Excluded Fund Fees and Expenses) and (b) the amount of fees and expenses incurred indirectly by the class through its investment in GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds the following amounts of the class's average daily net assets: 0.95% for Class II shares, 0.90% for Class III shares, 0.85% for Class IV shares, 0.8 0% for Class V shares, and 0.77% for Class VI shares, subject to a maximum total reimbursement to each class equal to such amounts of the class's average daily net assets.
53
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder in the GMO Special Purpose Holding Fund. For the period ended August 31, 2009, 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 Trust's independent Trustees and CCO during the period ended August 31, 2009 was $59,717 and $34,592, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $5,833,019,981 and $6,201,461,509, respectively. Proceeds from sales of securities for in-kind transactions for the period ended August 31, 2009 were $72,183,877.
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, the Fund had no shareholders who individually held more than 10% of the Fund's outstanding shares.
As of August 31, 2009, 0.53% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 17.85% of the Fund's shares were held by accounts for which the Manager had investment discretion.
54
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
7. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from August 12, 2009 through August 31, 2009 (Unaudited) | |||||||||||
Class II: | Shares | Amount | |||||||||
Shares sold | 240,291,234 | $ | 2,552,038,132 | ||||||||
Shares repurchased | (8,321,712 | ) | (89,245,036 | ) | |||||||
Purchase premiums | — | 40,000 | |||||||||
Redemption fees | — | 757,937 | |||||||||
Net increase (decrease) | 231,969,522 | $ | 2,463,591,033 |
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 33,722,297 | $ | 279,589,708 | 199,316,510 | $ | 1,549,659,316 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 695,268 | 6,730,191 | 54,047,677 | 611,126,733 | |||||||||||||||
Shares repurchased | (328,600,455 | ) | (3,420,246,047 | ) | (53,039,178 | ) | (662,859,942 | ) | |||||||||||
Purchase premiums | — | 1,612,283 | — | 3,747,220 | |||||||||||||||
Redemption fees | — | 1,930,316 | — | 3,863,411 | |||||||||||||||
Net increase (decrease) | (294,182,890 | ) | $ | (3,130,383,549 | ) | 200,325,009 | $ | 1,505,536,738 | |||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 51,903,729 | $ | 499,062,290 | 157,053,136 | $ | 1,026,539,902 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 368,194 | 3,549,390 | 40,848,201 | 475,454,559 | |||||||||||||||
Shares repurchased | (86,446,145 | ) | (814,430,844 | ) | (131,400,487 | ) | (1,282,059,060 | ) | |||||||||||
Purchase premiums | — | 182,584 | — | 482,899 | |||||||||||||||
Redemption fees | — | 1,503,478 | — | 4,587,042 | |||||||||||||||
Net increase (decrease) | (34,174,222 | ) | $ | (310,133,102 | ) | 66,500,850 | $ | 225,005,342 |
55
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class V: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 7,536,666 | $ | 62,111,505 | 196,888,178 | $ | 1,458,962,017 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 291,139 | 2,800,755 | 24,664,677 | 260,296,435 | |||||||||||||||
Shares repurchased | (110,636,529 | ) | (1,163,974,689 | ) | (152,881,388 | ) | (1,125,909,783 | ) | |||||||||||
Purchase premiums | — | 150,000 | — | 3,005,084 | |||||||||||||||
Redemption fees | — | 294,216 | — | 607,872 | |||||||||||||||
Net increase (decrease) | (102,808,724 | ) | $ | (1,098,618,213 | ) | 68,671,467 | $ | 596,961,625 | |||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 173,608,168 | $ | 1,776,478,314 | 244,681,931 | $ | 2,170,286,504 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 512,259 | 4,938,176 | 88,616,021 | 1,028,385,993 | |||||||||||||||
Shares repurchased | (28,156,712 | ) | (278,138,179 | ) | (426,960,691 | ) | (3,597,571,769 | ) | |||||||||||
Purchase premiums | — | 451,881 | — | 10,675,993 | |||||||||||||||
Redemption fees | — | 1,999,286 | — | 11,819,980 | |||||||||||||||
Net increase (decrease) | 145,963,715 | $ | 1,505,729,478 | (93,662,739 | ) | $ | (376,403,299 | ) |
56
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Investments in affiliated companies and other funds of the Trust
An affiliated company is a company in which the Fund has or had ownership of at least 5% of the voting securities. A summary of the Fund's transactions with companies that are or were affiliates during the period ended August 31, 2009 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Value, end of period | ||||||||||||||||||
Boryung Pharmaceutical Co Ltd | $ | 2,759,751 | $ | — | $ | 790,813 | $ | — | $ | 5,168,637 | |||||||||||||
CBAY Systems Holdings Ltd | 7,663,868 | — | — | — | 11,329,499 | ||||||||||||||||||
Daehan Pulp Co Ltd | 1,825,376 | 3,337,502 | 844,129 | — | 5,843,763 | ||||||||||||||||||
Dimerco Express Taiwan Corp | 6,639,875 | — | 619,920 | 203,774 | 7,865,272 | ||||||||||||||||||
Edu Ark Co Ltd | 662,925 | 4,568 | 12,273 | — | 648,727 | ||||||||||||||||||
In The F Co Ltd | 1,677,571 | — | 66,363 | — | 3,417,453 | ||||||||||||||||||
Keangnam Enterprises Ltd* | 707,885 | 4,935,662 | 5,175,348 | — | 6,784,840 | ||||||||||||||||||
Les Enphants Co Ltd* | 4,441,616 | — | 5,147,004 | 33,226 | 2,858,789 | ||||||||||||||||||
Millenium Information Technology | 787,469 | — | — | — | 3,014,309 | ||||||||||||||||||
Pumyang Construction Co Ltd | 5,161,915 | — | 498,664 | — | 5,228,091 | ||||||||||||||||||
Star Block Co Ltd (Foreign Registered) | 859 | — | — | — | — | ||||||||||||||||||
Totals | $ | 32,329,110 | $ | 8,277,732 | $ | 13,154,514 | $ | 237,000 | $ | 52,159,380 |
* No longer an affiliate as of August 31, 2009.
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Special Purpose Holding Fund | $ | 5,887 | $ | — | $ | — | $ | — | $ | — | $ | 5,645 | |||||||||||||||
Totals | $ | 5,887 | $ | — | $ | — | $ | — | $ | — | $ | 5,645 |
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
57
GMO Emerging Markets Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. 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, including the fact that the fees payable under the agreement were being reduced
58
GMO Emerging Markets Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
effective August 12, 2009. The Trustees considered information prepared by third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, 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 to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to separate account clients and the impact on the Manager of, and expenses and risks associated with, the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 in which it invests. 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
59
GMO Emerging Markets Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
60
GMO Emerging Markets Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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.
61
GMO Emerging Markets Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 2009 (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 II | |||||||||||||||||||
1) Actual | 1.02 | % | $ | 1,000.00 | $ | 1,006.60 | $ | 0.53 | (a) | ||||||||||
2) Hypothetical | 1.02 | % | $ | 1,000.00 | $ | 1,020.06 | $ | 5.19 | (b) | ||||||||||
Class III | |||||||||||||||||||
1) Actual | 1.07 | % | $ | 1,000.00 | $ | 1,701.10 | $ | 7.28 | * | ||||||||||
2) Hypothetical | 1.07 | % | $ | 1,000.00 | $ | 1,019.81 | $ | 5.45 | * | ||||||||||
Class IV | |||||||||||||||||||
1) Actual | 1.02 | % | $ | 1,000.00 | $ | 1,701.30 | $ | 6.94 | * | ||||||||||
2) Hypothetical | 1.02 | % | $ | 1,000.00 | $ | 1,020.06 | $ | 5.19 | * | ||||||||||
Class V | |||||||||||||||||||
1) Actual | 1.00 | % | $ | 1,000.00 | $ | 1,702.40 | $ | 6.81 | * | ||||||||||
2) Hypothetical | 1.00 | % | $ | 1,000.00 | $ | 1,020.16 | $ | 5.09 | * | ||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.95 | % | $ | 1,000.00 | $ | 1,702.80 | $ | 6.47 | * | ||||||||||
2) Hypothetical | 0.95 | % | $ | 1,000.00 | $ | 1,020.42 | $ | 4.84 | * |
(a) For the period August 12, 2009 (commencement of operations) through August 31, 2009. Expense is calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the period ended August 31, 2009, multiplied by the average account value over the period, multiplied by 19 days in the period, divided by 365 days in the year.
(b) For the period March 1, 2009 through August 31, 2009. Expense is calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the period ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
62
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.7 | % | |||||
Short-Term Investments | 3.4 | ||||||
Futures Contracts | 0.1 | ||||||
Other | (0.2 | ) | |||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 19.6 | % | |||||
Software & Services | 12.8 | ||||||
Energy | 11.2 | ||||||
Food, Beverage & Tobacco | 8.8 | ||||||
Health Care Equipment & Services | 8.4 | ||||||
Technology Hardware & Equipment | 8.1 | ||||||
Retailing | 6.2 | ||||||
Food & Staples Retailing | 6.0 | ||||||
Household & Personal Products | 3.3 | ||||||
Insurance | 2.7 | ||||||
Consumer Services | 2.4 | ||||||
Capital Goods | 1.8 | ||||||
Telecommunication Services | 1.7 | ||||||
Diversified Financials | 1.6 | ||||||
Materials | 1.1 | ||||||
Banks | 0.9 | ||||||
Media | 0.9 | ||||||
Utilities | 0.7 | ||||||
Consumer Durables & Apparel | 0.6 | ||||||
Semiconductors & Semiconductor Equipment | 0.5 | ||||||
Transportation | 0.3 | ||||||
Commercial & Professional Services | 0.3 | ||||||
Automobiles & Components | 0.1 | ||||||
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 96.7% | |||||||||||||||
Automobiles & Components — 0.1% | |||||||||||||||
27,000 | Harley-Davidson, Inc. | 647,460 | |||||||||||||
27,700 | Johnson Controls, Inc. | 686,129 | |||||||||||||
Total Automobiles & Components | 1,333,589 | ||||||||||||||
Banks — 0.9% | |||||||||||||||
186,100 | BB&T Corp. | 5,199,634 | |||||||||||||
17,200 | Capitol Federal Financial | 552,636 | |||||||||||||
4,800 | City National Corp. | 189,600 | |||||||||||||
5,100 | Commerce Bancshares, Inc. | 187,323 | |||||||||||||
4,000 | Cullen/Frost Bankers, Inc. | 197,120 | |||||||||||||
29,200 | First Horizon National Corp. * | 390,696 | |||||||||||||
69,700 | People's United Financial, Inc. | 1,119,382 | |||||||||||||
56,200 | TFS Financial Corp. | 640,680 | |||||||||||||
31,700 | US Bancorp | 717,054 | |||||||||||||
23,235 | Valley National Bancorp | 270,920 | |||||||||||||
273,200 | Wells Fargo & Co. | 7,518,464 | |||||||||||||
Total Banks | 16,983,509 | ||||||||||||||
Capital Goods — 1.7% | |||||||||||||||
128,600 | 3M Co. | 9,272,060 | |||||||||||||
6,500 | Aecom Technology Corp. * | 178,165 | |||||||||||||
4,400 | Caterpillar, Inc. | 199,364 | |||||||||||||
3,000 | Danaher Corp. | 182,130 | |||||||||||||
125,391 | DigitalGlobe, Inc. * | 2,515,344 | |||||||||||||
37,400 | Fastenal Co. | 1,353,880 | |||||||||||||
145,700 | General Dynamics Corp. | 8,623,983 | |||||||||||||
11,400 | Goodrich Corp. | 628,824 | |||||||||||||
5,700 | L-3 Communications Holdings, Inc. | 424,080 | |||||||||||||
25,400 | Lockheed Martin Corp. | 1,904,492 | |||||||||||||
60,600 | Masco Corp. | 877,488 | |||||||||||||
10,600 | Parker-Hannifin Corp. | 515,796 | |||||||||||||
3,900 | Rockwell Collins, Inc. | 179,556 |
See accompanying notes to the financial statements.
2
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Capital Goods — continued | |||||||||||||||
87,000 | United Technologies Corp. | 5,164,320 | |||||||||||||
25,500 | URS Corp. * | 1,102,365 | |||||||||||||
10,300 | W.W. Grainger, Inc. | 900,941 | |||||||||||||
Total Capital Goods | 34,022,788 | ||||||||||||||
Commercial & Professional Services — 0.2% | |||||||||||||||
6,500 | Cintas Corp. | 178,360 | |||||||||||||
33,100 | Copart, Inc. * | 1,169,754 | |||||||||||||
8,700 | Dun & Bradstreet Corp. | 635,448 | |||||||||||||
12,200 | Iron Mountain, Inc. * | 357,338 | |||||||||||||
12,300 | Manpower, Inc. | 635,910 | |||||||||||||
10,000 | Robert Half International, Inc. | 262,900 | |||||||||||||
51,500 | Waste Management, Inc. | 1,541,395 | |||||||||||||
Total Commercial & Professional Services | 4,781,105 | ||||||||||||||
Consumer Durables & Apparel — 0.6% | |||||||||||||||
265,100 | Coach, Inc. | 7,499,679 | |||||||||||||
29,000 | Hasbro, Inc. | 823,310 | |||||||||||||
50,900 | Leggett & Platt, Inc. | 928,925 | |||||||||||||
853 | NVR, Inc. * | 575,988 | |||||||||||||
14,600 | Polo Ralph Lauren Corp. | 969,148 | |||||||||||||
56,200 | Pulte Homes, Inc. | 718,236 | |||||||||||||
9,300 | Toll Brothers, Inc. * | 211,482 | |||||||||||||
2,800 | VF Corp. | 194,768 | |||||||||||||
5,300 | Whirlpool Corp. | 340,313 | |||||||||||||
Total Consumer Durables & Apparel | 12,261,849 | ||||||||||||||
Consumer Services — 2.3% | |||||||||||||||
233,000 | Apollo Group, Inc.-Class A * | 15,103,060 | |||||||||||||
14,700 | Career Education Corp. * | 349,125 | |||||||||||||
18,200 | Darden Restaurants, Inc. | 599,326 | |||||||||||||
88,000 | H&R Block, Inc. | 1,520,640 | |||||||||||||
68,800 | ITT Educational Services, Inc. * | 7,223,312 | |||||||||||||
8,331 | Marriott International, Inc.-Class A | 199,111 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Consumer Services — continued | |||||||||||||||
276,400 | McDonald's Corp. | 15,544,736 | |||||||||||||
10,100 | Penn National Gaming, Inc. * | 295,021 | |||||||||||||
206,300 | Starbucks Corp. * | 3,917,637 | |||||||||||||
4,060 | Strayer Education, Inc. | 857,066 | |||||||||||||
9,900 | Yum! Brands, Inc. | 339,075 | |||||||||||||
Total Consumer Services | 45,948,109 | ||||||||||||||
Diversified Financials — 1.5% | |||||||||||||||
7,000 | American Express Co. | 236,740 | |||||||||||||
950 | BlackRock, Inc. | 189,591 | |||||||||||||
5,820 | CME Group, Inc. | 1,693,853 | |||||||||||||
107,730 | Goldman Sachs Group (The), Inc. | 17,825,006 | |||||||||||||
2,200 | Greenhill & Co., Inc. | 174,240 | |||||||||||||
8,900 | IntercontinentalExchange, Inc. * | 834,820 | |||||||||||||
56,500 | JPMorgan Chase & Co. | 2,455,490 | |||||||||||||
31,800 | Moody's Corp. | 866,232 | |||||||||||||
106,000 | Morgan Stanley | 3,069,760 | |||||||||||||
9,900 | SEI Investments Co. | 182,556 | |||||||||||||
8,100 | State Street Corp. | 425,088 | |||||||||||||
10,000 | TD Ameritrade Holding Corp. * | 192,400 | |||||||||||||
67,377 | World Acceptance Corp. * | 1,753,823 | |||||||||||||
Total Diversified Financials | 29,899,599 | ||||||||||||||
Energy — 10.9% | |||||||||||||||
2,160 | Apache Corp. | 183,492 | |||||||||||||
22,300 | Baker Hughes, Inc. | 768,235 | |||||||||||||
94,300 | BJ Services Co. | 1,514,458 | |||||||||||||
937,000 | Chevron Corp. | 65,533,780 | |||||||||||||
14,300 | Cimarex Energy Co. | 558,272 | |||||||||||||
620,468 | ConocoPhillips | 27,939,674 | |||||||||||||
4,800 | ENSCO International, Inc. | 177,120 | |||||||||||||
1,394,100 | Exxon Mobil Corp. | 96,402,015 | |||||||||||||
77,600 | Nabors Industries Ltd. * | 1,371,968 | |||||||||||||
19,100 | Noble Energy, Inc. | 1,154,786 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Energy — continued | |||||||||||||||
148,900 | Occidental Petroleum Corp. | 10,884,590 | |||||||||||||
57,700 | Patterson-UTI Energy, Inc. | 766,833 | |||||||||||||
34,400 | Southwestern Energy Co. * | 1,267,984 | |||||||||||||
78,900 | Sunoco, Inc. | 2,122,410 | |||||||||||||
272,500 | Valero Energy Corp. | 5,106,650 | |||||||||||||
Total Energy | 215,752,267 | ||||||||||||||
Food & Staples Retailing — 5.8% | |||||||||||||||
129,200 | CVS Caremark Corp. | 4,847,584 | |||||||||||||
266,300 | Kroger Co. (The) | 5,749,417 | |||||||||||||
24,525 | Supervalu, Inc. | 351,934 | |||||||||||||
40,400 | Sysco Corp. | 1,029,796 | |||||||||||||
1,558,600 | Wal-Mart Stores, Inc. | 79,285,982 | |||||||||||||
714,400 | Walgreen Co. | 24,203,872 | |||||||||||||
22,400 | Whole Foods Market, Inc. * | 651,392 | |||||||||||||
Total Food & Staples Retailing | 116,119,977 | ||||||||||||||
Food, Beverage & Tobacco — 8.5% | |||||||||||||||
1,007,700 | Altria Group, Inc. | 18,420,756 | |||||||||||||
83,100 | Archer-Daniels-Midland Co. | 2,395,773 | |||||||||||||
61,000 | Campbell Soup Co. | 1,912,960 | |||||||||||||
1,025,300 | Coca-Cola Co. (The) | 50,003,881 | |||||||||||||
121,000 | Coca-Cola Enterprises, Inc. | 2,445,410 | |||||||||||||
42,400 | Constellation Brands, Inc.-Class A * | 627,096 | |||||||||||||
47,700 | Dean Foods Co. * | 865,278 | |||||||||||||
7,000 | Flowers Foods, Inc. | 166,390 | |||||||||||||
129,700 | General Mills, Inc. | 7,746,981 | |||||||||||||
39,100 | Hansen Natural Corp. * | 1,277,006 | |||||||||||||
122,900 | Hershey Co. (The) | 4,821,367 | |||||||||||||
5,200 | Hormel Foods Corp. | 192,140 | |||||||||||||
25,500 | JM Smucker Co. (The) | 1,332,885 | |||||||||||||
61,500 | Kellogg Co. | 2,896,035 | |||||||||||||
61,000 | Kraft Foods, Inc.-Class A | 1,729,350 | |||||||||||||
30,000 | Lorillard, Inc. | 2,183,100 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Food, Beverage & Tobacco — continued | |||||||||||||||
55,700 | Pepsi Bottling Group (The), Inc. | 1,990,161 | |||||||||||||
674,000 | PepsiCo, Inc. | 38,195,580 | |||||||||||||
646,400 | Philip Morris International, Inc. | 29,546,944 | |||||||||||||
5,400 | Ralcorp Holdings, Inc. * | 338,742 | |||||||||||||
Total Food, Beverage & Tobacco | 169,087,835 | ||||||||||||||
Health Care Equipment & Services — 8.2% | |||||||||||||||
275,600 | AmerisourceBergen Corp. | 5,873,036 | |||||||||||||
93,700 | Baxter International, Inc. | 5,333,404 | |||||||||||||
166,500 | Cardinal Health, Inc. | 5,757,570 | |||||||||||||
25,500 | Cerner Corp. * | 1,573,605 | |||||||||||||
88,500 | Cigna Corp. | 2,604,555 | |||||||||||||
71,600 | Coventry Health Care, Inc. * | 1,563,028 | |||||||||||||
34,700 | DaVita, Inc. * | 1,794,337 | |||||||||||||
18,500 | Edwards Lifesciences Corp. * | 1,144,780 | |||||||||||||
92,400 | Express Scripts, Inc. * | 6,673,128 | |||||||||||||
7,500 | Gen-Probe, Inc. * | 289,125 | |||||||||||||
42,200 | Humana, Inc. * | 1,506,540 | |||||||||||||
16,600 | Inverness Medical Innovations, Inc. * | 590,960 | |||||||||||||
204,700 | McKesson Corp. | 11,639,242 | |||||||||||||
32,500 | Medco Health Solutions, Inc. * | 1,794,650 | |||||||||||||
276,700 | Medtronic, Inc. | 10,597,610 | |||||||||||||
59,000 | Omnicare, Inc. | 1,350,510 | |||||||||||||
22,500 | Patterson Cos., Inc. * | 612,675 | |||||||||||||
75,700 | Quest Diagnostics, Inc. | 4,084,772 | |||||||||||||
13,700 | ResMed, Inc. * | 628,967 | |||||||||||||
31,400 | Stryker Corp. | 1,301,844 | |||||||||||||
3,800 | Teleflex, Inc. | 172,140 | |||||||||||||
2,064,472 | UnitedHealth Group, Inc. | 57,805,216 | |||||||||||||
516,900 | WellPoint, Inc. * | 27,318,165 | |||||||||||||
213,200 | Zimmer Holdings, Inc. * | 10,095,020 | |||||||||||||
Total Health Care Equipment & Services | 162,104,879 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Household & Personal Products — 3.2% | |||||||||||||||
69,800 | Avon Products, Inc. | 2,224,526 | |||||||||||||
11,500 | Church & Dwight Co., Inc. | 656,995 | |||||||||||||
92,400 | Clorox Co. | 5,459,916 | |||||||||||||
240,600 | Colgate-Palmolive Co. | 17,491,620 | |||||||||||||
22,800 | Estee Lauder Cos. (The), Inc.-Class A | 817,380 | |||||||||||||
120,700 | Kimberly-Clark Corp. | 7,297,522 | |||||||||||||
542,300 | Procter & Gamble Co. (The) | 29,343,853 | |||||||||||||
Total Household & Personal Products | 63,291,812 | ||||||||||||||
Insurance — 2.6% | |||||||||||||||
18,900 | Aflac, Inc. | 767,718 | |||||||||||||
241,100 | Allstate Corp. (The) | 7,085,929 | |||||||||||||
9,800 | American Financial Group, Inc. | 251,370 | |||||||||||||
8,700 | Aon Corp. | 363,312 | |||||||||||||
31,000 | Arthur J. Gallagher & Co. | 736,870 | |||||||||||||
19,700 | Assurant, Inc. | 590,015 | |||||||||||||
51,000 | Brown & Brown, Inc. | 1,013,370 | |||||||||||||
162,000 | Chubb Corp. | 8,001,180 | |||||||||||||
74,200 | Fidelity National Financial, Inc.-Class A | 1,114,484 | |||||||||||||
15,600 | First American Corp. | 491,712 | |||||||||||||
64,200 | HCC Insurance Holdings, Inc. | 1,697,448 | |||||||||||||
102,600 | Marsh & McLennan Cos., Inc. | 2,415,204 | |||||||||||||
18,300 | Odyssey Re Holdings Corp. | 926,895 | |||||||||||||
60,600 | Old Republic International Corp. | 721,746 | |||||||||||||
87,400 | Progressive Corp. (The) * | 1,443,848 | |||||||||||||
25,200 | Torchmark Corp. | 1,073,772 | |||||||||||||
407,500 | Travelers Cos. (The), Inc. | 20,546,150 | |||||||||||||
15,300 | Unum Group | 344,709 | |||||||||||||
105,750 | W.R. Berkley Corp. | 2,701,913 | |||||||||||||
Total Insurance | 52,287,645 | ||||||||||||||
Materials — 1.1% | |||||||||||||||
150,600 | Alcoa, Inc. | 1,814,730 | |||||||||||||
152,200 | Barrick Gold Corp. | 5,281,340 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Materials — continued | |||||||||||||||
15,800 | Bemis Co., Inc. | 420,122 | |||||||||||||
177,700 | Dow Chemical Co. (The) | 3,783,233 | |||||||||||||
21,500 | Freeport-McMoRan Copper & Gold, Inc. | 1,354,070 | |||||||||||||
3,900 | Martin Marietta Materials, Inc. | 341,562 | |||||||||||||
29,600 | Nucor Corp. | 1,318,384 | |||||||||||||
39,000 | Pactiv Corp. * | 969,150 | |||||||||||||
7,900 | Reliance Steel & Aluminum Co. | 291,826 | |||||||||||||
15,300 | Scotts Miracle-Gro Co. (The)-Class A | 622,557 | |||||||||||||
7,400 | Sonoco Products Co. | 191,956 | |||||||||||||
110,100 | Southern Copper Corp. | 3,111,426 | |||||||||||||
7,400 | Valspar Corp. | 198,172 | |||||||||||||
26,600 | Vulcan Materials Co. | 1,331,064 | |||||||||||||
Total Materials | 21,029,592 | ||||||||||||||
Media — 0.9% | |||||||||||||||
46,500 | Cablevision Systems Corp.-Class A | 1,038,810 | |||||||||||||
295,600 | CBS Corp.-Class B (Non Voting) | 3,059,460 | |||||||||||||
347,200 | Comcast Corp.-Class A | 5,319,104 | |||||||||||||
39,000 | DirecTV Group (The), Inc. * | 965,640 | |||||||||||||
15,200 | Discovery Communications, Inc. * | 393,984 | |||||||||||||
6,600 | Liberty Media, Corp.-Class A * | 184,074 | |||||||||||||
21,900 | McGraw-Hill Cos. (The), Inc. | 736,059 | |||||||||||||
214,800 | News Corp.-Class A | 2,302,656 | |||||||||||||
6,700 | Omnicom Group, Inc. | 243,344 | |||||||||||||
50,664 | Time Warner Cable, Inc. | 1,870,515 | |||||||||||||
30,200 | Viacom, Inc. * | 756,208 | |||||||||||||
Total Media | 16,869,854 | ||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 19.0% | |||||||||||||||
656,200 | Abbott Laboratories | 29,679,926 | |||||||||||||
42,700 | Allergan, Inc. | 2,387,784 | |||||||||||||
850,900 | Amgen, Inc. * | 50,832,766 | |||||||||||||
112,000 | Biogen Idec, Inc. * | 5,623,520 | |||||||||||||
1,014,400 | Bristol-Myers Squibb Co. | 22,448,672 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — continued | |||||||||||||||
18,000 | Cephalon, Inc. * | 1,024,740 | |||||||||||||
7,600 | Dendreon Corp. * | 177,612 | |||||||||||||
529,300 | Eli Lilly & Co. | 17,710,378 | |||||||||||||
8,800 | Endo Pharmaceuticals Holdings, Inc. * | 198,616 | |||||||||||||
360,400 | Forest Laboratories, Inc. * | 10,548,908 | |||||||||||||
164,300 | Gilead Sciences, Inc. * | 7,403,358 | |||||||||||||
1,088,200 | Johnson & Johnson | 65,770,808 | |||||||||||||
18,200 | King Pharmaceuticals, Inc. * | 188,916 | |||||||||||||
4,000 | Life Technologies Corp. * | 178,120 | |||||||||||||
1,108,400 | Merck & Co., Inc. | 35,945,412 | |||||||||||||
77,600 | Mylan, Inc. * | 1,138,392 | |||||||||||||
24,800 | Myriad Genetics, Inc. * | 758,136 | |||||||||||||
4,784,180 | Pfizer, Inc. | 79,895,806 | |||||||||||||
289,900 | Schering-Plough Corp. | 8,169,382 | |||||||||||||
60,200 | Thermo Fisher Scientific, Inc. * | 2,721,642 | |||||||||||||
39,400 | Vertex Pharmaceuticals, Inc. * | 1,473,954 | |||||||||||||
10,500 | Watson Pharmaceuticals, Inc. * | 370,545 | |||||||||||||
662,900 | Wyeth | 31,719,765 | |||||||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 376,367,158 | ||||||||||||||
Retailing — 6.0% | |||||||||||||||
44,100 | Abercrombie & Fitch Co.-Class A | 1,423,989 | |||||||||||||
54,700 | Advance Auto Parts, Inc. | 2,313,810 | |||||||||||||
113,200 | Amazon.com, Inc. * | 9,190,708 | |||||||||||||
48,800 | American Eagle Outfitters, Inc. | 658,800 | |||||||||||||
47,300 | AutoNation, Inc. * | 897,754 | |||||||||||||
54,950 | AutoZone, Inc. * | 8,091,387 | |||||||||||||
151,900 | Bed Bath & Beyond, Inc. * | 5,541,312 | |||||||||||||
151,800 | Best Buy Co., Inc. | 5,507,304 | |||||||||||||
11,200 | CarMax, Inc. * | 193,872 | |||||||||||||
57,200 | Dollar Tree, Inc. * | 2,856,568 | |||||||||||||
8,800 | Expedia, Inc. * | 202,840 | |||||||||||||
101,300 | Family Dollar Stores, Inc. | 3,067,364 | |||||||||||||
98,100 | Gap (The), Inc. | 1,927,665 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Retailing — continued | |||||||||||||||
11,100 | Genuine Parts Co. | 411,144 | |||||||||||||
1,314,604 | Home Depot, Inc. | 35,875,543 | |||||||||||||
28,500 | J.C. Penney Co., Inc. | 856,140 | |||||||||||||
184,300 | Kohl's Corp. * | 9,508,037 | |||||||||||||
59,300 | Limited Brands, Inc. | 884,756 | |||||||||||||
518,900 | Lowe's Cos., Inc. | 11,156,350 | |||||||||||||
17,800 | Netflix, Inc. * | 777,148 | |||||||||||||
32,600 | Nordstrom, Inc. | 914,104 | |||||||||||||
65,700 | O'Reilly Automotive, Inc. * | 2,514,996 | |||||||||||||
71,300 | PetSmart, Inc. | 1,490,883 | |||||||||||||
2,970 | Priceline.com Inc. * | 457,321 | |||||||||||||
30,600 | Ross Stores, Inc. | 1,427,184 | |||||||||||||
18,600 | Sears Holdings Corp. * | 1,180,170 | |||||||||||||
77,100 | Sherwin-Williams Co. (The) | 4,641,420 | |||||||||||||
95,000 | Staples, Inc. | 2,052,950 | |||||||||||||
67,100 | Target Corp. | 3,153,700 | |||||||||||||
7,500 | Urban Outfitters, Inc. * | 213,225 | |||||||||||||
Total Retailing | 119,388,444 | ||||||||||||||
Semiconductors & Semiconductor Equipment — 0.4% | |||||||||||||||
31,600 | Altera Corp. | 607,036 | |||||||||||||
104,600 | Broadcom Corp.-Class A * | 2,975,870 | |||||||||||||
13,300 | Cree, Inc. * | 489,972 | |||||||||||||
121,400 | NVIDIA Corp. * | 1,762,728 | |||||||||||||
95,800 | Texas Instruments, Inc. | 2,355,722 | |||||||||||||
19,500 | Xilinx, Inc. | 433,680 | |||||||||||||
Total Semiconductors & Semiconductor Equipment | 8,625,008 | ||||||||||||||
Software & Services — 12.4% | |||||||||||||||
7,200 | Adobe Systems, Inc. * | 226,224 | |||||||||||||
112,700 | Affiliated Computer Services, Inc.-Class A * | 5,048,960 | |||||||||||||
23,000 | Alliance Data Systems Corp. * | 1,277,880 | |||||||||||||
69,200 | Automatic Data Processing, Inc. | 2,653,820 | |||||||||||||
14,900 | BMC Software, Inc. * | 531,185 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Software & Services — continued | |||||||||||||||
59,100 | Citrix Systems, Inc. * | 2,108,688 | |||||||||||||
73,500 | Cognizant Technology Solutions Corp.-Class A * | 2,563,680 | |||||||||||||
29,600 | Computer Sciences Corp. * | 1,445,960 | |||||||||||||
401,600 | eBay, Inc. * | 8,891,424 | |||||||||||||
3,500 | Factset Research Systems, Inc. | 192,640 | |||||||||||||
18,200 | Fidelity National Information Services, Inc. | 446,992 | |||||||||||||
49,000 | Global Payments, Inc. | 2,079,560 | |||||||||||||
110,440 | Google, Inc.-Class A * | 50,986,835 | |||||||||||||
27,000 | Intuit, Inc. * | 749,790 | |||||||||||||
6,570 | MasterCard, Inc.-Class A | 1,331,279 | |||||||||||||
72,300 | McAfee, Inc. * | 2,876,094 | |||||||||||||
3,219,900 | Microsoft Corp. | 79,370,535 | |||||||||||||
1,084,900 | Novell, Inc. * | 4,719,315 | |||||||||||||
3,330,100 | Oracle Corp. | 72,829,287 | |||||||||||||
24,900 | SAIC, Inc. * | 460,401 | |||||||||||||
189,100 | Symantec Corp. * | 2,859,192 | |||||||||||||
30,900 | Visa, Inc.-Class A | 2,196,990 | |||||||||||||
6,100 | VMware, Inc. * | 216,123 | |||||||||||||
13,000 | Yahoo!, Inc. * | 189,930 | |||||||||||||
Total Software & Services | 246,252,784 | ||||||||||||||
Technology Hardware & Equipment — 7.8% | |||||||||||||||
36,440 | Apple, Inc. * | 6,129,572 | |||||||||||||
2,536,300 | Cisco Systems, Inc. * | 54,784,080 | |||||||||||||
161,900 | Corning, Inc. | 2,441,452 | |||||||||||||
510,100 | Dell, Inc. * | 8,074,883 | |||||||||||||
190,900 | EMC Corp. * | 3,035,310 | |||||||||||||
142,290 | International Business Machines Corp. | 16,797,335 | |||||||||||||
34,100 | Juniper Networks, Inc. * | 786,687 | |||||||||||||
435,700 | Motorola, Inc. | 3,128,326 | |||||||||||||
1,233,500 | Qualcomm, Inc. | 57,259,070 | |||||||||||||
56,200 | SanDisk Corp. * | 994,740 | |||||||||||||
57,600 | Western Digital Corp. * | 1,974,528 | |||||||||||||
Total Technology Hardware & Equipment | 155,405,983 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Telecommunication Services — 1.6% | |||||||||||||||
417,567 | AT&T, Inc. | 10,877,620 | |||||||||||||
95,200 | CenturyTel, Inc. | 3,068,296 | |||||||||||||
87,000 | Frontier Communications Corp. | 618,570 | |||||||||||||
32,400 | MetroPCS Communications, Inc. * | 257,904 | |||||||||||||
552,822 | Verizon Communications, Inc. | 17,159,595 | |||||||||||||
20,700 | Windstream Corp. | 177,399 | |||||||||||||
Total Telecommunication Services | 32,159,384 | ||||||||||||||
Transportation — 0.3% | |||||||||||||||
29,900 | CH Robinson Worldwide, Inc. | 1,682,174 | |||||||||||||
37,100 | Norfolk Southern Corp. | 1,701,777 | |||||||||||||
72,400 | Southwest Airlines Co. | 592,232 | |||||||||||||
44,700 | United Parcel Service, Inc.-Class B | 2,389,662 | |||||||||||||
Total Transportation | 6,365,845 | ||||||||||||||
Utilities — 0.7% | |||||||||||||||
45,300 | Aqua America, Inc. | 763,305 | |||||||||||||
14,300 | CMS Energy Corp. | 191,763 | |||||||||||||
74,700 | Consolidated Edison, Inc. | 3,002,193 | |||||||||||||
10,600 | FPL Group, Inc. | 595,508 | |||||||||||||
14,800 | NSTAR | 468,272 | |||||||||||||
140,500 | PG&E Corp. | 5,702,895 | |||||||||||||
6,200 | Piedmont Natural Gas Co., Inc. | 148,924 | |||||||||||||
12,200 | Pinnacle West Capital Corp. | 401,502 | |||||||||||||
16,500 | Progress Energy, Inc. | 652,245 | |||||||||||||
69,100 | Southern Co. | 2,155,920 | |||||||||||||
9,900 | Xcel Energy, Inc. | 195,525 | |||||||||||||
Total Utilities | 14,278,052 | ||||||||||||||
TOTAL COMMON STOCKS (COST $2,033,558,029) | 1,920,617,067 |
See accompanying notes to the financial statements.
12
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 3.4% | |||||||||||||||
Money Market Funds — 2.4% | |||||||||||||||
46,608,263 | State Street Institutional Treasury Money Market Fund-Institutional Class | 46,608,263 | |||||||||||||
Other Short-Term Investments — 1.0% | |||||||||||||||
20,000,000 | U.S. Treasury Bill, 0.26%, due 04/08/10 (a) | 19,968,980 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $66,549,864) | 66,577,243 | ||||||||||||||
TOTAL INVESTMENTS — 100.1% (Cost $2,100,107,893) | 1,987,194,310 | ||||||||||||||
Other Assets and Liabilities (net) — (0.1%) | (1,465,740 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,985,728,570 |
See accompanying notes to the financial statements.
13
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
749 | S&P 500 E-Mini Index | September 2009 | $ | 38,187,765 | $ | 2,311,534 |
As of August 31, 2009, for the futures contracts held, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
* Non-income producing security.
(a) Rate shown represents yield-to-maturity.
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, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $2,100,107,893) (Note 2) | $ | 1,987,194,310 | |||||
Receivable for Fund shares sold | 67,816 | ||||||
Dividends and interest receivable | 5,301,221 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 3,370,500 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 34,751 | ||||||
Total assets | 1,995,968,598 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 2,967,575 | ||||||
Payable for Fund shares repurchased | 6,074,145 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 514,318 | ||||||
Shareholder service fee | 153,527 | ||||||
Administration fee – Class M | 213 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 3,954 | ||||||
Payable for 12b-1 fee – Class M | 523 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 288,365 | ||||||
Accrued expenses | 237,408 | ||||||
Total liabilities | 10,240,028 | ||||||
Net assets | $ | 1,985,728,570 |
See accompanying notes to the financial statements.
15
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 2,930,383,653 | |||||
Accumulated undistributed net investment income | 6,052,865 | ||||||
Accumulated net realized loss | (840,105,899 | ) | |||||
Net unrealized depreciation | (110,602,049 | ) | |||||
$ | 1,985,728,570 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 584,899,762 | |||||
Class IV shares | $ | 365,910,901 | |||||
Class VI shares | $ | 1,033,645,201 | |||||
Class M shares | $ | 1,272,706 | |||||
Shares outstanding: | |||||||
Class III | 59,673,866 | ||||||
Class IV | 37,416,651 | ||||||
Class VI | 105,714,275 | ||||||
Class M | 129,906 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.80 | |||||
Class IV | $ | 9.78 | |||||
Class VI | $ | 9.78 | |||||
Class M | $ | 9.80 |
See accompanying notes to the financial statements.
16
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $4,773) | $ | 22,284,096 | |||||
Interest | 35,760 | ||||||
Total investment income | 22,319,856 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 2,762,376 | ||||||
Shareholder service fee – Class III (Note 3) | 429,079 | ||||||
Shareholder service fee – Class IV (Note 3) | 169,757 | ||||||
Shareholder service fee – Class VI (Note 3) | 239,000 | ||||||
12b-1 fee – Class M (Note 3) | 1,834 | ||||||
Administration fee – Class M (Note 3) | 1,467 | ||||||
Custodian, fund accounting agent and transfer agent fees | 163,668 | ||||||
Legal fees | 34,868 | ||||||
Audit and tax fees | 31,832 | ||||||
Trustees fees and related expenses (Note 3) | 18,133 | ||||||
Registration fees | 14,352 | ||||||
Miscellaneous | 14,352 | ||||||
Total expenses | 3,880,718 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (250,608 | ) | |||||
Expense reductions (Note 2) | (1,017 | ) | |||||
Net expenses | 3,629,093 | ||||||
Net investment income (loss) | 18,690,763 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (225,033,943 | ) | |||||
Closed futures contracts | (3,681,149 | ) | |||||
Net realized gain (loss) | (228,715,092 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 644,696,330 | ||||||
Open futures contracts | 7,291,235 | ||||||
Net unrealized gain (loss) | 651,987,565 | ||||||
Net realized and unrealized gain (loss) | 423,272,473 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 441,963,236 |
See accompanying notes to the financial statements.
17
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 18,690,763 | $ | 49,233,468 | |||||||
Net realized gain (loss) | (228,715,092 | ) | (579,585,591 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 651,987,565 | (503,529,996 | ) | ||||||||
Net increase (decrease) in net assets from operations | 441,963,236 | (1,033,882,119 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (6,242,898 | ) | (13,415,542 | ) | |||||||
Class IV | (3,814,940 | ) | (7,250,680 | ) | |||||||
Class VI | (9,766,759 | ) | (29,721,224 | ) | |||||||
Class M | (15,450 | ) | (406,196 | ) | |||||||
Total distributions from net investment income | (19,840,047 | ) | (50,793,642 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | (63,640,388 | ) | (333,388,149 | ) | |||||||
Class IV | (2,277,427 | ) | (29,109,705 | ) | |||||||
Class VI | (24,994,979 | ) | (550,731,373 | ) | |||||||
Class M | (890,513 | ) | (44,651,124 | ) | |||||||
Increase (decrease) in net assets resulting from net share transactions | (91,803,307 | ) | (957,880,351 | ) | |||||||
Total increase (decrease) in net assets | 330,319,882 | (2,042,556,112 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 1,655,408,688 | 3,697,964,800 | |||||||||
End of period (including accumulated undistributed net investment income of $6,052,865 and $7,202,149, respectively) | $ | 1,985,728,570 | $ | 1,655,408,688 |
See accompanying notes to the financial statements.
18
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.65 | $ | 12.05 | $ | 14.77 | $ | 14.50 | $ | 14.28 | $ | 13.54 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.09 | 0.18 | 0.22 | 0.22 | 0.24 | 0.19 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.16 | (4.40 | ) | (1.10 | ) | 0.64 | 0.54 | 0.73 | |||||||||||||||||||
Total from investment operations | 2.25 | (4.22 | ) | (0.88 | ) | 0.86 | 0.78 | 0.92 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.10 | ) | (0.18 | ) | (0.25 | ) | (0.22 | ) | (0.24 | ) | (0.18 | ) | |||||||||||||||
From net realized gains | — | — | (1.59 | ) | (0.37 | ) | (0.32 | ) | — | ||||||||||||||||||
Total distributions | (0.10 | ) | (0.18 | ) | (1.84 | ) | (0.59 | ) | (0.56 | ) | (0.18 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.80 | $ | 7.65 | $ | 12.05 | $ | 14.77 | $ | 14.50 | $ | 14.28 | |||||||||||||||
Total Return(a) | 29.57 | %** | (35.39 | )% | (7.33 | )% | 5.97 | % | 5.60 | % | 6.89 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 584,900 | $ | 509,120 | $ | 1,131,800 | $ | 1,789,872 | $ | 2,841,959 | $ | 1,739,392 | |||||||||||||||
Net expenses to average daily net assets | 0.46 | %(b)* | 0.46 | %(b) | 0.46 | %(b) | 0.46 | % | 0.47 | % | 0.48 | % | |||||||||||||||
Net investment income to average daily net assets | 2.04 | %* | 1.70 | % | 1.55 | % | 1.51 | % | 1.69 | % | 1.46 | % | |||||||||||||||
Portfolio turnover rate | 26 | %** | 62 | % | 71 | % | 78 | % | 65 | % | 65 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
† 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 IV share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.63 | $ | 12.02 | $ | 14.75 | $ | 14.48 | $ | 14.26 | $ | 13.52 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.09 | 0.19 | 0.22 | 0.22 | 0.25 | 0.20 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.16 | (4.39 | ) | (1.10 | ) | 0.65 | 0.54 | 0.73 | |||||||||||||||||||
Total from investment operations | 2.25 | (4.20 | ) | (0.88 | ) | 0.87 | 0.79 | 0.93 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.10 | ) | (0.19 | ) | (0.26 | ) | (0.23 | ) | (0.25 | ) | (0.19 | ) | |||||||||||||||
From net realized gains | — | — | (1.59 | ) | (0.37 | ) | (0.32 | ) | — | ||||||||||||||||||
Total distributions | (0.10 | ) | (0.19 | ) | (1.85 | ) | (0.60 | ) | (0.57 | ) | (0.19 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.78 | $ | 7.63 | $ | 12.02 | $ | 14.75 | $ | 14.48 | $ | 14.26 | |||||||||||||||
Total Return(a) | 29.68 | %** | (35.36 | )% | (7.36 | )% | 6.05 | % | 5.66 | % | 6.96 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 365,911 | $ | 286,333 | $ | 478,084 | $ | 602,048 | $ | 749,822 | $ | 866,206 | |||||||||||||||
Net expenses to average daily net assets | 0.41 | %(b)* | 0.41 | %(b) | 0.41 | %(b) | 0.41 | % | 0.43 | % | 0.44 | % | |||||||||||||||
Net investment income to average daily net assets | 2.09 | %* | 1.78 | % | 1.57 | % | 1.55 | % | 1.76 | % | 1.49 | % | |||||||||||||||
Portfolio turnover rate | 26 | %** | 62 | % | 71 | % | 78 | % | 65 | % | 65 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
20
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.63 | $ | 12.02 | $ | 14.75 | $ | 14.47 | $ | 14.26 | $ | 13.52 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.10 | 0.19 | 0.23 | 0.23 | 0.25 | 0.21 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.15 | (4.38 | ) | (1.11 | ) | 0.65 | 0.54 | 0.72 | |||||||||||||||||||
Total from investment operations | 2.25 | (4.19 | ) | (0.88 | ) | 0.88 | 0.79 | 0.93 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.10 | ) | (0.20 | ) | (0.26 | ) | (0.23 | ) | (0.26 | ) | (0.19 | ) | |||||||||||||||
From net realized gains | — | — | (1.59 | ) | (0.37 | ) | (0.32 | ) | — | ||||||||||||||||||
Total distributions | (0.10 | ) | (0.20 | ) | (1.85 | ) | (0.60 | ) | (0.58 | ) | (0.19 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.78 | $ | 7.63 | $ | 12.02 | $ | 14.75 | $ | 14.47 | $ | 14.26 | |||||||||||||||
Total Return(a) | 29.70 | %** | (35.33 | )% | (7.32 | )% | 6.17 | % | 5.64 | % | 7.01 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,033,645 | $ | 858,170 | $ | 2,031,659 | $ | 3,671,926 | $ | 2,543,300 | $ | 1,750,325 | |||||||||||||||
Net expenses to average daily net assets | 0.37 | %(b)* | 0.37 | %(b) | 0.37 | %(b) | 0.37 | % | 0.38 | % | 0.39 | % | |||||||||||||||
Net investment income to average daily net assets | 2.14 | %* | 1.78 | % | 1.63 | % | 1.61 | % | 1.78 | % | 1.56 | % | |||||||||||||||
Portfolio turnover rate | 26 | %** | 62 | % | 71 | % | 78 | % | 65 | % | 65 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
21
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.65 | $ | 12.03 | $ | 14.75 | $ | 14.47 | $ | 14.26 | $ | 13.52 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.08 | 0.15 | 0.18 | 0.18 | 0.20 | 0.16 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.16 | (4.40 | ) | (1.11 | ) | 0.64 | 0.53 | 0.72 | |||||||||||||||||||
Total from investment operations | 2.24 | (4.25 | ) | (0.93 | ) | 0.82 | 0.73 | 0.88 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.09 | ) | (0.13 | ) | (0.20 | ) | (0.17 | ) | (0.20 | ) | (0.14 | ) | |||||||||||||||
From net realized gains | — | — | (1.59 | ) | (0.37 | ) | (0.32 | ) | — | ||||||||||||||||||
Total distributions | (0.09 | ) | (0.13 | ) | (1.79 | ) | (0.54 | ) | (0.52 | ) | (0.14 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.80 | $ | 7.65 | $ | 12.03 | $ | 14.75 | $ | 14.47 | $ | 14.26 | |||||||||||||||
Total Return(a) | 29.44 | %** | (35.61 | )% | (7.64 | )% | 5.73 | % | 5.22 | % | 6.61 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,273 | $ | 1,786 | $ | 56,422 | $ | 131,640 | $ | 157,009 | $ | 171,316 | |||||||||||||||
Net expenses to average daily net assets | 0.76 | %(b)* | 0.76 | %(b) | 0.76 | %(b) | 0.76 | % | 0.77 | % | 0.78 | % | |||||||||||||||
Net investment income to average daily net assets | 1.84 | %* | 1.29 | % | 1.23 | % | 1.22 | % | 1.41 | % | 1.17 | % | |||||||||||||||
Portfolio turnover rate | 26 | %** | 62 | % | 71 | % | 78 | % | 65 | % | 65 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
22
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO U.S. Core Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 its benchmark, the S&P 500 Index. The Fund typically makes equity investments in companies that issue stocks included in the S&P 500 Index, a U.S. stock index, and in companies with similar market capitalizations. Under normal circumstances, the Fund invests at least 80% of its assets in equity investments (which include common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depository receipts) tied economically to the U.S. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange- traded and over-the counter derivatives, including options, futures, and swap contracts. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
Throughout the period ended August 31, 2009, 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, IV and VI bear a shareholder service fee (See Note 3). The principal economic difference among the classes of shares is the type and level of fees they bear.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
23
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
Asset Valuation Inputs | Investments in Securities | Other Financial Instruments* | |||||||||
Level 1 - Quoted Prices | $ | 1,940,586,047 | $ | 2,311,534 | |||||||
Level 2 - Other Significant Observable Inputs | 46,608,263 | — | |||||||||
Level 3 - Significant Unobservable Inputs | — | — | |||||||||
Total | $ | 1,987,194,310 | $ | 2,311,534 |
* Other financial instruments include futures contracts.
24
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
All of the Fund's common stocks are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of the common stocks. Money market funds are classified as Level 2, and other short-term investments are classified as Level 1.
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. 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 various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset
25
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's e xposure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
26
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
27
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $277,985,666.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (253,190,292 | ) | ||||
Total | $ | (253,190,292 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 2,186,032,024 | $ | 78,431,261 | $ | (277,268,975 | ) | $ | (198,837,714 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
28
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's operations.
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Market Risk — Value Securities — The Fund purchases some equity securities at prices below what the Manager believes to be their fundamental value. The Fund bears the risk that the price of these securities may not increase to what the Manager believes to be their fundamental value or that the Manager may have overestimated their fundamental value.
Other principal risks of an investment in the Fund include Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Credit and Counterparty Risk (risk of default of a derivatives counterparty or borrower of the Fund's securities), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected).
29
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index).
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
30
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
31
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | 2,311,534 | — | 2,311,534 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 2,311,534 | $ | — | $ | 2,311,534 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
32
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | (3,681,149 | ) | — | (3,681,149 | ) | |||||||||||||||||||
Swap contract | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | (3,681,149 | ) | $ | — | $ | (3,681,149 | ) | |||||||||||||
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | 7,291,235 | — | 7,291,235 | |||||||||||||||||||||
Swap contract | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 7,291,235 | $ | — | $ | 7,291,235 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Futures | |||||||
Average notional amount outstanding | $ | 34,227,981 | |||||
Highest notional amount outstanding | 44,419,100 | ||||||
Lowest notional amount outstanding | — |
33
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 average daily net assets of each class at the annual rate of 0.15% for Class III shares, 0.10% for Class IVshares and 0.055% for Class VI shares.
Holders of Class M shares of the Fund pay GMO an administration fee for support services provided to Class M shareholders. That fee is paid monthly at the annual rate of 0.20% of the average daily net assets of Class M shares. Pursuant to a Rule 12b-1 distribution and service plan adopted by the Fund, holders of Class M shares of the Fund may pay a fee, at the annual rate of up to 1.00% of average daily net assets of Class M shares for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or the provision of services to Class M shareholders. The Trustees currently limit payments on Class M shares to 0.25% of the Fund's average daily net assets of Class M shares.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.31% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, administration fees, distribution (12b-1) fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an inve stment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.31% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.31% of the Fund's average daily net assets.
The Fund's portion of the fee paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $14,453 and $8,464, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
34
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the period ended August 31, 2009 aggregated $455,760,644 and $532,886,968, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 19.40% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 52.50% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,978,223 | $ | 16,947,769 | 10,238,738 | $ | 93,997,492 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 578,319 | 4,975,219 | 1,047,915 | 11,222,375 | |||||||||||||||
Shares repurchased | (9,464,453 | ) | (85,563,376 | ) | (38,645,942 | ) | (438,608,016 | ) | |||||||||||
Net increase (decrease) | (6,907,911 | ) | $ | (63,640,388 | ) | (27,359,289 | ) | $ | (333,388,149 | ) |
35
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 3,975,963 | $ | 37,540,736 | 10,729,862 | $ | 87,517,393 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 444,467 | 3,814,941 | 656,519 | 6,901,870 | |||||||||||||||
Shares repurchased | (4,533,716 | ) | (43,633,104 | ) | (13,623,143 | ) | (123,528,968 | ) | |||||||||||
Net increase (decrease) | (113,286 | ) | $ | (2,277,427 | ) | (2,236,762 | ) | $ | (29,109,705 | ) | |||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 14,515,594 | $ | 134,616,506 | 39,043,308 | $ | 402,535,356 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,138,320 | 9,766,759 | 2,776,239 | 29,721,224 | |||||||||||||||
Shares repurchased | (22,441,394 | ) | (169,378,244 | ) | (98,313,498 | ) | (982,987,953 | ) | |||||||||||
Net increase (decrease) | (6,787,480 | ) | $ | (24,994,979 | ) | (56,493,951 | ) | $ | (550,731,373 | ) | |||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | 10,515 | $ | 128,124 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,809 | 15,450 | 36,243 | 406,197 | |||||||||||||||
Shares repurchased | (105,425 | ) | (905,963 | ) | (4,504,666 | ) | (45,185,445 | ) | |||||||||||
Net increase (decrease) | (103,616 | ) | $ | (890,513 | ) | (4,457,908 | ) | $ | (44,651,124 | ) |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
36
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In
37
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, 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 to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to separate account clients and the impact on the Manager of, and expenses and risks associated with, the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and chan ges in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 facto rs, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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
38
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
39
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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 (12b-1) and/or administration 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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 U.S. Core Equity Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 2009 (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 | $ | 1,295.70 | $ | 2.66 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.41 | % | $ | 1,000.00 | $ | 1,296.80 | $ | 2.37 | |||||||||||
2) Hypothetical | 0.41 | % | $ | 1,000.00 | $ | 1,023.14 | $ | 2.09 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.37 | % | $ | 1,000.00 | $ | 1,297.00 | $ | 2.14 | |||||||||||
2) Hypothetical | 0.37 | % | $ | 1,000.00 | $ | 1,023.34 | $ | 1.89 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 0.76 | % | $ | 1,000.00 | $ | 1,294.40 | $ | 4.40 | |||||||||||
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, 2009, 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 Emerging Countries Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Emerging Countries Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 81.9 | % | |||||
Investment Funds | 8.4 | ||||||
Preferred Stocks | 6.6 | ||||||
Short-Term Investments | 1.8 | ||||||
Other | 1.3 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
South Korea | 17.6 | % | |||||
Russia | 11.6 | ||||||
Brazil | 10.9 | ||||||
China | 9.4 | ||||||
Taiwan | 9.2 | ||||||
Turkey | 8.8 | ||||||
United States | 8.7 | ||||||
India | 5.6 | ||||||
Thailand | 4.9 | ||||||
Poland | 3.1 | ||||||
Indonesia | 2.2 | ||||||
South Africa | 2.0 | ||||||
Malaysia | 1.6 | ||||||
Egypt | 1.2 | ||||||
Israel | 0.8 | ||||||
Mexico | 0.7 | ||||||
Philippines | 0.5 | ||||||
Czech Republic | 0.4 | ||||||
Chile | 0.3 | ||||||
Hungary | 0.2 | ||||||
Morocco | 0.2 | ||||||
Argentina | 0.1 | ||||||
Peru | 0.0 | ||||||
100.0 | % |
1
GMO Emerging Countries Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Industry Group Summary | % of Equity Investments | ||||||
Banks | 18.0 | % | |||||
Energy | 16.8 | ||||||
Materials | 11.5 | ||||||
Miscellaneous | 8.7 | ||||||
Telecommunication Services | 8.1 | ||||||
Semiconductors & Semiconductor Equipment | 6.2 | ||||||
Capital Goods | 6.0 | ||||||
Technology Hardware & Equipment | 4.5 | ||||||
Software & Services | 3.5 | ||||||
Automobiles & Components | 3.0 | ||||||
Food, Beverage & Tobacco | 2.6 | ||||||
Utilities | 2.4 | ||||||
Diversified Financials | 2.1 | ||||||
Real Estate | 1.1 | ||||||
Transportation | 1.0 | ||||||
Retailing | 0.8 | ||||||
Media | 0.8 | ||||||
Consumer Durables & Apparel | 0.7 | ||||||
Food & Staples Retailing | 0.5 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 0.5 | ||||||
Household & Personal Products | 0.4 | ||||||
Consumer Services | 0.4 | ||||||
Insurance | 0.3 | ||||||
Health Care Equipment & Services | 0.1 | ||||||
100.0 | % |
2
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 81.9% | |||||||||||||||
Argentina — 0.1% | |||||||||||||||
5,060 | Cresud SA Sponsored ADR | 57,178 | |||||||||||||
20,680 | Petrobras Energia Participaciones SA Sponsored ADR * | 137,108 | |||||||||||||
Total Argentina | 194,286 | ||||||||||||||
Brazil — 4.8% | |||||||||||||||
18,730 | Banco Bradesco Sponsored ADR | 303,613 | |||||||||||||
68,200 | Banco do Brasil SA | 946,629 | |||||||||||||
99,400 | BM&F BOVESPA SA | 612,845 | |||||||||||||
11,600 | BRF-Brasil Foods SA * | 258,503 | |||||||||||||
10,000 | Cia de Saneamento de Minas Gerais-Copasa MG | 159,760 | |||||||||||||
74,100 | Companhia Brasileira de Meios de Pagamento | 646,365 | |||||||||||||
2,207 | Companhia de Bebidas das Americas | 141,481 | |||||||||||||
20,809 | Companhia Saneamento Basico Sao Paulo | 383,123 | |||||||||||||
8,400 | Electrobras (Centro) | 122,789 | |||||||||||||
21,900 | Empresa Brasileira de Aeronautica SA | 117,593 | |||||||||||||
9,100 | Empresa Brasileira de Aeronautica SA Sponsored ADR | 193,284 | |||||||||||||
28,800 | Gerdau SA | 260,540 | |||||||||||||
31,887 | Investimentos Itau SA | 185,431 | |||||||||||||
32,400 | Natura Cosmeticos SA | 524,156 | |||||||||||||
7,240 | Petroleo Brasileiro SA (Petrobras) | 144,170 | |||||||||||||
33,950 | Petroleo Brasileiro SA (Petrobras) ADR | 1,345,778 | |||||||||||||
33,900 | Redecard SA | 464,063 | |||||||||||||
7,723 | Souza Cruz SA | 245,208 | |||||||||||||
8,900 | Tele Norte Leste Participacoes SA | 166,742 | |||||||||||||
8,525 | Usinas Siderurgicas de Minas Gerais SA | 201,014 | |||||||||||||
52,200 | Vale SA | 1,015,916 | |||||||||||||
15,930 | Vale SA Sponsored ADR | 306,015 | |||||||||||||
Total Brazil | 8,745,018 | ||||||||||||||
Chile — 0.3% | |||||||||||||||
1,570 | Banco Santander Chile SA ADR | 80,337 | |||||||||||||
4,430 | Compania Cervecerias Unidas ADR | 144,152 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Chile — continued | |||||||||||||||
1,170 | Embotelladora Andina SA ADR A Shares | 16,988 | |||||||||||||
2,100 | Embotelladora Andina SA ADR B Shares | 35,994 | |||||||||||||
1,150 | Enersis SA Sponsored ADR | 19,907 | |||||||||||||
17,560 | Lan Airlines SA Sponsored ADR | 208,086 | |||||||||||||
Total Chile | 505,464 | ||||||||||||||
China — 9.1% | |||||||||||||||
258,000 | Air China Ltd Class H * | 152,010 | |||||||||||||
3,258,000 | Bank of China Ltd Class H | 1,584,621 | |||||||||||||
366,000 | China Coal Energy Co Class H | 466,308 | |||||||||||||
272,000 | China Communication Services Corp Ltd Class H | 152,277 | |||||||||||||
1,282,000 | China Construction Bank Class H | 966,148 | |||||||||||||
126,597 | China International Marine Containers Co Ltd Class B | 122,470 | |||||||||||||
203,250 | China Merchants Bank Co Ltd Class H | 443,097 | |||||||||||||
86,664 | China Mobile Ltd | 850,952 | |||||||||||||
20,032 | China Mobile Ltd Sponsored ADR | 985,975 | |||||||||||||
128,000 | China National Building Material Co Ltd Class H | 269,582 | |||||||||||||
470,000 | China Oilfield Services Ltd Class H | 408,592 | |||||||||||||
899,083 | China Petroleum & Chemical Corp Class H | 753,207 | |||||||||||||
116,000 | China Resources Land Ltd | 243,398 | |||||||||||||
1,794,000 | China Telecom Corp Ltd Class H | 924,857 | |||||||||||||
77,100 | China Vanke Co Ltd Class B | 89,525 | |||||||||||||
196,149 | Cosco Pacific Ltd | 293,472 | |||||||||||||
568,000 | Denway Motors Ltd | 256,551 | |||||||||||||
628,000 | Dongfeng Motor Group Co Ltd | 652,034 | |||||||||||||
168,000 | Guangdong Investments Ltd | 85,670 | |||||||||||||
319,000 | Huaneng Power International Inc Class H | 222,701 | |||||||||||||
2,246,000 | Industrial and Commercial Bank of China Ltd Class H | 1,533,316 | |||||||||||||
98,000 | Jiangxi Copper Co Ltd Class H | 204,358 | |||||||||||||
144,000 | Kingboard Chemical Holdings Ltd | 457,314 | |||||||||||||
64,000 | Lee & Man Paper Manufacturing Ltd | 103,923 | |||||||||||||
4,140 | Netease.Com Inc ADR * | 173,839 | |||||||||||||
270,000 | Parkson Retail Group Ltd | 399,114 | |||||||||||||
511,553 | PetroChina Co Ltd Class H | 564,773 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
China — continued | |||||||||||||||
156,000 | PICC Property & Casualty Co Ltd Class H * | 97,985 | |||||||||||||
8,660 | Shanda Interactive Entertainment Ltd Sponsored ADR * | 423,994 | |||||||||||||
40,400 | Shanghai Industrial Holdings Ltd | 194,304 | |||||||||||||
414,000 | Shenzhen Investment Ltd | 148,543 | |||||||||||||
108,000 | Shimao Property Holdings Ltd | 160,399 | |||||||||||||
3,760 | Sina Corp * | 112,800 | |||||||||||||
340,000 | Sino-Ocean Land Holdings Ltd | 309,951 | |||||||||||||
42,000 | Tencent Holdings Ltd | 626,648 | |||||||||||||
42,000 | Tingyi (Cayman Islands) Holding Corp | 75,580 | |||||||||||||
71,400 | Yanlord Land Group Ltd | 113,838 | |||||||||||||
202,000 | Yanzhou Coal Mining Co Ltd Class H | 286,040 | |||||||||||||
76,000 | Zhaojin Mining Industry Co Ltd | 108,268 | |||||||||||||
202,000 | Zhejiang Expressway Co Ltd Class H | 192,687 | |||||||||||||
458,000 | Zijin Mining Group Co Ltd Class H | 384,625 | |||||||||||||
Total China | 16,595,746 | ||||||||||||||
Czech Republic — 0.4% | |||||||||||||||
4,960 | CEZ AS | 259,561 | |||||||||||||
600 | Komercni Banka AS | 114,899 | |||||||||||||
1,945 | Pegas Nonwovens SA | 49,427 | |||||||||||||
256 | Philip Morris CR AS | 119,771 | |||||||||||||
4,300 | Telefonica 02 Czech Republic AS | 119,418 | |||||||||||||
7,920 | Unipetrol AS * | 58,666 | |||||||||||||
Total Czech Republic | 721,742 | ||||||||||||||
Egypt — 1.2% | |||||||||||||||
9,612 | Alexandria Mineral Oils Co | 85,320 | |||||||||||||
53,720 | Commercial International Bank | 525,828 | |||||||||||||
22,800 | EFG-Hermes Holding SAE | 115,918 | |||||||||||||
8,267 | Egyptian Co for Mobile Services | 323,800 | |||||||||||||
440 | El Ezz Aldekhela Steel Alexa Co | 61,060 | |||||||||||||
3,670 | ElSwedy Cables Holding Co | 53,354 | |||||||||||||
4,400 | Orascom Construction Industries | 185,091 | |||||||||||||
47,298 | Orascom Telecom Holding SAE | 309,016 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Egypt — continued | |||||||||||||||
10,200 | Oriental Weavers Co | 60,901 | |||||||||||||
43,927 | Sidi Kerir Petrochemicals Co | 91,399 | |||||||||||||
69,100 | Talaat Moustafa Group * | 78,639 | |||||||||||||
94,154 | Telecom Egypt | 315,153 | |||||||||||||
Total Egypt | 2,205,479 | ||||||||||||||
Hungary — 0.2% | |||||||||||||||
80 | Egis Gyogyszergyar Nyrt | 8,398 | |||||||||||||
580 | MOL Hungarian Oil and Gas Nyrt * | 45,607 | |||||||||||||
10,700 | OTP Bank Nyrt * | 276,451 | |||||||||||||
350 | Richter Gedeon Nyrt | 70,243 | |||||||||||||
Total Hungary | 400,699 | ||||||||||||||
India — 5.4% | |||||||||||||||
10,500 | Axis Bank Ltd | 194,488 | |||||||||||||
2,200 | Bajaj Auto Ltd | 54,874 | |||||||||||||
19,686 | Bank of Baroda | 174,551 | |||||||||||||
26,400 | Bank of India | 182,831 | |||||||||||||
6,600 | Bharat Heavy Electricals Ltd | 312,195 | |||||||||||||
38,470 | Canara Bank Ltd | 210,665 | |||||||||||||
4,000 | Grasim Industries Ltd | 219,498 | |||||||||||||
3,000 | Hero Honda Motors Ltd | 93,118 | |||||||||||||
13,233 | ICICI Bank Ltd | 203,712 | |||||||||||||
19,260 | ICICI Bank Ltd Sponsored ADR | 587,815 | |||||||||||||
117,400 | IFCI Ltd * | 134,596 | |||||||||||||
22,100 | Infosys Technologies Ltd | 964,838 | |||||||||||||
13,940 | Infosys Technologies Ltd Sponsored ADR | 602,626 | |||||||||||||
12,100 | Jaiprakash Associates Ltd | 56,051 | |||||||||||||
11,524 | Jindal Steel & Power Ltd | 738,265 | |||||||||||||
13,000 | Kotak Mahindra Bank Ltd | 190,786 | |||||||||||||
8,000 | Larsen & Toubro Ltd | 256,341 | |||||||||||||
9,011 | Mahindra & Mahindra Ltd | 159,669 | |||||||||||||
18,100 | Oil & Natural Gas Corp Ltd | 440,998 | |||||||||||||
20,500 | Punjab National Bank Ltd | 287,010 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
India — continued | |||||||||||||||
43,600 | Reliance Communications Ltd | 232,453 | |||||||||||||
16,200 | Reliance Energy Ltd | 379,360 | |||||||||||||
6,300 | Reliance Industries Ltd * | 258,060 | |||||||||||||
32,355 | Satyam Computer Services Ltd | 80,703 | |||||||||||||
49,700 | Sesa Goa Ltd | 215,728 | |||||||||||||
21,800 | State Bank of India | 779,663 | |||||||||||||
82,430 | Steel Authority of India Ltd | 274,428 | |||||||||||||
24,600 | Sterlite Industries India Ltd | 338,484 | |||||||||||||
5,720 | Sterlite Industries India Ltd ADR | 76,591 | |||||||||||||
56,000 | Tata Consultancy Services Ltd | 608,878 | |||||||||||||
8,800 | Tata Steel Ltd | 76,493 | |||||||||||||
31,763 | Unitech Ltd | 68,694 | |||||||||||||
37,000 | Wipro Ltd | 417,441 | |||||||||||||
Total India | 9,871,903 | ||||||||||||||
Indonesia — 2.1% | |||||||||||||||
171,000 | Astra International Tbk PT | 511,697 | |||||||||||||
487,000 | Bank Central Asia Tbk PT | 205,098 | |||||||||||||
83,000 | Bank Danamon Indonesia Tbk PT | 38,704 | |||||||||||||
948,500 | Bank Negara Indonesia (Persero) Tbk PT | 182,462 | |||||||||||||
580,500 | Bank Rakyat Tbk PT | 437,860 | |||||||||||||
5,167,000 | Bumi Resources Tbk PT | 1,482,693 | |||||||||||||
85,000 | Gudang Garam Tbk PT | 120,687 | |||||||||||||
735,500 | Indah Kiat Pulp and Paper Corp Tbk PT * | 129,116 | |||||||||||||
34,500 | Indo Tambangraya Megah PT | 83,548 | |||||||||||||
218,500 | International Nickel Indonesia Tbk PT * | 91,615 | |||||||||||||
954,000 | Kalbe Farma Tbk PT | 120,362 | |||||||||||||
595,000 | Perusahaan Gas Negara PT | 205,276 | |||||||||||||
27,000 | Tambang Batubara Bukit Asam Tbk PT | 34,828 | |||||||||||||
215,000 | Telekomunikasi Indonesia Tbk PT | 178,004 | |||||||||||||
371,500 | Timah Tbk PT | 76,464 | |||||||||||||
Total Indonesia | 3,898,414 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Israel — 0.8% | |||||||||||||||
4,600 | Africa Israel Properties Ltd * | 73,592 | |||||||||||||
83,630 | Bank Hapoalim BM * | 268,982 | |||||||||||||
37,940 | Bezeq Israeli Telecommunication Corp Ltd | 79,279 | |||||||||||||
990 | Delek Group Ltd | 165,176 | |||||||||||||
850 | Elbit Systems Ltd | 55,265 | |||||||||||||
18,980 | Jerusalem Economy Ltd * | 143,616 | |||||||||||||
11,850 | Teva Pharmaceutical Industries Ltd Sponsored ADR | 610,275 | |||||||||||||
Total Israel | 1,396,185 | ||||||||||||||
Malaysia — 1.5% | |||||||||||||||
90,121 | Berjaya Sports Toto Berhad | 109,472 | |||||||||||||
8,499 | British American Tobacco Malaysia Berhad | 110,642 | |||||||||||||
97,400 | CIMB Group Holdings Berhad | 273,897 | |||||||||||||
63,800 | Hong Leong Financial Group Berhad | 94,092 | |||||||||||||
88,600 | IOI Corp Berhad | 127,772 | |||||||||||||
791,500 | KNM Group Berhad | 167,012 | |||||||||||||
61,000 | Kulim Malaysia Berhad | 128,579 | |||||||||||||
100,115 | Lion Diversified Holdings | 15,511 | |||||||||||||
110,619 | Lion Industries Corp Berhad | 48,607 | |||||||||||||
62,109 | PPB Group Berhad | 270,701 | |||||||||||||
351,578 | Resorts World Berhad | 277,393 | |||||||||||||
233,319 | RHB Capital Berhad | 312,227 | |||||||||||||
174,680 | Sime Darby Berhad | 407,630 | |||||||||||||
37,899 | Tanjong Plc | 164,620 | |||||||||||||
132,400 | Tenaga Nasional Berhad | 300,506 | |||||||||||||
Total Malaysia | 2,808,661 | ||||||||||||||
Mexico — 0.7% | |||||||||||||||
53,000 | Alfa SA de CV Class A | 231,578 | |||||||||||||
7,770 | America Movil SAB de CV Class L ADR | 350,815 | |||||||||||||
93,866 | Cemex SA de CV CPO * | 124,271 | |||||||||||||
65,300 | Consorcio ARA SAB de CV * | 37,896 | |||||||||||||
37,700 | Controladora Comercial Mexicana SA de CV * | 30,913 | |||||||||||||
52,700 | Corporacion GEO SA de CV Series B * | 124,506 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Mexico — continued | |||||||||||||||
64,700 | Grupo Financiero Banorte SAB de CV Class O | 190,841 | |||||||||||||
47,974 | Grupo Mexico SA Class B * | 68,974 | |||||||||||||
24,400 | Sare Holding SA de CV Class B * | 9,684 | |||||||||||||
8,510 | Telefonos de Mexico SAB de CV Class L Sponsored ADR | 158,201 | |||||||||||||
Total Mexico | 1,327,679 | ||||||||||||||
Morocco — 0.2% | |||||||||||||||
1,650 | Attijariwafa Bank | 57,706 | |||||||||||||
139 | Compagnie Generale Immobiliere | 33,483 | |||||||||||||
380 | Credit Immobilier et Hotelier | 19,331 | |||||||||||||
9,659 | Maroc Telecom | 173,716 | |||||||||||||
140 | Societe Nationale De Siderurgie | 40,087 | |||||||||||||
Total Morocco | 324,323 | ||||||||||||||
Peru — 0.0% | |||||||||||||||
1,191 | Compania Minera Milpo SA | 2,902 | |||||||||||||
378 | Sociedad Minera Cerro Verde SA * | 8,864 | |||||||||||||
23,016 | Volcan Compania Minera SA Class B * | 21,657 | |||||||||||||
Total Peru | 33,423 | ||||||||||||||
Philippines — 0.5% | |||||||||||||||
293,600 | Alliance Global Group Inc * | 30,591 | |||||||||||||
82,300 | Bank of the Philippine Islands | 75,494 | |||||||||||||
1,998,300 | Benpres Holdings Corp * | 150,774 | |||||||||||||
564,900 | Energy Development Corp | 51,929 | |||||||||||||
173,600 | First Gen Corp * | 76,234 | |||||||||||||
57,700 | First Philippine Holdings Corp * | 49,462 | |||||||||||||
28,600 | Manila Electric Co | 117,341 | |||||||||||||
2,084,500 | Megaworld Corp | 68,749 | |||||||||||||
4,680 | Philippine Long Distance Telephone Co | 240,454 | |||||||||||||
745,600 | Vista Land & Lifescapes Inc * | 42,712 | |||||||||||||
Total Philippines | 903,740 |
See accompanying notes to the financial statements.
9
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Poland — 3.0% | |||||||||||||||
11,760 | Asseco Poland SA | 258,292 | |||||||||||||
6,100 | Bank Handlowy W Warszawie SA * | 135,345 | |||||||||||||
2,870 | Bank Pekao SA * | 146,455 | |||||||||||||
23,650 | Cyfrowy Polsat SA | 130,637 | |||||||||||||
58,600 | Getin Holding SA * | 182,148 | |||||||||||||
30,300 | Globe Trade Centre SA * | 270,860 | |||||||||||||
18,670 | Grupa Lotos SA * | 170,058 | |||||||||||||
51,280 | KGHM Polska Miedz SA | 1,539,980 | |||||||||||||
62,740 | Polski Koncern Naftowy Orlen SA * | 642,510 | |||||||||||||
97,910 | Polskie Gornictwo Naftowe I Gazownictwo SA | 132,822 | |||||||||||||
91,740 | Powszechna Kasa Oszczednosci Bank Polski SA | 1,132,147 | |||||||||||||
15,840 | Przedsiebiorstwo Eksportu i Importu Kopex SA * | 125,111 | |||||||||||||
63,530 | Telekomunikacja Polska SA | 358,186 | |||||||||||||
38,390 | TVN SA | 192,244 | |||||||||||||
Total Poland | 5,416,795 | ||||||||||||||
Russia — 10.9% | |||||||||||||||
63,740 | Aeroflot - Russian Airlines | 64,871 | |||||||||||||
63,070 | Cherepovets MK Severstal GDR (Registered Shares) | 462,393 | |||||||||||||
32,000 | Gazprom Neft Class S | 115,502 | |||||||||||||
6,900 | Gazprom Neft Sponsored ADR | 122,742 | |||||||||||||
66,940 | KamAZ * | 75,962 | |||||||||||||
57,680 | Lukoil Sponsored ADR | 2,892,036 | |||||||||||||
17,300 | Magnit OJSC Sponsored GDR (Registered Shares) | 198,258 | |||||||||||||
25,200 | Magnitogorsk Iron & Steel Works Sponsored GDR (Registered Shares) * | 219,578 | |||||||||||||
15,710 | Mechel Sponsored ADR | 191,819 | |||||||||||||
76,100 | MMC Norilsk Nickel JSC ADR * | 837,039 | |||||||||||||
45,140 | Mobile Telesystems Sponsored ADR | 1,958,173 | |||||||||||||
22,000 | NovaTek OAO Sponsored GDR (Registered Shares) | 867,785 | |||||||||||||
15,000 | Novolipetsk Steel GDR (Registered Shares) * | 356,607 | |||||||||||||
317,944 | OAO Gazprom Sponsored GDR | 6,672,110 | |||||||||||||
21,466 | OAO Tatneft Sponsored GDR (Registered Shares) | 532,039 | |||||||||||||
6,600 | Polyus Gold Sponsored ADR | 132,468 | |||||||||||||
172,100 | Rosneft OJSC GDR | 1,098,428 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Russia — continued | |||||||||||||||
3,290 | Rostelecom Sponsored ADR | 99,424 | |||||||||||||
6,085,690 | RusHydro Class S * | 212,999 | |||||||||||||
289,960 | Sberbank RF | 432,738 | |||||||||||||
200,400 | Surgutneftegaz Sponsored ADR | 1,708,436 | |||||||||||||
20,180 | Vimpelcom Sponsored ADR * | 311,579 | |||||||||||||
22,700 | X5 Retail Group NV GDR (Registered Shares) * | 436,025 | |||||||||||||
Total Russia | 19,999,011 | ||||||||||||||
South Africa — 1.9% | |||||||||||||||
6,852 | Absa Group Ltd | 111,610 | |||||||||||||
4,200 | AngloGold Ashanti Ltd | 161,047 | |||||||||||||
36,167 | Aveng Ltd | 191,560 | |||||||||||||
6,100 | Exxaro Resources Ltd | 72,407 | |||||||||||||
106,400 | FirstRand Ltd | 217,254 | |||||||||||||
29,400 | Foschini Ltd | 230,363 | |||||||||||||
20,100 | Harmony Gold Mining Co Ltd * | 188,421 | |||||||||||||
10,000 | Highveld Steel and Vanadium Corp Ltd | 97,669 | |||||||||||||
15,400 | Impala Platinum Holdings Ltd | 359,971 | |||||||||||||
33,300 | JD Group Ltd | 181,885 | |||||||||||||
11,000 | Naspers Ltd Class N | 359,933 | |||||||||||||
36,507 | Remgro Ltd | 403,677 | |||||||||||||
12,700 | Reunert Ltd | 83,099 | |||||||||||||
52,400 | RMB Holdings Ltd | 177,885 | |||||||||||||
53,900 | Telkom South Africa Ltd | 300,632 | |||||||||||||
11,424 | Tiger Brands Ltd | 228,157 | |||||||||||||
14,600 | Vodacom Group (Pty) Ltd * | 108,099 | |||||||||||||
Total South Africa | 3,473,669 | ||||||||||||||
South Korea — 16.5% | |||||||||||||||
260 | Amorepacific Corp | 151,490 | |||||||||||||
25,660 | Busan Bank | 230,605 | |||||||||||||
18,520 | Daegu Bank | 215,333 | |||||||||||||
9,496 | Daelim Industrial Co Ltd | 547,013 | |||||||||||||
16,100 | Daewoo Securities Co Ltd | 295,135 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
South Korea — continued | |||||||||||||||
13,610 | Dongbu Insurance Co Ltd | 412,968 | |||||||||||||
5,030 | Dongkuk Steel Mill Co Ltd | 117,379 | |||||||||||||
6,390 | GS Engineering & Construction Corp | 488,813 | |||||||||||||
12,170 | GS Holdings Corp | 321,074 | |||||||||||||
23,360 | Hana Financial Group Inc | 610,855 | |||||||||||||
4,509 | Hanjin Heavy Industries & Construction Co Ltd | 99,448 | |||||||||||||
39,930 | Hanwha Chemical Corp | 414,628 | |||||||||||||
6,778 | Honam Petrochemical Corp | 508,183 | |||||||||||||
470 | Hyosung Corp | 33,917 | |||||||||||||
14,350 | Hyundai Development Co | 523,085 | |||||||||||||
1,750 | Hyundai Elevator Co Ltd | 86,085 | |||||||||||||
2,860 | Hyundai Heavy Industries Co Ltd | 435,462 | |||||||||||||
4,165 | Hyundai Mipo Dockyard | 411,269 | |||||||||||||
18,850 | Hyundai Mobis | 1,997,144 | |||||||||||||
14,490 | Hyundai Motor Co | 1,228,166 | |||||||||||||
8,770 | Hyundai Securities Co Ltd | 117,024 | |||||||||||||
41,520 | Industrial Bank of Korea * | 447,870 | |||||||||||||
9,010 | INTOPS Co Ltd | 136,515 | |||||||||||||
24,570 | Kangwon Land Inc | 324,252 | |||||||||||||
28,562 | KB Financial Group Inc * | 1,172,703 | |||||||||||||
862 | KB Financial Group Inc ADR * | 35,144 | |||||||||||||
8,970 | Keangnam Enterprises Ltd * | 121,018 | |||||||||||||
25,880 | Korea Exchange Bank | 230,540 | |||||||||||||
10,470 | Korea Investment Holdings Co Ltd | 299,457 | |||||||||||||
4,470 | Korea Zinc Co Ltd | 487,571 | |||||||||||||
4,220 | KT Corp | 131,460 | |||||||||||||
20,330 | KT Corp Sponsored ADR | 316,538 | |||||||||||||
23,663 | KT&G Corp | 1,274,415 | |||||||||||||
4,666 | LG Chem Ltd | 703,041 | |||||||||||||
7,690 | LG Corp | 467,661 | |||||||||||||
14,130 | LG Display Co Ltd | 412,590 | |||||||||||||
280 | LG Household & Health Care Ltd | 48,493 | |||||||||||||
30,790 | LG Telecom Ltd | 192,176 | |||||||||||||
2,550 | Lotte Shopping Co Ltd | 580,144 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
South Korea — continued | |||||||||||||||
2,070 | Mirae Asset Securities Co Ltd | 120,810 | |||||||||||||
3,120 | NCSoft Corp | 341,798 | |||||||||||||
3,350 | NHN Corp * | 455,429 | |||||||||||||
3,790 | POSCO | 1,390,739 | |||||||||||||
2,110 | POSCO ADR | 192,981 | |||||||||||||
44,090 | Samho International Co Ltd * | 168,972 | |||||||||||||
7,588 | Samsung Electronics Co Ltd | 4,678,946 | |||||||||||||
5,750 | Samsung Engineering Co Ltd | 373,023 | |||||||||||||
2,900 | Samsung Securities Co Ltd | 173,379 | |||||||||||||
6,140 | Samsung Techwin Co Ltd | 381,979 | |||||||||||||
6,950 | Seoul Semiconductor Co Ltd * | 245,607 | |||||||||||||
36,935 | Shinhan Financial Group Co Ltd * | 1,206,555 | |||||||||||||
380 | Shinsegae Co Ltd | 157,418 | |||||||||||||
2,470 | SK Chemicals Co Ltd | 119,817 | |||||||||||||
6,555 | SK Energy Co Ltd | 526,552 | |||||||||||||
12,677 | SK Holdings Co Ltd | 1,064,093 | |||||||||||||
23,560 | SK Networks Co Ltd | 231,664 | |||||||||||||
1,080 | SK Telecom Co Ltd | 150,948 | |||||||||||||
42,590 | SK Telecom Co Ltd ADR | 662,700 | |||||||||||||
7,430 | STX Engine Co Ltd | 142,857 | |||||||||||||
16,430 | STX Pan Ocean Co Ltd | 145,718 | |||||||||||||
14,550 | Sungwoo Hitech Co Ltd | 132,551 | |||||||||||||
23,720 | Tong Yang Securities Inc | 307,839 | |||||||||||||
14,431 | Woori Finance Holdings Co Ltd * | 161,910 | |||||||||||||
Total South Korea | 30,160,949 | ||||||||||||||
Taiwan — 9.0% | |||||||||||||||
63,630 | Asia Optical Co Inc | 95,569 | |||||||||||||
267,266 | Asustek Computer Inc | 424,557 | |||||||||||||
422,080 | AU Optronics Corp | 420,361 | |||||||||||||
66,500 | Catcher Technology Co Ltd | 171,457 | |||||||||||||
444,000 | Chi Mei Optoelectronics Corp * | 217,433 | |||||||||||||
651,014 | China Steel Corp | 590,426 | |||||||||||||
1,166,000 | Chinatrust Financial Holding Co Ltd | 647,293 |
See accompanying notes to the financial statements.
13
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Taiwan — continued | |||||||||||||||
340,804 | Chunghwa Telecom Co Ltd | 583,563 | |||||||||||||
350,299 | Compal Electronics Inc | 352,675 | |||||||||||||
81,000 | Epistar Corp | 237,537 | |||||||||||||
177,480 | Far Eastern Textile Co Ltd | 176,510 | |||||||||||||
229,000 | Far Eastone Telecommunications Co Ltd | 258,236 | |||||||||||||
53,757 | First Financial Holding Co Ltd | 29,084 | |||||||||||||
425,500 | Formosa Plastics Corp | 764,259 | |||||||||||||
1,224,000 | HannStar Display Corp * | 256,056 | |||||||||||||
73,887 | High Tech Computer Corp | 741,622 | |||||||||||||
478,638 | Hon Hai Precision Industry Co Ltd | 1,611,535 | |||||||||||||
291,000 | Hung Sheng Construction Co Ltd | 110,734 | |||||||||||||
183,340 | Innolux Display Corp | 204,857 | |||||||||||||
435,009 | Lite-On Technology Corp | 486,769 | |||||||||||||
408,591 | Macronix International Co Ltd | 194,019 | |||||||||||||
145,375 | MediaTek Inc | 2,107,256 | |||||||||||||
294,289 | Nan Ya Plastics Corp | 409,352 | |||||||||||||
106,793 | Novatek Microelectronics Corp Ltd | 250,251 | |||||||||||||
244,550 | Pou Chen Corp | 151,299 | |||||||||||||
187,250 | Powertech Technology Inc | 510,685 | |||||||||||||
2,050,000 | ProMOS Technologies Inc * | 72,866 | |||||||||||||
434,715 | Quanta Computer Inc | 899,688 | |||||||||||||
76,870 | Radiant Opto-Electronics Corp | 97,820 | |||||||||||||
279,000 | Siliconware Precision Industries Co | 345,830 | |||||||||||||
106,000 | Sincere Navigation Corp | 120,561 | |||||||||||||
292,000 | Synnex Technology International Corp | 509,278 | |||||||||||||
363,000 | Taishin Financial Holding Co Ltd * | 120,007 | |||||||||||||
133,787 | Taiwan Mobile Co Ltd | 209,925 | |||||||||||||
796,606 | Taiwan Semiconductor Manufacturing Co Ltd | 1,431,364 | |||||||||||||
296,132 | Wistron Corp | 573,121 | |||||||||||||
Total Taiwan | 16,383,855 | ||||||||||||||
Thailand — 4.8% | |||||||||||||||
344,690 | Advanced Info Service Pcl (Foreign Registered) (a) | 874,045 | |||||||||||||
427,660 | Asian Property Development Pcl (Foreign Registered) (a) | 70,417 |
See accompanying notes to the financial statements.
14
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Thailand — continued | |||||||||||||||
87,450 | Asian Property Development Pcl NVDR (a) | 14,398 | |||||||||||||
32,000 | Bangkok Bank Pcl (a) | 103,471 | |||||||||||||
114,250 | Bangkok Bank Pcl NVDR (a) | 369,426 | |||||||||||||
340,300 | Bangkok Dusit Medical Service Pcl (Foreign Registered) (a) | 248,263 | |||||||||||||
21,690 | Banpu Pcl (Foreign Registered) (a) | 254,518 | |||||||||||||
18,310 | Banpu Pcl NVDR (a) | 214,856 | |||||||||||||
570,640 | BEC World Pcl (Foreign Registered) (a) | 313,835 | |||||||||||||
90,000 | Electricity Generating Pcl (Foreign Registered) (a) | 208,377 | |||||||||||||
18,000 | Electricity Generating Pcl NVDR (a) | 41,543 | |||||||||||||
2,874,950 | IRPC Pcl (Foreign Registered) (a) | 324,773 | |||||||||||||
238,010 | Kasikornbank Pcl (Foreign Registered) (a) | 527,919 | |||||||||||||
102,770 | Kasikornbank Pcl NVDR (a) | 218,892 | |||||||||||||
1,451,000 | Krung Thai Bank Pcl (Foreign Registered) (a) | 366,813 | |||||||||||||
124,000 | PTT Chemical Pcl (Foreign Registered) (a) | 240,819 | |||||||||||||
133,000 | PTT Exploration & Production Pcl (Foreign Registered) (a) | 541,863 | |||||||||||||
250,722 | PTT Pcl (Foreign Registered) (a) | 1,799,118 | |||||||||||||
62,039 | Siam Cement Pcl (Foreign Registered) (a) | 360,319 | |||||||||||||
34,000 | Siam Cement Pcl NVDR (a) | 193,971 | |||||||||||||
324,000 | Siam City Bank Pcl (Foreign Registered) (a) | 205,750 | |||||||||||||
260,730 | Siam Commercial Bank Pcl (Foreign Registered) (a) | 590,005 | |||||||||||||
19,420 | Siam Commercial Bank Pcl NVDR (a) | 43,945 | |||||||||||||
382,770 | Thai Oil Pcl (Foreign Registered) (a) | 455,757 | |||||||||||||
191,000 | Thoresen Thai Agencies Pcl (Foreign Registered) (a) | 129,730 | |||||||||||||
Total Thailand | 8,712,823 | ||||||||||||||
Turkey — 8.5% | |||||||||||||||
189,838 | Akbank TAS | 1,091,072 | |||||||||||||
50,240 | Anadolu Efes Biracilik ve Malt Sanayii AS | 548,806 | |||||||||||||
83,394 | Arcelik AS * | 239,315 | |||||||||||||
232,400 | Asya Katilim Bankasi AS * | 430,447 | |||||||||||||
241,470 | Dogan Sirketler Grubu Holdings AS * | 226,567 | |||||||||||||
47,074 | Enka Insaat ve Sanayi AS | 189,999 | |||||||||||||
29,200 | Gubre Fabrikalari TAS * | 157,787 | |||||||||||||
128,323 | Haci Omer Sabanci Holding AS | 496,622 |
See accompanying notes to the financial statements.
15
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Turkey — continued | |||||||||||||||
188,000 | Kardemir Karabuk Demir Celik Sanayi ve Ticaret AS Class A * | 102,851 | |||||||||||||
567,780 | Kardemir Karabuk Demir Celik Sanayi ve Ticaret AS Class D * | 235,147 | |||||||||||||
432,070 | KOC Holding AS * | 1,148,213 | |||||||||||||
131,075 | Sekerbank TAS * | 212,859 | |||||||||||||
37,084 | Tupras-Turkiye Petrol Rafineriler AS | 556,242 | |||||||||||||
178,590 | Turk Ekonomi Bankasi AS * | 217,343 | |||||||||||||
285,350 | Turk Hava Yollari Anonim Ortakligi | 548,519 | |||||||||||||
176,004 | Turk Sise ve Cam Fabrikalari AS * | 186,637 | |||||||||||||
133,380 | Turk Telekomunikasyon AS | 407,308 | |||||||||||||
213,087 | Turkcell Iletisim Hizmet AS | 1,379,292 | |||||||||||||
927,590 | Turkiye Garanti Bankasi * | 3,433,206 | |||||||||||||
142,960 | Turkiye Halk Bankasi AS | 772,789 | |||||||||||||
258,087 | Turkiye IS Bankasi Class C | 1,023,824 | |||||||||||||
255,370 | Turkiye Sinai Kalkinma Bankasi AS * | 212,755 | |||||||||||||
383,070 | Turkiye Vakiflar Bankasi TAO Class D * | 847,988 | |||||||||||||
163,700 | Vestel Elektronik Sanayi AS * | 252,255 | |||||||||||||
301,500 | Yapi ve Kredi Bankasi AS * | 635,835 | |||||||||||||
Total Turkey | 15,553,678 | ||||||||||||||
TOTAL COMMON STOCKS (COST $128,637,175) | 149,633,542 | ||||||||||||||
PREFERRED STOCKS — 6.6% | |||||||||||||||
Brazil — 5.8% | |||||||||||||||
54,800 | Banco Bradesco SA 0.57% | 894,095 | |||||||||||||
18,800 | Centrais Eletricas Brasileiras SA Class B 6.90% | 246,883 | |||||||||||||
10,239 | Companhia de Bebidas das Americas 1.04% | 766,010 | |||||||||||||
25,441 | Companhia Energetica de Minas Gerais 2.79% | 374,589 | |||||||||||||
20,900 | Companhia Paranaense de Energia Class B 0.45% | 325,249 | |||||||||||||
31,900 | Duratex SA 1.25% | 486,954 | |||||||||||||
9,800 | Eletropaulo Metropolitana SA 5.67% | 181,836 | |||||||||||||
14,300 | Fertilizantes Fosfatados SA * | 133,918 | |||||||||||||
21,800 | Gerdau Metalurgica SA 1.48% | 319,476 | |||||||||||||
33,308 | Gerdau SA 0.74% | 389,863 |
See accompanying notes to the financial statements.
16
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Brazil — continued | |||||||||||||||
14,767 | Itau Unibanco Holding SA 0.42% | 250,570 | |||||||||||||
90,660 | Itausa-Investimentos Itau SA 0.59% | 465,638 | |||||||||||||
17,905 | Net Servicos de Comunicacoa SA * | 188,389 | |||||||||||||
97,924 | Petroleo Brasileiro SA (Petrobras) 1.11% | 1,630,421 | |||||||||||||
31,610 | Petroleo Brasileiro SA Sponsored ADR 1.14% | 1,049,452 | |||||||||||||
12,280 | Tele Norte Leste Participacoes ADR 6.99% | 195,743 | |||||||||||||
10,300 | Tele Norte Leste Participacoes SA 7.08% | 165,045 | |||||||||||||
5,500 | Telecomunicacoes de Sao Paulo SA 4.48% | 126,914 | |||||||||||||
3,400 | Telemar Norte Leste SA Class A 7.14% | 93,267 | |||||||||||||
24,500 | Usinas Siderrurgicas de Minas Gerais SA Class A 1.14% | 575,874 | |||||||||||||
75,656 | Vale SA Preference A 2.87% | 1,320,678 | |||||||||||||
21,930 | Vale SA Sponsored ADR 2.83% | 377,415 | |||||||||||||
Total Brazil | 10,558,279 | ||||||||||||||
Russia — 0.3% | |||||||||||||||
890 | Transneft 1.20% | 572,217 | |||||||||||||
South Korea — 0.5% | |||||||||||||||
6,110 | Hyundai Motor Co 1.98% | 213,798 | |||||||||||||
1,990 | Samsung Electronics Co Ltd (Non Voting) 1.15% | 782,425 | |||||||||||||
Total South Korea | 996,223 | ||||||||||||||
TOTAL PREFERRED STOCKS (COST $9,838,490) | 12,126,719 | ||||||||||||||
INVESTMENT FUNDS — 8.4% | |||||||||||||||
United States — 8.4% | |||||||||||||||
436,116 | iShares MSCI Emerging Markets Index Fund (b) | 15,399,256 | |||||||||||||
TOTAL INVESTMENT FUNDS (COST $13,791,177) | 15,399,256 |
See accompanying notes to the financial statements.
17
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 1.8% | |||||||||||||||
USD | 40,864 | Bank of Ireland Time Deposit, 0.03%, due 09/01/09 | 40,864 | ||||||||||||
USD | 1,100,000 | BNP Paribas Time Deposit, 0.18%, due 09/01/09 | 1,100,000 | ||||||||||||
ZAR | 4,189 | Brown Brothers Harriman Time Deposit, 6.15%, due 09/01/09 | 547 | ||||||||||||
USD | 2,100,000 | Societe Generale Time Deposit, 0.13%, due 09/01/09 | 2,100,000 | ||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $3,241,411) | 3,241,411 | ||||||||||||||
TOTAL INVESTMENTS — 98.7% (Cost $155,508,253) | 180,400,928 | ||||||||||||||
Other Assets and Liabilities (net) — 1.3% | 2,411,268 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 182,812,196 |
Notes to Schedule of Investments:
ADR - American Depositary Receipt
CPO - Ordinary Participation Certificate (Certificado de Participacion Ordinares), representing a bundle of shares of the multiple series of one issuer that trade together as a unit.
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).
(b) Represents an investment to equitize cash in the iShares® MSCI Emerging Markets Index Fund, which is a separate investment portfolio of iShares, Inc., a registered investment company. The iShares® MSCI Emerging Markets Index Fund invests in global emerging markets and seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Emerging Markets Index. iShares® is a registered trademark of Barclays Global Investors, N.A. ("BGI"). Neither BGI nor the iShares® Funds make any representations regarding the advisability of investing in the iShares® MSCI Emerging Markets Index Fund.
Currency Abbreviations:
USD - United States Dollar
ZAR - South African Rand
See accompanying notes to the financial statements.
18
GMO Emerging Countries Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $155,508,253) (Note 2) | $ | 180,400,928 | |||||
Cash | 1,603,543 | ||||||
Foreign currency, at value (cost $430,282) (Note 2) | 430,132 | ||||||
Receivable for investments sold | 56,003 | ||||||
Receivable for Fund shares sold | 54,664 | ||||||
Dividends and interest receivable | 688,613 | ||||||
Foreign taxes receivable | 235,223 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 14,640 | ||||||
Miscellaneous receivable | 126,879 | ||||||
Total assets | 183,610,625 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 165,175 | ||||||
Payable for Fund shares repurchased | 72,511 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 101,541 | ||||||
Shareholder service fee | 19,580 | ||||||
Administration fee – Class M | 5,137 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 289 | ||||||
Payable for 12b-1 fee – Class M | 12,315 | ||||||
Payable for foreign currency purchased | 152 | ||||||
Miscellaneous payable | 71,289 | ||||||
Accrued expenses | 350,440 | ||||||
Total liabilities | 798,429 | ||||||
Net assets | $ | 182,812,196 |
See accompanying notes to the financial statements.
19
GMO Emerging Countries Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 252,156,617 | |||||
Accumulated undistributed net investment income | 1,812,369 | ||||||
Accumulated net realized loss | (96,048,872 | ) | |||||
Net unrealized appreciation | 24,892,082 | ||||||
$ | 182,812,196 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 152,780,537 | |||||
Class M shares | $ | 30,031,659 | |||||
Shares outstanding: | |||||||
Class III | 18,033,368 | ||||||
Class M | 3,594,067 | ||||||
Net asset value per share: | |||||||
Class III | $ | 8.47 | |||||
Class M | $ | 8.36 |
See accompanying notes to the financial statements.
20
GMO Emerging Countries Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $330,093) | $ | 2,800,119 | |||||
Interest | 51,888 | ||||||
Total investment income | 2,852,007 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 503,212 | ||||||
Shareholder service fee – Class III (Note 3) | 96,341 | ||||||
12b-1 fee – Class M (Note 3) | 32,967 | ||||||
Administration fee – Class M (Note 3) | 26,379 | ||||||
Custodian and fund accounting agent fees | 465,584 | ||||||
Audit and tax fees | 41,860 | ||||||
Transfer agent fees | 26,680 | ||||||
Registration fees | 13,064 | ||||||
Legal fees | 3,956 | ||||||
Trustees fees and related expenses (Note 3) | 1,535 | ||||||
Miscellaneous | 2,115 | ||||||
Total expenses | 1,213,693 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (276,503 | ) | |||||
Expense reductions (Note 2) | (5 | ) | |||||
Net expenses | 937,185 | ||||||
Net investment income (loss) | 1,914,822 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of foreign capital gains tax of $13,330) (Note 2) | (10,799,225 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 13,160 | ||||||
Net realized gain (loss) | (10,786,065 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 81,822,078 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 43,546 | ||||||
Net unrealized gain (loss) | 81,865,624 | ||||||
Net realized and unrealized gain (loss) | 71,079,559 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 72,994,381 |
See accompanying notes to the financial statements.
21
GMO Emerging Countries Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,914,822 | $ | 5,729,375 | |||||||
Net realized gain (loss) | (10,786,065 | ) | (79,155,727 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 81,865,624 | (130,209,210 | ) | ||||||||
Net increase (decrease) in net assets from operations | 72,994,381 | (203,635,562 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (50,056 | ) | (3,618,944 | ) | |||||||
Class M | (2,891 | ) | (355,007 | ) | |||||||
Total distributions from net investment income | (52,947 | ) | (3,973,951 | ) | |||||||
Net realized gains | |||||||||||
Class III | (400,445 | ) | (45,733,749 | ) | |||||||
Class M | (80,952 | ) | (3,890,739 | ) | |||||||
Total distributions from net realized gains | (481,397 | ) | (49,624,488 | ) | |||||||
(534,344 | ) | (53,598,439 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 2,933,948 | (62,229,331 | ) | ||||||||
Class M | (3,431,971 | ) | 27,387,567 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (498,023 | ) | (34,841,764 | ) | |||||||
Total increase (decrease) in net assets | 71,962,014 | (292,075,765 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 110,850,182 | 402,925,947 | |||||||||
End of period (including accumulated undistributed net investment income of $1,812,369 and distributions in excess of net investment income of $49,506, respectively) | $ | 182,812,196 | $ | 110,850,182 |
See accompanying notes to the financial statements.
22
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 5.06 | $ | 15.26 | $ | 16.04 | $ | 19.20 | $ | 15.99 | $ | 14.99 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.09 | 0.24 | 0.23 | 0.32 | 0.28 | 0.30 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 3.34 | (8.10 | ) | 4.87 | 2.50 | 5.09 | 3.43 | ||||||||||||||||||||
Total from investment operations | 3.43 | (7.86 | ) | 5.10 | 2.82 | 5.37 | 3.73 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.00 | )(a) | (0.22 | ) | (0.30 | ) | (0.36 | ) | (0.35 | ) | (0.31 | ) | |||||||||||||||
From net realized gains | (0.02 | ) | (2.12 | ) | (5.58 | ) | (5.62 | ) | (1.81 | ) | (2.42 | ) | |||||||||||||||
Total distributions | (0.02 | ) | (2.34 | ) | (5.88 | ) | (5.98 | ) | (2.16 | ) | (2.73 | ) | |||||||||||||||
Net asset value, end of period | $ | 8.47 | $ | 5.06 | $ | 15.26 | $ | 16.04 | $ | 19.20 | $ | 15.99 | |||||||||||||||
Total Return | 67.97 | %(b)** | (58.58 | )%(b) | 30.68 | %(b) | 16.20 | % | 36.38 | %(b) | 28.76 | %(b) | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 152,781 | $ | 89,902 | $ | 371,540 | $ | 339,268 | $ | 346,018 | $ | 249,005 | |||||||||||||||
Net expenses to average daily net assets | 1.16 | %(c)* | 1.16 | %(d) | 1.11 | %(d) | 1.06 | % | 1.10 | % | 1.10 | % | |||||||||||||||
Net investment income to average daily net assets | 2.52 | %* | 2.25 | % | 1.31 | % | 1.74 | % | 1.68 | % | 2.12 | % | |||||||||||||||
Portfolio turnover rate | 74 | %** | 128 | % | 72 | % | 58 | % | 35 | % | 53 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.36 | %* | 0.14 | % | 0.03 | % | — | 0.01 | % | 0.05 | % |
(a) Distributions from net investment income were less than $0.01 per share.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions.
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
23
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 5.00 | $ | 15.07 | $ | 15.90 | $ | 19.05 | $ | 15.87 | $ | 14.91 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.08 | 0.16 | 0.18 | 0.30 | 0.27 | 0.26 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 3.30 | (7.92 | ) | 4.82 | 2.44 | 5.00 | 3.39 | ||||||||||||||||||||
Total from investment operations | 3.38 | (7.76 | ) | 5.00 | 2.74 | 5.27 | 3.65 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.00 | )(a) | (0.19 | ) | (0.25 | ) | (0.27 | ) | (0.28 | ) | (0.27 | ) | |||||||||||||||
From net realized gains | (0.02 | ) | (2.12 | ) | (5.58 | ) | (5.62 | ) | (1.81 | ) | (2.42 | ) | |||||||||||||||
Total distributions | (0.02 | ) | (2.31 | ) | (5.83 | ) | (5.89 | ) | (2.09 | ) | (2.69 | ) | |||||||||||||||
Net asset value, end of period | $ | 8.36 | $ | 5.00 | $ | 15.07 | $ | 15.90 | $ | 19.05 | $ | 15.87 | |||||||||||||||
Total Return | 67.74 | %(b)** | (58.67 | )%(b) | 30.29 | %(b) | 15.89 | % | 35.99 | %(b) | 28.30 | %(b) | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 30,032 | $ | 20,948 | $ | 31,386 | $ | 29,423 | $ | 57,136 | $ | 69,109 | |||||||||||||||
Net expenses to average daily net assets | 1.46 | %(c)* | 1.48 | %(d) | 1.41 | %(d) | 1.36 | % | 1.39 | % | 1.40 | % | |||||||||||||||
Net investment income to average daily net assets | 2.23 | %* | 1.68 | % | 0.99 | % | 1.63 | % | 1.65 | % | 1.82 | % | |||||||||||||||
Portfolio turnover rate | 74 | %** | 128 | % | 72 | % | 58 | % | 35 | % | 53 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.36 | %* | 0.23 | % | 0.03 | % | — | 0.01 | % | 0.05 | % |
(a) Distributions from net investment income were less than $0.01 per share.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions.
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
24
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Emerging Countries Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, 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 countries ("emerging countries"). Under normal circumstances, the Fund invests at least 80% of its assets in investments tied economically to emerging countries. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter derivatives (including options, futures, warrants, and swap contracts) and may invest in exchange-traded funds ("ETFs"). The Fund has entere d into an agreement with ETFs that allows the Fund to invest in an ETF beyond 1940 Act statutory limitations, provided that the Fund complies with the terms and conditions of the relevant ETF's exemptive order. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
Throughout the period ended August 31, 2009, 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 they bear.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
25
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 66.57% of the net assets of the Fund were valued using fair value prices base d on models used by a third party vendor and are classified as using Level 2 inputs in the table below.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation or quoted prices for similar securities.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund's securities in Thailand were valued at the local price and subject to a premium adjustment upon exceeding foreign ownership limitations.
26
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Argentina | $ | 194,286 | $ | — | $ | — | $ | 194,286 | |||||||||||
Brazil | 8,745,018 | — | — | 8,745,018 | |||||||||||||||
Chile | 505,464 | — | — | 505,464 | |||||||||||||||
China | 1,696,608 | 14,899,138 | — | 16,595,746 | |||||||||||||||
Czech Republic | — | 721,742 | — | 721,742 | |||||||||||||||
Egypt | 2,205,479 | — | — | 2,205,479 | |||||||||||||||
Hungary | — | 400,699 | — | 400,699 | |||||||||||||||
India | 1,267,032 | 8,604,871 | — | 9,871,903 | |||||||||||||||
Indonesia | — | 3,898,414 | — | 3,898,414 | |||||||||||||||
Israel | 610,275 | 785,910 | — | 1,396,185 | |||||||||||||||
Malaysia | — | 2,808,661 | — | 2,808,661 | |||||||||||||||
Mexico | 1,327,679 | — | — | 1,327,679 | |||||||||||||||
Morocco | — | 324,323 | — | 324,323 | |||||||||||||||
Peru | 33,423 | — | — | 33,423 | |||||||||||||||
Philippines | 51,929 | 851,811 | — | 903,740 | |||||||||||||||
Poland | — | 5,416,795 | — | 5,416,795 | |||||||||||||||
Russia | 2,759,253 | 17,239,758 | — | 19,999,011 | |||||||||||||||
South Africa | 108,099 | 3,365,570 | — | 3,473,669 | |||||||||||||||
South Korea | 1,207,363 | 28,953,586 | — | 30,160,949 | |||||||||||||||
Taiwan | 72,866 | 16,310,989 | — | 16,383,855 | |||||||||||||||
Thailand | — | — | 8,712,823 | 8,712,823 | |||||||||||||||
Turkey | — | 15,553,678 | — | 15,553,678 | |||||||||||||||
TOTAL COMMON STOCKS | 20,784,774 | 120,135,945 | 8,712,823 | 149,633,542 | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Brazil | 10,558,279 | — | — | 10,558,279 | |||||||||||||||
Russia | — | 572,217 | — | 572,217 | |||||||||||||||
South Korea | — | 996,223 | — | 996,223 | |||||||||||||||
TOTAL PREFERRED STOCKS | 10,558,279 | 1,568,440 | — | 12,126,719 | |||||||||||||||
Investment Funds | |||||||||||||||||||
United States | 15,399,256 | — | — | 15,399,256 | |||||||||||||||
TOTAL INVESTMENT FUNDS | 15,399,256 | — | — | 15,399,256 | |||||||||||||||
Short-Term Investments | 3,241,411 | — | — | 3,241,411 | |||||||||||||||
Total | $ | 49,983,720 | $ | 121,704,385 | $ | 8,712,823 | $ | 180,400,928 |
27
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The aggregate net value of the Fund's direct investments in securities using Level 3 inputs was 4.77% of total net assets.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchase/ Sales | Accrued Discounts/ Premiums | Total Realized Gain/Loss | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Common Stock | |||||||||||||||||||||||||||||||
Thailand | $ | 5,352,748 | $ | 1,400,038 | $ | — | $ | (1,432,837 | ) | $ | 3,392,874 | $ | — | $ | 8,712,823 | ||||||||||||||||
Total | $ | 5,352,748 | $ | 1,400,038 | $ | — | $ | (1,432,837 | ) | $ | 3,392,874 | $ | — | $ | 8,712,823 |
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
28
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because many foreign exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign futures 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, the Fund generally values foreign futures using fair value prices, which are based on adjustments to closing prices supplied by a thir d party vendor based on that vendor's proprietary models. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying
29
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations.
30
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exposure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to
31
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if 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 accrual for capital gains and repatriation taxes is included in net unrealized gain (loss) in the Statement of Operations. For the period ended August 31, 2009, the Fund incurred $13,330 in capital gains taxes, which is included in net realized gain (loss) in the Statement of Operations.
The Fund is currently subject to a Taiwanese security transaction tax of 0.30% of the transaction amount on equities, which must be paid by the Fund upon the sale or transfer of any portfolio securities subject to that tax.
32
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $72,060,837.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 166,899,296 | $ | 20,118,349 | $ | (6,616,717 | ) | $ | 13,501,632 |
The Fund is subject to the provisions of Financial Accounting Standards Board Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted
33
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's operations.
Brown Brothers Harriman & Co. ("BBH") serves as custodian and fund accounting agent of the Fund. State Street Bank and Trust Company ("State Street") serves as transfer agent of the Fund. BBH and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund may need to maintain a license to invest in some foreign markets (e.g. Brazil, India, Russia, South Korea, and Taiwan). Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the econom ies of developed countries.
34
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. These risks are particularly pronounced for the Fund because it typically makes equity investments in companies in emerging countries and may make investments in companies with smaller market capitalizations. In addition, the Fund may buy securities that are less liquid than those in its benchmark.
• Smaller Company Risk — The securities of companies with smaller market capitalizations typically are less widely held, trade less frequently and in lesser quantities, and have market prices that may fluctuate more than those of securities of larger capitalization companies. The Fund may buy securities that have smaller market capitalizations than those in its benchmark.
Other principal risks of an investment in the Fund include Credit and Counterparty Risk (risk of default of a derivatives counterparty or borrower of the Fund's securities), Focused Investment Risk (increased risk from the Fund's focus on investments in a limited number of countries and geographic regions), Market Risk — Value Securities (risk that the price of the Fund's securities may not increase to what the Manager believes to be their fundamental value or that the Manager may have overestimated their fundamental value), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds (including ETFs) in which the Fund invests will not perform as expected). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates,
35
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a
36
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
37
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | — | — | — | — | $ | — | |||||||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | — | — | — | — | $ | — | |||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | — | — | — | — | $ | — | |||||||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | — | — | — | — | $ | — |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
38
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | — | — | — | — | $ | — | |||||||||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 22,966 | — | — | — | 22,966 | |||||||||||||||||||||
Total | $ | — | 22,966 | — | — | — | $ | 22,966 | |||||||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | — | — | 18,679 | — | $ | 18,679 | |||||||||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | (32,067 | ) | — | — | — | (32,067 | ) | |||||||||||||||||||
Total | $ | — | (32,067 | ) | — | 18,679 | — | $ | (13,388 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Forwards | Rights/Warrants | ||||||||||
Average notional amount outstanding | $ | 369,268 | $ | 9,216 | |||||||
Highest notional amount outstanding | 1,662,284 | 30,932 | |||||||||
Lowest notional amount outstanding | — | — |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.65% of average daily net assets. The Fund has adopted a Shareholder Service Plan
39
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
underwhich 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.
Holders of Class M shares of the Fund pay GMO an administration fee for support services provided to Class M shareholders. That fee is paid monthly at the annual rate of 0.20% of the average daily net assets of Class M shares. Pursuant to a Rule 12b-1 distribution and service plan adopted by the Fund, holders of Class M shares of the Fund may pay a fee, at the annual rate of up to 1.00% of average daily net assets of Class M shares for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or for the provision of services to Class M shareholders. The Trustees currently limit payments on Class M shares to 0.25% of the Fund's average daily net assets of Class M shares.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 1.00% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, administration fees, distribution (12b-1) fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (in cluding an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 1.00% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 1.00% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $1,167 and $644, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $109,752,730 and $111,793,594, respectively.
40
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 64.97% of the outstanding shares of the Fund were held by four shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 0.12% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 2.62% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,818,660 | $ | 13,104,024 | 8,395,532 | $ | 66,791,311 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 57,294 | 419,962 | 4,479,699 | 46,605,889 | |||||||||||||||
Shares repurchased | (1,599,303 | ) | (10,590,038 | ) | (19,463,147 | ) | (175,626,531 | ) | |||||||||||
Net increase (decrease) | 276,651 | $ | 2,933,948 | (6,587,916 | ) | $ | (62,229,331 | ) |
41
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 243,074 | $ | 1,718,718 | 6,833,888 | $ | 59,787,842 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 11,596 | 83,843 | 433,569 | 4,245,746 | |||||||||||||||
Shares repurchased | (850,364 | ) | (5,234,532 | ) | (5,160,510 | ) | (36,646,021 | ) | |||||||||||
Net increase (decrease) | (595,694 | ) | $ | (3,431,971 | ) | 2,106,947 | $ | 27,387,567 |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
42
GMO Emerging Countries Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those p ersonnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
43
GMO Emerging Countries Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, 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 to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to separate accoun t clients and the impact on the Manager of, and expenses and risks associated with, the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management b y, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 in which it invests. 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
44
GMO Emerging Countries Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
45
GMO Emerging Countries Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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 (12b-1) and/or administration 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.
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, 2009 through August 31, 2009.
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, an $10,000,000 account value divided by $1,000 = 10,000), 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 | 1.16 | % | $ | 1,000.00 | $ | 1,679.70 | $ | 7.84 | |||||||||||
2) Hypothetical | 1.16 | % | $ | 1,000.00 | $ | 1,019.36 | $ | 5.90 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 1.46 | % | $ | 1,000.00 | $ | 1,677.40 | $ | 9.85 | |||||||||||
2) Hypothetical | 1.46 | % | $ | 1,000.00 | $ | 1,017.85 | $ | 7.43 |
* Expenses are calculated using each Class's annualized expense ratio for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
46
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 will be available on Trust's website at www.gmo.com and on the Securities and Exchange Commission's website at www.sec.gov no later than August 31 of each year.
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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Short-Term Investments | 100.0 | % | |||||
Other | 0.0 | ||||||
100.0 | % |
1
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 100.0% | |||||||||||
Money Market Funds — 0.0% | |||||||||||
16,655 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 16,655 | |||||||||
Other Short-Term Investments — 100.0% | |||||||||||
47,675,000 | U.S. Treasury Bill, 0.17%, due 10/15/09 (a) | 47,665,074 | |||||||||
97,850,000 | U.S. Treasury Bill, 0.17%-0.43% due 10/22/09 (a) | 97,797,846 | |||||||||
12,600,000 | U.S. Treasury Bill, 0.13%, due 11/19/09 (a) | 12,596,346 | |||||||||
16,050,000 | U.S. Treasury Bill, 0.14%, due 11/27/09 (a) | 16,044,687 | |||||||||
25,000,000 | U.S. Treasury Bill, 0.14%, due 12/03/09 (a) | 24,990,950 | |||||||||
35,600,000 | U.S. Treasury Bill, 0.16%, due 12/17/09 (a) | 35,583,375 | |||||||||
Total Other Short-Term Investments | 234,678,278 | ||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $234,665,278) | 234,694,933 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $234,665,278) | 234,694,933 | ||||||||||
Other Assets and Liabilities (net) — 0.00% | 31,408 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 234,726,341 |
Notes to Schedule of Investments:
(a) Rate shown represents yield-to-maturity.
See accompanying notes to the financial statements.
2
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $234,665,278) (Note 2) | $ | 234,694,933 | |||||
Receivable for investments sold | 13,498,350 | ||||||
Receivable for Fund shares sold | 1,750,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 24,296 | ||||||
Total assets | 249,967,579 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 15,200,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 16,856 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 861 | ||||||
Dividend payable | 1,415 | ||||||
Accrued expenses | 22,106 | ||||||
Total liabilities | 15,241,238 | ||||||
Net assets | $ | 234,726,341 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 234,588,981 | |||||
Accumulated net realized gain | 107,705 | ||||||
Net unrealized appreciation | 29,655 | ||||||
$ | 234,726,341 | ||||||
Net assets | $ | 234,726,341 | |||||
Shares outstanding: | 9,384,067 | ||||||
Net asset value per share: | $ | 25.01 |
See accompanying notes to the financial statements.
3
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Statement of Operations — Period from March 17, 2009 (commencement of operations)
through August 31, 2009 (Unaudited)
Investment Income: | |||||||
Interest | $ | 420,703 | |||||
Dividends | 81 | ||||||
Total investment income | 420,784 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 103,840 | ||||||
Audit and tax fees | 28,824 | ||||||
Custodian, fund accounting agent and transfer agent fees | 20,540 | ||||||
Legal fees | 8,608 | ||||||
Trustees fees and related expenses (Note 3) | 2,720 | ||||||
Registration fees | 1,588 | ||||||
Miscellaneous | 2,863 | ||||||
Total expenses | 168,983 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (60,992 | ) | |||||
Fees and expenses waived by Manager (Note 3) | (103,840 | ) | |||||
Net expenses | 4,151 | ||||||
Net investment income (loss) | 416,633 | ||||||
Realized and unrealized gain (loss): | |||||||
Investments | 107,705 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 29,655 | ||||||
Net realized and unrealized gain (loss) | 137,360 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 553,993 |
See accompanying notes to the financial statements.
4
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Period from March 17, 2009 (commencement of operations) through August 31, 2009 (Unaudited) | |||||||
Increase (decrease) in net assets: | |||||||
Operations: | |||||||
Net investment income (loss) | $ | 416,633 | |||||
Net realized gain (loss) | 107,705 | ||||||
Change in net unrealized appreciation (depreciation) | 29,655 | ||||||
Net increase (decrease) in net assets from operations | 553,993 | ||||||
Distributions to shareholders from: | |||||||
Net investment income | (416,633 | ) | |||||
(416,633 | ) | ||||||
Net share transactions (Note 7): | 234,588,981 | ||||||
Total increase (decrease) in net assets | 234,726,341 | ||||||
Net assets: | |||||||
Beginning of period | — | ||||||
End of period | $ | 234,726,341 |
See accompanying notes to the financial statements.
5
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Financial Highlights
(For a share outstanding throughout the period)
Period from March 17, 2009 (commencement of operations) through August 31, 2009 (Unaudited) | |||||||
Net asset value, beginning of period | $ | 25.00 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)† | 0.04 | ||||||
Net realized and unrealized gain (loss) | 0.01 | ||||||
Total from investment operations | 0.05 | ||||||
Less distributions to shareholders: | |||||||
From net investment income | (0.04 | ) | |||||
Total distributions | (0.04 | ) | |||||
Net asset value, end of period | $ | 25.01 | |||||
Total Return(a) | 0.19 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 234,726 | |||||
Net expenses to average daily net assets | 0.00 | %(b)* | |||||
Net investment income to average daily net assets | 0.32 | %* | |||||
Portfolio turnover rate | 0 | %** | |||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets | 0.13 | %* |
(a) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions.
(b) 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.
6
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO U.S. Treasury Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 liquidity and safety of principal with current income as a secondary objective. The Fund seeks to achieve its investment objective by investing primarily in U.S. Treasury securities. Under normal circumstances, the Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in Direct U.S. Treasury Obligations and repurchase agreements collateralized by these Obligations. "Direct U.S. Treasury Obligations" include U.S. Treasury bills, bonds, and notes and other securities issued by the U.S. Treasury, such as Separately Traded Registered Interest and Principal Securities (STRIPS) and other zero-coupon securities, that are backed by the full faith and credit of the U.S. government as well as repurchase agreements relating to the foregoing. As a principal investment strategy the Fund may enter into repurchase agreements. In addition to Direct U.S. Treasury Obligations, the F und may also invest in other fixed-income securities that are backed by the full faith and credit of the U.S. government, such as guaranteed securities issued by the Government National Mortgage Association (GNMA) and the Federal Deposit Insurance Corporation (FDIC). The Fund may also invest in unaffiliated money market funds. The Fund normally invests in Direct U.S. Treasury Obligations and other fixed-income securities backed by the full faith and credit of the U.S. government with a stated or remaining maturity of one year or less. This may not be true of Direct U.S. Treasury Obligations purchased pursuant to repurchase agreements, and, therefore, if the counterparty to the repurchase agreement defaults, the Fund may own a security with a stated or remaining maturity of greater than one year. Although the Fund primarily invests in short-term obligations, it is not a money market fund and is not subject to the duration, quality, diversification, and other requirements applicable to money market funds. Othe r series of the Trust may invest in the Fund to achieve exposure to U.S. Treasury securities, to invest cash and/or to seek to generate a return similar to yields on U.S. Treasury securities. The Fund's benchmark is the Citigroup 3 Month Treasury Bill Index.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP
7
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant.
8
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | — | $ | 16,655 | $ | — | $ | 16,655 | |||||||||||
Short-Term Investments | 89,215,358 | 145,462,920 | — | 234,678,278 | |||||||||||||||
Total Investments | $ | 89,215,358 | $ | 145,479,575 | $ | — | $ | 234,694,933 |
The Fund held no investments or other financial instruments at August 31, 2009, whose fair value was determined using Level 3 inputs.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 distributions from net investment income daily, and will pay distributions on the first business day following the end of each month in which distributions were declared. The Fund's policy is to declare and pay distributions from net realized short-term and long-term capital gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
9
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 234,665,278 | $ | 29,655 | $ | — | $ | 29,655 |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds.
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the
10
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's U.S. Treasury and other fixed income securities will decline during periods of rising interest rates, and yields on the Fund's securities may equal or approach zero during some market conditions.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices.
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to a repurchase agreement, or a borrower of the Fund's securities will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations.
• Focused Investment Risk — Focusing investments in countries, regions, or sectors with high positive correlations to one another creates additional risk.
Other principal risks of an investment in the Fund include Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disr upt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected).
Disclosures about Derivative Instruments and Hedging Activities — The Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
As of August 31, 2009, the Fund held no derivative contracts for the purposes of SFAS 161.
11
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.08% of average daily net assets. The Manager has voluntarily agreed to waive the Fund's management fee. The Manager may change or terminate this waiver at any time. This waiver is in addition to the Manager's contractual agreement to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 (see paragraph below). During any period for which the voluntary management fee waiver is in effect, the Fund will incur management fees at an annual rate lower than 0.08% of the Fund's average daily net assets.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total operating expenses (without giving effect to any voluntary management fee waiver) (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.08% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (in cluding an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3 (c)(7) of the 1940 Act), hedging transactions fees, extraordinary, non-recurring and certain other unusual expenses (including taxes).
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $2,004 and $1,432, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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 period ended August 31, 2009.
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss
12
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 57.87% of the shares outstanding of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. Two of the shareholders are other funds of the Trust.
As of August 31, 2009, 0.30% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 99.65% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from March 17, 2009 (commencement of operations) August 31, 2009 (Unaudited) | |||||||||||
Shares | Amount | ||||||||||
Shares sold | 41,921,156 | $ | 1,048,224,218 | ||||||||
Shares issued to shareholders in reinvestment of distributions | 16,259 | 406,708 | |||||||||
Shares repurchased | (32,553,348 | ) | (814,041,945 | ) | |||||||
Net increase (decrease) | 9,384,067 | $ | 234,588,981 |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
13
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
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, to be relevant. At a meeting on December 4, 2008, the Trustees discussed materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their 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. During the meeting, the Trustees met with members of the Manager's Fixed Income Division, the investment division that would be responsible for overall investment management of the Fund. As discussed below, at meetings throughout the year, the Trustees also considered other information releva nt to approval of the Fund's investment management agreement.
The Trustees considered that they had met with the Manager's investment advisory personnel over the course of the year with respect to other funds of the Trust. The Trustees also considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel who would be providing 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 internal 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 the Manager's senior management to the Fund. The Trustees considered the business reputati on 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 that the Fund's purpose is to serve as an investment vehicle for the Trust's other funds and GMO separate account clients rather than as a stand-alone fund, the qualifications and experience of the personnel responsible for managing those 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 to be paid under the Fund's investment management agreement. In evaluating those fees, the Trustees 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 how the proposed fees compared to fees paid by other funds of GMO Trust and so-called "fallout benefits" to the Manager, such as the possible reputational value to be derived from serving as investment manager to the Fund. As the Fund had not yet commenced operations, the Trustees did not consider possible economies of scale to the Manager associated with managing the Fund. 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.
14
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
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 considered 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also took into account information concerning the Manager's practices and results with respect to the execution of portfolio transactions that they received over the course of the year. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services to be provided by the Manager to the Fund under the investment management agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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 with respect t o 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.
Following their review, on December 4, 2008, 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 U.S. Treasury Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the period ended August 31, 2009.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management 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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.00 | % | $ | 1,000.00 | $ | 1,001.90 | $ | 0.00 | (a) | ||||||||||
2) Hypothetical | 0.00 | % | $ | 1,000.00 | $ | 1,025.21 | $ | 0.00 | (b) |
(a) For the period March 17, 2009 (commencement of operations) through August 31, 2009. Expense is calculated using the Fund's annualized net expense ratio for the period ended August 31, 2009, multiplied by the average account value over the period, multiplied by 168 days in the period, divided by 365 days in the year.
(b) For the period March 1, 2009 through August 31, 2009. Expense is calculated using the Fund's annualized net expense ratio for the period ended August 31, 2009, 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%.
16
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 96.4 | % | |||||
Short-Term Investments | 3.9 | ||||||
Futures | 0.3 | ||||||
Preferred Stocks | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Forward Currency Contracts | (1.1 | ) | |||||
Other | 0.5 | ||||||
100.0 | % | ||||||
Country / Region Summary** | % of Investments | ||||||
Euro Region*** | 27.9 | % | |||||
Japan | 24.9 | ||||||
United Kingdom | 23.3 | ||||||
Switzerland | 9.1 | ||||||
Sweden | 4.6 | ||||||
Australia | 4.4 | ||||||
Canada | 1.9 | ||||||
Singapore | 1.4 | ||||||
Denmark | 1.1 | ||||||
Hong Kong | 0.9 | ||||||
Norway | 0.3 | ||||||
New Zealand | 0.2 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts. The Fund attempts to hedge at least 70% of the foreign currency exposure in the underlying fund's investments relative to the U.S. Dollar. Therefore, the Fund's currency exposures will be different than the country exposures noted above.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia 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, 2009 (Unaudited)
Shares/ Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 99.5% | |||||||||||
United States — 99.5% | |||||||||||
Affiliated Issuers | |||||||||||
838,301 | GMO International Growth Equity Fund, Class IV | 16,053,470 | |||||||||
786,780 | GMO International Intrinsic Value Fund, Class IV | 16,184,061 | |||||||||
Total United States | 32,237,531 | ||||||||||
TOTAL MUTUAL FUNDS (COST $38,440,562) | 32,237,531 | ||||||||||
SHORT-TERM INVESTMENTS — 1.9% | |||||||||||
30,320 | Bank of Ireland Time Deposit, 0.03%, due 09/01/09 | 30,320 | |||||||||
14 | Brown Brothers Harriman Time Deposit, 0.02%, due 09/01/09 | 14 | |||||||||
600,000 | Societe Generale Time Deposit, 0.13%, due 09/01/09 | 600,000 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $630,334) | 630,334 | ||||||||||
TOTAL INVESTMENTS — 101.4% (Cost $39,070,896) | 32,867,865 | ||||||||||
Other Assets and Liabilities (net) — (1.4%) | (460,583 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 32,407,282 |
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, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys † | |||||||||||||||||||
10/23/09 | CAD | 342,000 | $ | 312,427 | $ | 3,462 | |||||||||||||
10/23/09 | CHF | 148,000 | 139,833 | 2,819 | |||||||||||||||
10/23/09 | JPY | 13,368,000 | 143,716 | 1,621 | |||||||||||||||
10/23/09 | NZD | 65,000 | 44,461 | 1,001 | |||||||||||||||
$ | 640,437 | $ | 8,903 | ||||||||||||||||
Sales # | |||||||||||||||||||
10/23/09 | AUD | 1,439,072 | $ | 1,211,333 | $ | (31,380 | ) | ||||||||||||
10/23/09 | AUD | 1,439,072 | 1,211,333 | (32,733 | ) | ||||||||||||||
10/23/09 | AUD | 154,000 | 129,629 | (4,216 | ) | ||||||||||||||
10/23/09 | CHF | 803,409 | 759,076 | (14,561 | ) | ||||||||||||||
10/23/09 | CHF | 779,779 | 736,750 | (11,185 | ) | ||||||||||||||
10/23/09 | CHF | 779,779 | 736,750 | (10,980 | ) | ||||||||||||||
10/23/09 | DKK | 5,020,078 | 965,861 | (16,316 | ) | ||||||||||||||
10/23/09 | DKK | 4,385,078 | 843,688 | (13,291 | ) | ||||||||||||||
10/23/09 | EUR | 1,616,444 | 2,317,386 | (42,026 | ) | ||||||||||||||
10/23/09 | EUR | 870,444 | 1,247,897 | (18,462 | ) | ||||||||||||||
10/23/09 | EUR | 870,444 | 1,247,897 | (22,276 | ) | ||||||||||||||
10/23/09 | EUR | 870,444 | 1,247,897 | (19,824 | ) | ||||||||||||||
10/23/09 | EUR | 870,444 | 1,247,897 | (20,683 | ) | ||||||||||||||
10/23/09 | EUR | 870,444 | 1,247,897 | (20,736 | ) | ||||||||||||||
10/23/09 | EUR | 870,444 | 1,247,897 | (18,020 | ) | ||||||||||||||
10/23/09 | GBP | 384,951 | 626,631 | 5,961 | |||||||||||||||
10/23/09 | GBP | 384,951 | 626,631 | 10,771 | |||||||||||||||
10/23/09 | GBP | 384,951 | 626,630 | 6,537 | |||||||||||||||
10/23/09 | GBP | 384,951 | 626,630 | 9,519 | |||||||||||||||
10/23/09 | GBP | 384,951 | 626,630 | 9,307 | |||||||||||||||
10/23/09 | GBP | 857,951 | 1,396,589 | 6,549 | |||||||||||||||
10/23/09 | GBP | 384,951 | 626,630 | 9,986 | |||||||||||||||
10/23/09 | HKD | 4,739,380 | 611,747 | (15 | ) | ||||||||||||||
10/23/09 | JPY | 85,349,849 | 917,575 | (15,921 | ) |
See accompanying notes to the financial statements.
3
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Forward Currency Contracts — continued
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
10/23/09 | JPY | 85,349,849 | $ | 917,575 | $ | (16,167 | ) | ||||||||||||
10/23/09 | JPY | 85,349,849 | 917,575 | (15,448 | ) | ||||||||||||||
10/23/09 | JPY | 85,349,849 | 917,575 | (16,643 | ) | ||||||||||||||
10/23/09 | JPY | 159,783,849 | 1,717,797 | (29,144 | ) | ||||||||||||||
10/23/09 | JPY | 85,349,849 | 917,575 | (15,986 | ) | ||||||||||||||
10/23/09 | JPY | 85,349,849 | 917,575 | (16,453 | ) | ||||||||||||||
10/23/09 | NOK | 4,075,524 | 676,251 | (16,023 | ) | ||||||||||||||
10/23/09 | NZD | 207,000 | 141,590 | (4,463 | ) | ||||||||||||||
10/23/09 | SEK | 3,038,998 | 427,010 | (8,822 | ) | ||||||||||||||
10/23/09 | SEK | 3,038,998 | 427,010 | (7,624 | ) | ||||||||||||||
10/23/09 | SGD | 505,286 | 350,491 | (1,994 | ) | ||||||||||||||
10/23/09 | SGD | 505,286 | 350,491 | (2,210 | ) | ||||||||||||||
$ | 31,763,396 | $ | (404,972 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
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
USD - United States Dollar
See accompanying notes to the financial statements.
4
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $630,334) (Note 2) | $ | 630,334 | |||||
Investments in affiliated issuers, at value (cost $38,440,562) (Notes 2 and 8) | 32,237,531 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 67,533 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 29,209 | ||||||
Total assets | 32,964,607 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 14,649 | ||||||
Shareholder service fee | 4,072 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 68 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 463,602 | ||||||
Accrued expenses | 74,934 | ||||||
Total liabilities | 557,325 | ||||||
Net assets | $ | 32,407,282 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 46,342,798 | |||||
Accumulated undistributed net investment income | 327,245 | ||||||
Accumulated net realized loss | (7,663,661 | ) | |||||
Net unrealized depreciation | (6,599,100 | ) | |||||
$ | 32,407,282 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 32,407,282 | |||||
Shares outstanding: | |||||||
Class III | 12,438,236 | ||||||
Net asset value per share: | |||||||
Class III | $ | 2.61 |
See accompanying notes to the financial statements.
5
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 564,762 | |||||
Interest | 1,036 | ||||||
Total investment income | 565,798 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 78,333 | ||||||
Shareholder service fee – Class III (Note 3) | 21,762 | ||||||
Custodian and fund accounting agent fees | 33,236 | ||||||
Audit and tax fees | 30,912 | ||||||
Transfer agent fees | 13,524 | ||||||
Registration fees | 2,116 | ||||||
Legal fees | 460 | ||||||
Trustees fees and related expenses (Note 3) | 233 | ||||||
Miscellaneous | 273 | ||||||
Total expenses | 180,849 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (80,340 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (71,353 | ) | |||||
Shareholder service fee waived (Note 3) | (12,844 | ) | |||||
Net expenses | 16,312 | ||||||
Net investment income (loss) | 549,486 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (3,747,168 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (2,395,451 | ) | |||||
Net realized gain (loss) | (6,142,619 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in affiliated issuers | 13,189,551 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (604,252 | ) | |||||
Net unrealized gain (loss) | 12,585,299 | ||||||
Net realized and unrealized gain (loss) | 6,442,680 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 6,992,166 |
See accompanying notes to the financial statements.
6
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 549,486 | $ | 1,003,127 | |||||||
Net realized gain (loss) | (6,142,619 | ) | 1,816,102 | ||||||||
Change in net unrealized appreciation (depreciation) | 12,585,299 | (13,166,709 | ) | ||||||||
Net increase (decrease) in net assets from operations | 6,992,166 | (10,347,480 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (2,756,296 | ) | (1,457,990 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (8,027,267 | ) | ||||||||
(2,756,296 | ) | (9,485,257 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 2,754,271 | 14,976,832 | |||||||||
Total increase (decrease) in net assets | 6,990,141 | (4,855,905 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 25,417,141 | 30,273,046 | |||||||||
End of period (including accumulated undistributed net investment income of $327,245 and $2,534,055, respectively) | $ | 32,407,282 | $ | 25,417,141 |
See accompanying notes to the financial statements.
7
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 2.26 | $ | 5.32 | $ | 7.45 | $ | 9.07 | $ | 8.38 | $ | 7.33 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.05 | 0.15 | 0.03 | 0.10 | 0.07 | 0.21 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.55 | (1.60 | ) | (0.29 | ) | 1.17 | 2.17 | 0.84 | |||||||||||||||||||
Total from investment operations | 0.60 | (1.45 | ) | (0.26 | ) | 1.27 | 2.24 | 1.05 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.25 | ) | (0.20 | ) | — | (0.12 | ) | (0.71 | )(b) | — | |||||||||||||||||
From net realized gains | — | (1.41 | ) | (1.87 | ) | (2.77 | ) | (0.84 | ) | — | |||||||||||||||||
Total distributions | (0.25 | ) | (1.61 | ) | (1.87 | ) | (2.89 | ) | (1.55 | ) | — | ||||||||||||||||
Net asset value, end of period | $ | 2.61 | $ | 2.26 | $ | 5.32 | $ | 7.45 | $ | 9.07 | $ | 8.38 | |||||||||||||||
Total Return(c) | 27.68 | %** | (35.57 | )% | (6.75 | )% | 15.60 | % | 28.42 | % | 14.32 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 32,407 | $ | 25,417 | $ | 30,273 | $ | 227,096 | $ | 728,814 | $ | 580,905 | |||||||||||||||
Net expenses to average daily net assets(d) | 0.11 | %* | 0.11 | %(e) | 0.08 | %(e) | 0.07 | % | 0.05 | % | 0.04 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 3.79 | %* | 3.96 | % | 0.42 | % | 1.23 | % | 0.82 | % | 2.64 | % | |||||||||||||||
Portfolio turnover rate | 6 | %** | 17 | % | 11 | % | 18 | % | 36 | % | 3 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 1.13 | %* | 1.24 | % | 0.71 | % | 0.68 | % | 0.67 | % | 0.71 | % |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds 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 and/or waived during the periods shown and assumes the effect of reinvested distributions.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(e) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
8
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Currency Hedged International Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the MSCI EAFE Index (Europe, Australasia, and Far East) (Hedged). The Fund is a fund of funds and invests primarily in other series of the Trust. The Fund may invest to varying extents in GMO International Core Equity Fund, GMO International Intrinsic Value Fund, GMO International Growth Equity Fund, GMO International Small Companies Fund, and GMO Flexible Equities Fund (the GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). Under normal circumstances, the Fund invests at least 80% of its assets in equity investments (which include common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depository receipts). GMO attempts to hedge at least 70% of the foreign currency exposure in the underlying funds' investments relative to the U.S. dollar through the use of currency forwards and ot her derivatives. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and other cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
The financial statements of the 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 visiting GMO's website at www.gmo.com.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
9
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Portfolio valuation
Shares of the underlying funds and other mutual funds are generally valued at their net asset value.
Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty. 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 t he NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 92.48% of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on models used by a third party vendor. Those underlying funds classify such securities under SFAS 157 (as defined below) as Level 2.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based on inputs that are unobservable and significant.
10
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | |||||||||||||||||||
United States | $ | 32,237,531 | $ | — | $ | — | $ | 32,237,531 | |||||||||||
Short-Term Investments | 630,334 | — | — | 630,334 | |||||||||||||||
Total Investments | 32,867,865 | — | — | 32,867,865 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | — | 67,533 | — | 67,533 | |||||||||||||||
Total | $ | 32,867,865 | $ | 67,533 | $ | — | $ | 32,935,398 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | $ | — | $ | (463,602 | ) | $ | — | $ | (463,602 | ) | |||||||||
Total | $ | — | $ | (463,602 | ) | $ | — | $ | (463,602 | ) |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financials statements.
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
11
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. 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. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the
12
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the-counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
13
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying
14
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the stri ke price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after
15
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 42,618,940 | $ | — | $ | (9,751,075 | ) | $ | (9,751,075 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
16
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
Brown Brothers Harriman & Co. ("BBH") serves as custodian and fund accounting agent of the Fund. State Street Bank and Trust Company ("State Street") serves as transfer agent of the Fund. BBH and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund, including those risks to which the Fund is exposed as a result of its investments in underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities held by underlying funds may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and its underlying funds generally seek to be fully invested and normally do not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's and the underlying funds' investments.
17
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
• Derivatives Risk — The use of derivatives by the Fund or underlying funds involves risks different from, and potentially greater than, risks associated with direct investments in securities and other assets. Derivatives may increase other Fund risks, including market risk, liquidity risk, and credit and counterparty risk, and their value may or may not correlate with the value of the relevant underlying asset. The risk to the Fund of using derivatives is particularly pronounced because the Fund typically makes frequent use of currency forwards and other derivatives for hedging purposes.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund or an underlying fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent an underlying fund from selling securities or closing derivative positions at desirable prices.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests will not perform as expected.
Other principal risks of an investment in the Fund include Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments by an underlying fund in companies with smaller market capitalizations), Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of an underlying fund's investments denominated in foreign currencies, or that the U.S. dollar will decline in value relative to the foreign currency being hedged by the Fund or an underlying fund), Credit and Counterparty Risk (risk of default of a derivatives counterparty of the Fund or an underlying fund or a borrower of an underlying fund's securities), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by an underlying fund may affect the Fund's performance more than if the Fund were diversified.
18
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund uses derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may take active overweighted and underweighted positions in particular currencies relative to its benchmark. The Manager looks at the holdings of the GMO Trust Funds in which the Fund invests (the "underlying Funds") to measure base currency exposure and then attempts to hedge at least 70% of the foreign currency exposure in the underlying Funds' investments relative to the U.S. dollar through the use of currency forwards and other derivatives.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with
19
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
a limited number of counterparties and events that affect the creditworthiness of any one of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
20
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options, rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 67,533 | — | — | — | 67,533 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | 67,533 | $ | — | $ | — | $ | — | $ | 67,533 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | (463,602 | ) | — | — | — | (463,602 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | (463,602 | ) | $ | — | $ | — | $ | — | $ | (463,602 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
21
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options, rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | (2,460,995 | ) | — | — | — | (2,460,995 | ) | |||||||||||||||||||
Total | $ | — | $ | (2,460,995 | ) | $ | — | $ | — | $ | — | $ | (2,460,995 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options, rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | (604,252 | ) | — | — | — | (604,252 | ) | |||||||||||||||||||
Total | $ | — | $ | (604,252 | ) | $ | — | $ | — | $ | — | $ | (604,252 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Forwards | |||||||
Average notional amount outstanding | $ | 30,036,162 | |||||
Highest notional amount outstanding | 32,590,924 | ||||||
Lowest notional amount outstanding | 27,103,029 |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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
22
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.54% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses incurred indirectly by investment in the underlying funds, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage co mmissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, nonrecurring and certain other unusual expenses (including taxes) (collectively, "Excluded Fund Fees and Expenses"). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 direct or indirect investment in 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.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 | |||||||||
0.497 | % | 0.089 | % | 0.586 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $233 and $184, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
23
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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, 2009 aggregated $1,662,762 and $3,841,000, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 99.84% of the outstanding shares of the Fund were held by one shareholder.
As of August 31, 2009, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 99.84% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | 3,152,794 | $ | 7,126,233 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,188,047 | 2,756,270 | 2,760,917 | 9,207,751 | |||||||||||||||
Shares repurchased | (897 | ) | (1,999 | ) | (353,573 | ) | (1,357,152 | ) | |||||||||||
Net increase (decrease) | 1,187,150 | $ | 2,754,271 | 5,560,138 | $ | 14,976,832 |
24
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 IV | $ | 12,499,409 | $ | 1,163,645 | $ | 1,584,500 | $ | 373,645 | $ | — | $ | 16,053,470 | |||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 12,473,977 | 499,117 | 2,256,500 | 191,117 | — | 16,184,061 | |||||||||||||||||||||
Totals | $ | 24,973,386 | $ | 1,662,762 | $ | 3,841,000 | $ | 564,762 | $ | — | $ | 32,237,531 |
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
25
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The
26
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for advisory fees, shareholder fees and most other expenses of the underlying funds 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal
27
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
28
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | $ | 1,276.80 | $ | 4.02 | |||||||||||
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, 2009, 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 Global Equity Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 94.7 | % | |||||
Short-Term Investments | 2.6 | ||||||
Cash and Cash Equivalents | 1.2 | ||||||
Preferred Stocks | 1.0 | ||||||
Debt Obligations | 0.1 | ||||||
Private Equity Securities | 0.0 | ||||||
Investment Funds | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Convertible Securities | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Reverse Repurchase Agreements | (0.0 | ) | |||||
Swaps | (0.5 | ) | |||||
Futures | (0.7 | ) | |||||
Other | 1.6 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Country Summary** | % of Investments | ||||||
United States | 39.6 | % | |||||
Euro Region*** | 13.8 | ||||||
Japan | 13.6 | ||||||
United Kingdom | 10.7 | ||||||
Switzerland | 4.7 | ||||||
South Korea | 2.4 | ||||||
Australia | 1.7 | ||||||
Sweden | 1.7 | ||||||
Russia | 1.6 | ||||||
Brazil | 1.5 | ||||||
China | 1.3 | ||||||
Taiwan | 1.3 | ||||||
Turkey | 1.1 | ||||||
India | 0.7 | ||||||
Singapore | 0.7 | ||||||
Thailand | 0.6 | ||||||
Canada | 0.5 | ||||||
Hong Kong | 0.5 | ||||||
Denmark | 0.3 | ||||||
Indonesia | 0.3 | ||||||
Poland | 0.3 | ||||||
Egypt | 0.2 | ||||||
Malaysia | 0.2 | ||||||
South Africa | 0.2 | ||||||
Israel | 0.1 | ||||||
Mexico | 0.1 | ||||||
New Zealand | 0.1 | ||||||
Norway | 0.1 | ||||||
Philippines | 0.1 | ||||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds except for GMO Alpha Only Fund. The table excludes short-term investments. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
2
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
AFFILIATED ISSUERS — 100.0% | |||||||||||
Mutual Funds — 100.0% | |||||||||||
1,974,391 | GMO Alpha Only Fund, Class IV | 9,832,467 | |||||||||
6,603,954 | GMO Emerging Markets Fund, Class VI | 70,332,106 | |||||||||
687,336 | GMO Flexible Equities Fund, Class VI | 14,042,272 | |||||||||
4,140,036 | GMO International Core Equity Fund, Class VI | 110,290,556 | |||||||||
3,172,397 | GMO International Growth Equity Fund, Class IV | 60,751,412 | |||||||||
3,069,359 | GMO International Intrinsic Value Fund, Class IV | 63,136,705 | |||||||||
1,609,023 | GMO International Small Companies Fund, Class III | 11,070,081 | |||||||||
12,465,724 | GMO Quality Fund, Class VI | 219,272,076 | |||||||||
16,896 | GMO Short-Duration Investment Fund, Class III | 131,281 | |||||||||
3,353,566 | GMO U.S. Core Equity Fund, Class VI | 32,797,879 | |||||||||
1,039 | GMO U.S. Growth Fund, Class III | 13,819 | |||||||||
591,670,654 | |||||||||||
Private Investment Fund — 0.0% | |||||||||||
175 | GMO SPV I, LLC (a) | 39 | |||||||||
TOTAL AFFILIATED ISSUERS (COST $533,990,273) | 591,670,693 | ||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||
29,068 | State Street Eurodollar Time Deposit , 0.01%, due 09/01/09 | 29,068 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $29,068) | 29,068 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $534,019,341) | 591,699,761 | ||||||||||
Other Assets and Liabilities (net) — (0.0%) | (31,440 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 591,668,321 |
See accompanying notes to the financial statements.
3
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Notes to Schedule of Investments:
(a) Underlying investment represents interests in defaulted securities.
See accompanying notes to the financial statements.
4
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $29,068) (Note 2) | $ | 29,068 | |||||
Investments in affiliated issuers, at value (cost $533,990,273) (Notes 2 and 8) | 591,670,693 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 8,866 | ||||||
Total assets | 591,708,627 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 923 | ||||||
Accrued expenses | 39,383 | ||||||
Total liabilities | 40,306 | ||||||
Net assets | $ | 591,668,321 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 680,842,115 | |||||
Accumulated undistributed net investment income | 5,958,842 | ||||||
Accumulated net realized loss | (152,813,056 | ) | |||||
Net unrealized appreciation | 57,680,420 | ||||||
$ | 591,668,321 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 591,668,321 | |||||
Shares outstanding: | |||||||
Class III | 82,133,888 | ||||||
Net asset value per share: | |||||||
Class III | $ | 7.20 |
See accompanying notes to the financial statements.
5
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 5,964,171 | |||||
Total investment income | 5,964,171 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 19,688 | ||||||
Audit and tax fees | 16,376 | ||||||
Legal fees | 8,740 | ||||||
Trustees fees and related expenses (Note 3) | 4,532 | ||||||
Registration fees | 4,140 | ||||||
Miscellaneous | 4,136 | ||||||
Total expenses | 57,612 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (50,968 | ) | |||||
Expense reductions (Note 2) | (1,315 | ) | |||||
Net expenses | 5,329 | ||||||
Net investment income (loss) | 5,958,842 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (132,541,185 | ) | |||||
Net realized gain (loss) | (132,541,185 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in affiliated issuers | 257,691,916 | ||||||
Net realized and unrealized gain (loss) | 125,150,731 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 131,109,573 |
See accompanying notes to the financial statements.
6
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 5,958,842 | $ | 14,470,249 | |||||||
Net realized gain (loss) | (132,541,185 | ) | (7,893,357 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 257,691,916 | (182,023,986 | ) | ||||||||
Net increase (decrease) in net assets from operations | 131,109,573 | (175,447,094 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (15,018,150 | ) | ||||||||
Net realized gains | |||||||||||
Class III | (3,648,757 | ) | (35,633,100 | ) | |||||||
(3,648,757 | ) | (50,651,250 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 32,543,726 | 300,532,912 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 385,592 | 319,677 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 32,929,318 | 300,852,589 | |||||||||
Total increase (decrease) in net assets | 160,390,134 | 74,754,245 | |||||||||
Net assets: | |||||||||||
Beginning of period | 431,278,187 | 356,523,942 | |||||||||
End of period (including accumulated undistributed net investment income of $5,958,842 and $0, respectively) | $ | 591,668,321 | $ | 431,278,187 |
See accompanying notes to the financial statements.
7
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 5.29 | $ | 10.25 | $ | 11.96 | $ | 11.89 | $ | 11.63 | $ | 10.86 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.08 | 0.34 | 0.20 | 0.23 | 0.23 | 0.23 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 1.88 | (4.01 | ) | 0.09 | (b) | 1.08 | 1.32 | 1.23 | |||||||||||||||||||
Total from investment operations | 1.96 | (3.67 | ) | 0.29 | 1.31 | 1.55 | 1.46 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.31 | ) | (0.49 | ) | (0.38 | ) | (0.34 | ) | (0.27 | ) | ||||||||||||||||
From net realized gains | (0.05 | ) | (0.98 | ) | (1.51 | ) | (0.86 | ) | (0.95 | ) | (0.42 | ) | |||||||||||||||
Total distributions | (0.05 | ) | (1.29 | ) | (2.00 | ) | (1.24 | ) | (1.29 | ) | (0.69 | ) | |||||||||||||||
Net asset value, end of period | $ | 7.20 | $ | 5.29 | $ | 10.25 | $ | 11.96 | $ | 11.89 | $ | 11.63 | |||||||||||||||
Total Return(c) | 37.17 | %** | (39.44 | )% | 1.01 | % | 11.56 | % | 13.91 | % | 13.70 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 591,668 | $ | 431,278 | $ | 356,524 | $ | 354,236 | $ | 326,032 | $ | 335,819 | |||||||||||||||
Net expenses to average daily net assets(d)(e) | 0.00 | %(f)* | 0.00 | %(f) | 0.00 | %(f) | 0.00 | % | 0.00 | % | 0.00 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 2.59 | %* | 4.27 | % | 1.63 | % | 1.90 | % | 1.99 | % | 2.11 | % | |||||||||||||||
Portfolio turnover rate | 34 | %** | 52 | % | 30 | % | 15 | % | 20 | % | 17 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.03 | % | 0.02 | % | 0.02 | % | 0.02 | % | 0.04 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.01 | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 0.00 | (g) |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds 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 returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. 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 funds (See Note 3).
(e) Net expenses to average daily net assets were less than 0.01%.
(f) The net expense ratio does not include the effect of expense reductions.
(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 Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Global Equity Allocation Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the MSCI ACWI (All Country World Index) Index. The Fund is a fund of funds and invests primarily in shares of the GMO International Equity Funds and the GMO U.S. Equity Funds. The Fund may also invest in shares of other series of the Trust, including the GMO Fixed Income Funds, GMO Alpha Only Fund, GMO Flexible Equities Fund, and GMO Alternative Asset Opportunity Fund (the GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). Although the Fund's primary exposure is to foreign and U.S. equity securities (including emerging country equities, both growth and value style equities, and equities of any market capitalization), the Fund also may have exposure to foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), the investment returns of commodities and, f rom time to time, other alternative asset classes. Under normal circumstances, the Fund invests at least 80% of its assets in equity investments (which include common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depository receipts). The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and other cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
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). As of August 31, 2009, shares of GMO Flexible Equities Fund were not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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
9
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
in the financial statements. Actual results could differ from those estimates. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Shares of the underlying funds and other mutual funds are generally valued at their net asset value.
Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 54.10% of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on models used by a third party vendor. Those underlying funds classify such securities under SFAS 157 (as defined below) as Level 2.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
10
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Level 3 – Valuations based on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | 577,628,382 | $ | 14,042,272 | $ | — | $ | 591,670,654 | |||||||||||
Private Investment Fund | — | 39 | — | 39 | |||||||||||||||
Short-Term Investments | 29,068 | — | — | 29,068 | |||||||||||||||
Total | $ | 577,657,450 | $ | 14,042,311 | $ | — | $ | 591,699,761 |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net value of the Fund's indirect investments in securities using Level 3 inputs was 0.76% of total net assets.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Private Investment Fund | $ | 49 | $ | — | $ | — | $ | — | $ | (10 | ) | $ | (39 | ) | $ | — | |||||||||||||||
Total | $ | 49 | $ | — | $ | — | $ | — | $ | (10 | ) | $ | (39 | ) | $ | — |
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
11
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 674,422,745 | $ | — | $ | (82,722,984 | ) | $ | (82,722,984 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Income dividends and capital gain distributions from the underlying funds 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
12
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the six-month period ended August 31, 2009, the premium on cash purchases and the fee on cash redemptions were each 0.12% of the amount invested or redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospective or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and /or redemption fees may be waived at the Manager's discretion when they are de minimis and /or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and /or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and /or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redem ption of a Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer
13
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities held by underlying funds may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and its underlying funds generally seek to be fully invested and normally do not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's and the underlying funds' investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. An underlying fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent an underlying fund from selling securities or closing derivative positions at desirable prices.
• Derivatives Risk — The use of derivatives by underlying funds involves risks different from, and potentially greater than, risks associated with direct investments in securities and other assets. Derivatives may increase other Fund risks, including market risk, liquidity risk, and credit and counterparty risk, and their value may or may not correlate with the value of the relevant underlying asset.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests will not perform as
14
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, investments in underlying funds with higher fees or expenses than the underlying funds in which the Fund is invested will increase the Fund's total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may potentially be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
• Market Risk — Fixed Income Securities — Typically, the value of an underlying fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
Other principal risks of an investment in the Fund include Smaller Company Risk (greater market risk and liquidity risk resulting from investments by an underlying fund in companies with smaller market capitalizations), Commodities Risk (value of an underlying fund's shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments), Currency Risk (risk that fluctuations in exchange rates m ay adversely affect the value of an underlying fund's investments denominated in foreign currencies or that the U.S. dollar will decline in value relative to a foreign currency being hedged by an underlying fund), Leveraging Risk (increased risks from use of reverse repurchase agreements and other derivatives and securities lending by an underlying fund), Credit and Counterparty Risk (risk of default of an issuer of a portfolio security or a derivatives counterparty of an underlying fund or a borrower of an underlying fund's securities), Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate related investments that factors affecting the real estate industry may cause the value of the underlying fund's investments to fluctuate more than if it invested in securities of companies in a broader range of industries), Short Sales Risk (risk that an underlying fund's loss on the short sale of securities that it does not own is unlimited), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). Some of the underlying funds are non-diversified investment companies under the 1940 Act, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
15
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund adopted SFAS 161 on March 1, 2009. As of August 31, 2009, the Fund held no derivative contracts for the purposes of SFAS 161.
3. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent that the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.00% of the fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, nonrecurring and certain other unusual expenses (including taxes).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 | ||||||||||||
0.451 | % | 0.063 | % | 0.000 | % | 0.514 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $3,612 and $2,116, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
16
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the period ended August 31, 2009 aggregated $192,689,874 and $157,459,039, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 24.76% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, less than 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 30,132,857 | $ | 189,788,668 | 43,957,397 | $ | 281,047,058 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 445,443 | 2,841,923 | 5,687,137 | 43,314,729 | |||||||||||||||
Shares repurchased | (29,896,614 | ) | (160,086,865 | ) | (2,975,721 | ) | (23,828,875 | ) | |||||||||||
Purchase premiums | — | 211,030 | — | 310,403 | |||||||||||||||
Redemption fees | — | 174,562 | — | 9,274 | |||||||||||||||
Net increase (decrease) | 681,686 | $ | 32,929,318 | 46,668,813 | $ | 300,852,589 |
17
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 IV | $ | 15,228,232 | $ | 3,375,887 | $ | 7,555,616 | $ | 436,505 | $ | — | $ | 9,832,467 | |||||||||||||||
GMO Emerging Markets Fund, Class VI | 39,020,469 | 23,144,209 | 15,555,697 | 161,497 | — | 70,332,106 | |||||||||||||||||||||
GMO Flexible Equities Fund, Class VI | 8,309,024 | 5,285,269 | 2,309,812 | — | — | 14,042,272 | |||||||||||||||||||||
GMO International Core Equity Fund, Class VI | 90,834,974 | 20,589,850 | 32,402,478 | 824,816 | — | 110,290,556 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | 37,592,210 | 26,935,060 | 15,187,650 | 1,434,174 | — | 60,751,412 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 32,338,156 | 27,955,374 | 13,190,227 | 743,063 | — | 63,136,705 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | — | 10,103,430 | — | 36,271 | — | 11,070,081 | |||||||||||||||||||||
GMO Quality Fund, Class VI | 178,925,759 | 68,386,890 | 62,147,035 | 2,020,247 | — | 219,272,076 | |||||||||||||||||||||
GMO Short-Duration Investment Fund, Class III | 119,922 | 916 | — | 916 | — | 131,281 | |||||||||||||||||||||
GMO SPV I, LLC | 49 | — | — | — | — | 39 | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | 28,906,379 | 6,911,967 | 9,106,721 | 306,576 | — | 32,797,879 | |||||||||||||||||||||
GMO U.S. Growth Fund, Class III | 13,953 | 1,022 | 3,803 | 106 | — | 13,819 | |||||||||||||||||||||
Totals | $ | 431,289,127 | $ | 192,689,874 | $ | 157,459,039 | $ | 5,964,171 | $ | — | $ | 591,670,693 |
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. Effective September 14, 2009, the premium on cash purchases was 0.11% of the amount invested and the fee an cash redemptions was 0.11% of the amount redeemed.
18
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 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
19
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
considered so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 and the Trust as a whole (including the effect of recent market events and changes in assets under management and revenues on such profitability); information prepared by third-party data services concerning fees paid to managers of funds deemed by those services 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 with similar objectives.
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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
20
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (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.
Following their review, on June 15, 2009, 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, 2009.
21
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | $ | 1,371.70 | $ | 3.11 | |||||||||||
2) Hypothetical | 0.52 | % | $ | 1,000.00 | $ | 1,022.58 | $ | 2.65 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
22
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 77.9 | % | |||||
Debt Obligations | 16.9 | ||||||
Short-Term Investments | 4.4 | ||||||
Cash and Cash Equivalents | 3.3 | ||||||
Options Purchased | 0.3 | ||||||
Loan Participations | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Preferred Stocks | 0.0 | ||||||
Loan Assignments | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Written Options | (0.1 | ) | |||||
Reverse Repurchase Agreements | (1.2 | ) | |||||
Swaps | (1.2 | ) | |||||
Futures | (2.3 | ) | |||||
Other | 2.0 | ||||||
100.0 | % | ||||||
Country / Region Summary** | % of Investments | ||||||
United States | 54.4 | % | |||||
Japan | 12.9 | ||||||
Euro Region*** | 11.7 | ||||||
United Kingdom | 10.2 | ||||||
Switzerland | 4.7 | ||||||
Sweden | 1.9 | ||||||
Australia | 1.6 | ||||||
Canada | 0.8 | ||||||
Singapore | 0.6 | ||||||
Denmark | 0.4 | ||||||
Hong Kong | 0.3 | ||||||
Emerging | 0.2 | ||||||
New Zealand | 0.1 | ||||||
Norway | 0.1 | ||||||
Russia | 0.1 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds except for GMO Alpha Only Fund. The table excludes short-term investments. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
1
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 2.5% | |||||||||||||||
Asset-Backed Securities — 2.5% | |||||||||||||||
Auto Financing — 0.3% | |||||||||||||||
234,076 | BMW Vehicle Lease Trust, Series 07-1, Class A3B, 1 mo. LIBOR + .24%, 0.51%, due 08/15/13 | 233,945 | |||||||||||||
600,000 | Capital Auto Receivable Asset Trust, Series 08-1, Class A4B, 1 mo. LIBOR + 1.35%, 1.62%, due 07/15/14 | 572,628 | |||||||||||||
500,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 1.85%, 2.13%, due 11/10/14 | 481,250 | |||||||||||||
40,241 | Daimler Chrysler Master Owner Trust, Series 06-A, Class A, 1 mo. LIBOR + .03%, 0.30%, due 11/15/11 | 40,052 | |||||||||||||
800,000 | Ford Credit Auto Owner Trust, Series 07-B, Class A4B, 1 mo. LIBOR + .38%, 0.65%, due 07/15/12 | 790,000 | |||||||||||||
700,000 | Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.52%, due 06/15/13 | 651,000 | |||||||||||||
300,000 | Nissan Auto Lease Trust, Series 08-A, Class A3B, 1 mo. LIBOR + 2.20%, 2.47%, due 07/15/11 | 298,320 | |||||||||||||
300,000 | Nissan Auto Receivables Owner Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.27%, due 06/17/13 | 298,409 | |||||||||||||
200,000 | Nissan Master Owner Trust Receivables, Series 07-A, Class A, 1 mo. LIBOR, 0.27%, due 05/15/12 | 191,000 | |||||||||||||
500,000 | Swift Master Auto Receivables Trust, Series 07-1, Class A, 1 mo. LIBOR + .10%, 0.37%, due 06/15/12 | 465,000 | |||||||||||||
800,000 | Truck Retail Installment Paper Corp., Series 05-1A, Class A, 144A, 1 mo. LIBOR + .27%, 0.54%, due 12/15/16 | 690,081 | |||||||||||||
Total Auto Financing | 4,711,685 | ||||||||||||||
Bank Loan Collateralized Debt Obligations — 0.1% | |||||||||||||||
776,361 | Arran Corp. Loans No. 1 B.V., Series 06-1A, Class A3, 144A, 3 mo. LIBOR + .17%, 0.78%, due 06/20/25 | 722,744 | |||||||||||||
1,120,000 | Omega Capital Europe Plc, Series GLOB-5A, Class A1, 144A, 3 mo. LIBOR + .25%, 0.83%, due 07/05/11 | 996,800 | |||||||||||||
Total Bank Loan Collateralized Debt Obligations | 1,719,544 |
See accompanying notes to the financial statements.
2
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Business Loans — 0.2% | |||||||||||||||
1,068,467 | Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, 1 mo. LIBOR + .39%, 0.66%, due 01/25/36 | 694,503 | |||||||||||||
387,927 | GE Business Loan Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .29%, 0.56%, due 05/15/32 | 267,670 | |||||||||||||
700,000 | GE Dealer Floorplan Master Trust, Series 06-4, Class A, 1 mo. LIBOR + .01%, 0.28%, due 10/20/11 | 697,956 | |||||||||||||
774,186 | Lehman Brothers Small Balance Commercial, Series 05-2A, Class 1A, 144A, 1 mo. LIBOR + .25%, 0.52%, due 09/25/30 | 464,512 | |||||||||||||
400,000 | Navistar Financial Dealer Note Master Trust, Series 05-1, Class A, 1 mo. LIBOR + .11%, 0.39%, due 02/25/13 | 388,000 | |||||||||||||
Total Business Loans | 2,512,641 | ||||||||||||||
CMBS — 0.2% | |||||||||||||||
600,000 | Commercial Mortgage Pass-Through Certificates, Series 06-FL12, Class AJ, 144A, 1 mo. LIBOR + .13%, 0.40%, due 12/15/20 | 330,000 | |||||||||||||
500,000 | GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45 | 501,700 | |||||||||||||
600,000 | GS Mortgage Securities Corp., Series 07-EOP, Class A2, 144A, 1 mo. LIBOR + .13%, 0.41%, due 03/06/20 | 504,000 | |||||||||||||
600,000 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-LDP7, Class A2, 6.05%, due 04/15/45 | 604,862 | |||||||||||||
400,000 | Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, 5.79%, due 05/12/39 | 402,520 | |||||||||||||
398,434 | Wachovia Bank Commercial Mortgage Trust, Series 06-WL7A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.36%, due 09/15/21 | 286,873 | |||||||||||||
Total CMBS | 2,629,955 | ||||||||||||||
Credit Cards — 0.5% | |||||||||||||||
800,000 | American Express Credit Account Master Trust, Series 05-5, Class A, 1 mo. LIBOR + .04%, 0.31%, due 02/15/13 | 796,096 | |||||||||||||
800,000 | Cabela's Master Credit Card Trust, Series 08-4A, Class A2, 144A, 1 mo. LIBOR + 3.00%, 3.27%, due 09/15/14 | 821,048 | |||||||||||||
1,000,000 | Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, 3 mo. LIBOR + .15%, 0.59%, due 06/16/14 | 980,310 | |||||||||||||
300,000 | Capital One Multi-Asset Execution Trust, Series 07-A6, Class A6, 1 mo. LIBOR + .07%, 0.34%, due 05/15/13 | 298,068 |
See accompanying notes to the financial statements.
3
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Credit Cards — continued | |||||||||||||||
700,000 | Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.52%, due 09/15/17 | 646,723 | |||||||||||||
EUR | 600,000 | Citibank Credit Card Issuance Trust, Series 04-A2, Class A, 3 mo. EUR LIBOR + .10%, 0.95%, due 05/24/13 | 815,380 | ||||||||||||
300,000 | Citibank OMNI Master Trust, Series 07-A9A, Class A9, 144A, 1 mo. LIBOR + 1.10%, 1.37%, due 12/23/13 | 298,800 | |||||||||||||
1,200,000 | Discover Card Master Trust I, Series 06-2, Class A2, 1 mo. LIBOR + .03%, 0.30%, due 01/16/14 | 1,173,333 | |||||||||||||
600,000 | GE Capital Credit Card Master Note Trust, Series 07-3, Class A1, 1 mo. LIBOR + .01%, 0.28%, due 06/15/13 | 592,800 | |||||||||||||
600,000 | Household Credit Card Master Note Trust I, Series 07-2, Class A, 1 mo. LIBOR + .55%, 0.82%, due 07/15/13 | 588,000 | |||||||||||||
100,000 | MBNA Credit Card Master Note Trust, Series 04-A8, Class A8, 1 mo. LIBOR + .15%, 0.42%, due 01/15/14 | 98,150 | |||||||||||||
500,000 | National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.07%, due 05/15/13 | 485,000 | |||||||||||||
Total Credit Cards | 7,593,708 | ||||||||||||||
Equipment Leases — 0.0% | |||||||||||||||
191,063 | CNH Equipment Trust, Series 07-B, Class A3B, 1 mo. LIBOR + .60%, 0.87%, due 10/17/11 | 191,132 | |||||||||||||
328,508 | GE Equipment Midticket LLC, Series 07-1, Class A3B, 1 mo. LIBOR + .25%, 0.52%, due 06/14/11 | 327,276 | |||||||||||||
Total Equipment Leases | 518,408 | ||||||||||||||
Insurance Premiums — 0.0% | |||||||||||||||
400,000 | AICCO Premium Finance Master Trust, Series 07-AA, Class A, 144A, 1 mo. LIBOR + .05%, 0.32%, due 12/15/11 | 384,240 | |||||||||||||
Insured Auto Financing — 0.2% | |||||||||||||||
1,000,000 | AmeriCredit Automobile Receivables Trust, Series 07-DF, Class A4B, FSA, 1 mo. LIBOR + .80%, 1.08%, due 06/06/14 | 868,139 | |||||||||||||
660,870 | Capital One Auto Finance Trust, Series 06-A, Class A4, AMBAC, 1 mo. LIBOR + .01%, 0.28%, due 12/15/12 | 637,145 | |||||||||||||
800,000 | Santander Drive Auto Receivables Trust, Series 07-3, Class A4B, FGIC, 1 mo. LIBOR + .65%, 0.92%, due 10/15/14 | 744,560 |
See accompanying notes to the financial statements.
4
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Auto Financing — continued | |||||||||||||||
700,000 | Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.48%, due 07/14/14 | 637,000 | |||||||||||||
Total Insured Auto Financing | 2,886,844 | ||||||||||||||
Insured Other — 0.1% | |||||||||||||||
1,100,000 | DB Master Finance LLC, Series 06-1, Class A2, 144A, AMBAC, 5.78%, due 06/20/31 | 1,016,731 | |||||||||||||
900,000 | Dominos Pizza Master Issuer LLC, Series 07-1, Class A2, 144A, MBIA, 5.26%, due 04/25/37 | 722,552 | |||||||||||||
Total Insured Other | 1,739,283 | ||||||||||||||
Insured Residential Asset-Backed Securities (United States) — 0.0% | |||||||||||||||
248,730 | Residential Asset Mortgage Products, Inc., Series 05-RS9, Class AI3, FGIC, 1 mo. LIBOR + .22%, 0.49%, due 11/25/35 | 111,929 | |||||||||||||
Insured Residential Mortgage-Backed Securities (United States) — 0.0% | |||||||||||||||
694,155 | Countrywide Home Equity Loan Trust, Series 07-E, Class A, MBIA, 1 mo. LIBOR + .15%, 0.42%, due 06/15/37 | 138,414 | |||||||||||||
Insured Time Share — 0.0% | |||||||||||||||
332,484 | Sierra Receivables Funding Co., Series 07-2A, Class A2, 144A, MBIA, 1 mo. LIBOR + 1.00%, 1.27%, due 09/20/19 | 206,213 | |||||||||||||
Investment Grade Corporate Collateralized Debt Obligations — 0.2% | |||||||||||||||
2,000,000 | Morgan Stanley ACES SPC, Series 05-15, Class A, 144A, 3 mo. LIBOR + .40%, 1.01%, due 12/20/10 | 1,683,000 | |||||||||||||
1,100,000 | Morgan Stanley ACES SPC, Series 06-13A, Class A, 144A, 3 mo. LIBOR + .29%, 0.90%, due 06/20/13 | 598,950 | |||||||||||||
Total Investment Grade Corporate Collateralized Debt Obligations | 2,281,950 | ||||||||||||||
Residential Asset-Backed Securities (United States) — 0.4% | |||||||||||||||
483,007 | ACE Securities Corp., Series 06-SL3, Class A1, 1 mo. LIBOR + .10%, 0.37%, due 06/25/36 | 15,698 | |||||||||||||
594,477 | ACE Securities Corp., Series 07-WM1, Class A2A, 1 mo. LIBOR + .07%, 0.34%, due 11/25/36 | 282,377 |
See accompanying notes to the financial statements.
5
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
244,509 | Argent Securities, Inc., Series 06-W2, Class A2B, 1 mo. LIBOR + .19%, 0.46%, due 03/25/36 | 151,595 | |||||||||||||
231,284 | Argent Securities, Inc., Series 06-M2, Class A2B, 1 mo. LIBOR + .11%, 0.38%, due 09/25/36 | 138,770 | |||||||||||||
900,000 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3B, 1 mo. LIBOR + .11%, 0.38%, due 10/25/36 | 840,240 | |||||||||||||
280,271 | Asset Backed Funding Certificates, Series 07-NC1, Class A1, 144A, 1 mo. LIBOR + .22%, 0.49%, due 05/25/37 | 201,263 | |||||||||||||
650,718 | Bayview Financial Acquisition Trust, Series 04-B, Class A2, 144A, 1 mo. LIBOR + .65%, 1.56%, due 05/28/39 | 390,431 | |||||||||||||
1,200,000 | Carrington Mortgage Loan Trust, Series 07-FRE1, Class A2, 1 mo. LIBOR + .20%, 0.47%, due 02/25/37 | 735,377 | |||||||||||||
30,560 | Chase Funding Mortgage Loan Trust, Series 03-3, Class 2A2, 1 mo. LIBOR + .27%, 0.81%, due 04/25/33 | 18,696 | |||||||||||||
1,600,000 | Countrywide Asset-Backed Certificates, Series 06-BC3, Class 2A2, 1 mo. LIBOR + .14%, 0.41%, due 02/25/37 | 873,760 | |||||||||||||
1,100,000 | J.P. Morgan Mortgage Acquisition Corp., Series 06-WMC4, Class A3, 1 mo. LIBOR + .12%, 0.39%, due 12/25/36 | 315,132 | |||||||||||||
400,000 | Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.42%, due 03/25/36 | 141,684 | |||||||||||||
703,435 | Morgan Stanley Home Equity Loans, Series 07-2, Class A1, 1 mo. LIBOR + .10%, 0.37%, due 04/25/37 | 549,383 | |||||||||||||
616,188 | Residential Asset Securities Corp., Series 05-KS12, Class A2, 1 mo. LIBOR + .25%, 0.52%, due 01/25/36 | 523,760 | |||||||||||||
Total Residential Asset-Backed Securities (United States) | 5,178,166 | ||||||||||||||
Residential Mortgage-Backed Securities (Australian) — 0.1% | |||||||||||||||
211,575 | Interstar Millennium Trust, Series 05-1G, Class A, 3 mo. LIBOR + .12%, 0.75%, due 12/08/36 | 173,841 | |||||||||||||
205,881 | Superannuation Members Home Loans Global Fund, Series 7, Class A1, 3 mo. LIBOR + .14%, 0.77%, due 03/09/36 | 194,423 | |||||||||||||
563,912 | Westpac Securitization Trust, Series 07-1G, Class A2A, 3 mo. LIBOR + .05%, 0.47%, due 05/21/38 | 481,051 | |||||||||||||
Total Residential Mortgage-Backed Securities (Australian) | 849,315 |
See accompanying notes to the financial statements.
6
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Mortgage-Backed Securities (European) — 0.1% | |||||||||||||||
300,000 | Aire Valley Mortgages, Series 07-1A, Class 1A2, 144A, 3 mo. LIBOR + .09%, 0.70%, due 03/20/30 | 150,000 | |||||||||||||
600,000 | Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.61%, due 01/13/39 | 526,688 | |||||||||||||
496,950 | Paragon Mortgages Plc, Series 7A, Class A1A, 144A, 3 mo. LIBOR + .21%, 0.65%, due 05/15/34 | 326,814 | |||||||||||||
500,000 | Pendeford Master Issuer Plc, Series 07-1A, Class 3A, 144A, 3 mo. LIBOR + .10%, 0.56%, due 02/12/16 | 470,000 | |||||||||||||
Total Residential Mortgage-Backed Securities (European) | 1,473,502 | ||||||||||||||
Student Loans — 0.1% | |||||||||||||||
500,000 | College Loan Corp. Trust, Series 06-1, Class A2, 3 mo. LIBOR + .02%, 0.52%, due 04/25/22 | 498,125 | |||||||||||||
104,245 | National Collegiate Student Loan Trust, Series 06-1, Class A2, 1 mo. LIBOR + .14%, 0.41%, due 08/25/23 | 96,428 | |||||||||||||
64,895 | National Collegiate Student Loan Trust, Series 06-A, Class A1, 144A, 1 mo. LIBOR + .08%, 0.35%, due 08/26/19 | 63,110 | |||||||||||||
600,000 | Nelnet Student Loan Trust, Series 05-2, Class A4, 3 mo. LIBOR + .08%, 0.69%, due 12/23/19 | 585,504 | |||||||||||||
Total Student Loans | 1,243,167 | ||||||||||||||
Total Asset-Backed Securities | 36,178,964 | ||||||||||||||
Corporate Debt — 0.0% | |||||||||||||||
147,000 | Health Care Property Investors, Inc., Series G, MTN, 5.63%, due 02/28/13 | 138,665 | |||||||||||||
U.S. Government Agency — 0.0% | |||||||||||||||
275,000 | Agency for International Development Floater (Support of Morocco), 6 mo. U.S. Treasury Bill + .45%, 0.76%, due 11/15/14 (a) | 262,941 | |||||||||||||
166,667 | Agency for International Development Floater (Support of Zimbabwe), 3 mo. U.S. Treasury Bill x 115%, 0.20%, due 01/01/12 (a) | 161,819 | |||||||||||||
Total U.S. Government Agency | 424,760 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $34,960,860) | 36,742,389 |
See accompanying notes to the financial statements.
7
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 97.5% | |||||||||||||||
Affiliated Issuers — 97.5% | |||||||||||||||
13,746,187 | GMO Alpha Only Fund, Class IV | 68,456,011 | |||||||||||||
1,583,403 | GMO Asset Allocation Bond Fund, Class VI | 40,645,965 | |||||||||||||
6,340,885 | GMO Domestic Bond Fund, Class VI | 41,279,161 | |||||||||||||
794,848 | GMO Emerging Country Debt Fund, Class IV | 6,120,331 | |||||||||||||
2,316,271 | GMO Flexible Equities Fund, Class VI | 47,321,407 | |||||||||||||
1,255,553 | GMO Inflation Indexed Plus Bond Fund, Class VI | 21,143,521 | |||||||||||||
12,013,970 | GMO International Growth Equity Fund, Class IV | 230,067,534 | |||||||||||||
11,601,423 | GMO International Intrinsic Value Fund, Class IV | 238,641,276 | |||||||||||||
4,014,013 | GMO International Small Companies Fund, Class III | 27,616,407 | |||||||||||||
29,866,881 | GMO Quality Fund, Class VI | 525,358,439 | |||||||||||||
1,109,007 | GMO Special Situations Fund, Class VI | 29,921,007 | |||||||||||||
5,263,196 | GMO Strategic Fixed Income Fund, Class VI | 84,579,555 | |||||||||||||
6,644,954 | GMO U.S. Core Equity Fund, Class VI | 64,987,648 | |||||||||||||
389,594 | GMO World Opportunity Overlay Fund | 7,542,545 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $1,575,925,194) | 1,433,680,807 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||||||
Money Market Funds — 0.0% | |||||||||||||||
33,483 | State Street Institutional U.S. Government Money Market Fund-Institutional Class | 33,483 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $33,483) | 33,483 | ||||||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $1,610,919,537) | 1,470,456,679 | ||||||||||||||
Other Assets and Liabilities (net) — 0.00% | 1,128 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,470,457,807 |
See accompanying notes to the financial statements.
8
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (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.
CMBS - Commercial Mortgage Backed Security
EUR LIBOR - London Interbank Offered Rate denominated in Euros.
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
The rates shown on variable rate notes are the current interest rates at August 31, 2009, which are subject to change based on the terms of the 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).
Currency Abbreviations:
EUR - Euro
See accompanying notes to the financial statements.
9
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $34,994,343) (Note 2) | $ | 36,775,872 | |||||
Investments in affiliated issuers, at value (cost $1,575,925,194) (Notes 2 and 8) | 1,433,680,807 | ||||||
Receivable for investments sold | 111,582 | ||||||
Interest receivable | 35,298 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 12,214 | ||||||
Miscellaneous receivable | 168 | ||||||
Total assets | 1,470,615,941 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 21 | ||||||
Payable for Fund shares repurchased | 111,750 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 2,451 | ||||||
Accrued expenses | 43,912 | ||||||
Total liabilities | 158,134 | ||||||
Net assets | $ | 1,470,457,807 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 1,671,044,743 | |||||
Accumulated undistributed net investment income | 14,064,037 | ||||||
Accumulated net realized loss | (74,188,115 | ) | |||||
Net unrealized depreciation | (140,462,858 | ) | |||||
$ | 1,470,457,807 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 1,470,457,807 | |||||
Shares outstanding: | |||||||
Class III | 80,786,202 | ||||||
Net asset value per share: | |||||||
Class III | $ | 18.20 |
See accompanying notes to the financial statements.
10
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 23,455,759 | |||||
Interest | 1,445,744 | ||||||
Dividends | 2,519 | ||||||
Total investment income | 24,904,022 | ||||||
Expenses: | |||||||
Legal fees | 23,828 | ||||||
Custodian, fund accounting agent and transfer agent fees | 23,552 | ||||||
Audit and tax fees | 15,640 | ||||||
Trustees fees and related expenses (Note 3) | 12,495 | ||||||
Chief Compliance Officer (Note 3) | 5,796 | ||||||
Registration fees | 2,944 | ||||||
Miscellaneous | 4,047 | ||||||
Total expenses | 88,302 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (70,012 | ) | |||||
Expense reductions (Note 2) | (1,335 | ) | |||||
Net expenses | 16,955 | ||||||
Net investment income (loss) | 24,887,067 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 72,441 | ||||||
Investments in affiliated issuers | (69,626,229 | ) | |||||
Realized gains distributions from affiliated issuers (Note 8) | 2,921,246 | ||||||
Foreign currency and foreign currency related transactions | (37 | ) | |||||
Net realized gain (loss) | (66,632,579 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 4,356,283 | ||||||
Investments in affiliated issuers | 345,996,174 | ||||||
Net unrealized gain (loss) | 350,352,457 | ||||||
Net realized and unrealized gain (loss) | 283,719,878 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 308,606,945 |
See accompanying notes to the financial statements.
11
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 24,887,067 | $ | 86,991,469 | |||||||
Net realized gain (loss) | (66,632,579 | ) | 14,967,160 | ||||||||
Change in net unrealized appreciation (depreciation) | 350,352,457 | (433,884,141 | ) | ||||||||
Net increase (decrease) in net assets from operations | 308,606,945 | (331,925,512 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (8,455,941 | ) | (97,614,780 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (55,458,846 | ) | ||||||||
(8,455,941 | ) | (153,073,626 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 63,027,238 | 491,786,568 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 21,816 | 304,811 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 63,049,054 | 492,091,379 | |||||||||
Total increase (decrease) in net assets | 363,200,058 | 7,092,241 | |||||||||
Net assets: | |||||||||||
Beginning of period | 1,107,257,749 | 1,100,165,508 | |||||||||
End of period (including accumulated undistributed net investment income of $14,064,037 and distributions in excess of net investment income of $2,367,089, respectively) | $ | 1,470,457,807 | $ | 1,107,257,749 |
See accompanying notes to the financial statements.
12
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 14.37 | $ | 22.70 | $ | 23.71 | $ | 22.37 | $ | 20.00 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(b)† | 0.32 | 1.57 | 0.99 | 0.69 | 0.52 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 3.62 | (7.23 | ) | (0.15 | ) | 2.17 | 2.34 | ||||||||||||||||
Total from investment operations | 3.94 | (5.66 | ) | 0.84 | 2.86 | 2.86 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.11 | ) | (1.61 | ) | (1.02 | ) | (0.90 | ) | (0.47 | ) | |||||||||||||
From net realized gains | — | (1.06 | ) | (0.83 | ) | (0.62 | ) | (0.02 | ) | ||||||||||||||
Total distributions | (0.11 | ) | (2.67 | ) | (1.85 | ) | (1.52 | ) | (0.49 | ) | |||||||||||||
Net asset value, end of period | $ | 18.20 | $ | 14.37 | $ | 22.70 | $ | 23.71 | $ | 22.37 | |||||||||||||
Total Return(c) | 27.47 | %** | (26.75 | )% | 3.15 | % | 12.98 | % | 14.42 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,470,458 | $ | 1,107,258 | $ | 1,100,116 | $ | 529,374 | $ | 366,622 | |||||||||||||
Net expenses to average daily net assets(d)(e) | 0.00 | %(f)* | 0.00 | %(f) | 0.00 | %(f) | 0.00 | % | 0.00 | %* | |||||||||||||
Net investment income to average daily net assets(b) | 3.84 | %* | 8.05 | % | 4.05 | % | 2.98 | % | 3.22 | %* | |||||||||||||
Portfolio turnover rate | 9 | %** | 34 | % | 47 | % | 23 | % | 10 | %** | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.01 | % | 0.02 | % | 0.06 | %* | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (g) | $ | 0.01 | $ | 0.01 | $ | 0.00 | (g) | $ | 0.02 |
(a) Period from May 31, 2005 (commencement of operations) through February 28, 2006.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. 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 funds (See Note 3).
(e) Net expenses to average daily net assets were less than 0.01%.
(f) The net expense ratio does not include the effect of expense reductions.
(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.
13
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Strategic Opportunities Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the GMO Strategic Opportunities Allocation Index. The GMO Strategic Opportunities Allocation Index is a composite benchmark computed by GMO consisting of: (i) the MSCI World Index, and (ii) the Barclays Capital U.S. Aggregate Index in the following proportions: 75% (MSCI World Index) and 25% (Barclays Capital U.S. Aggregate Index). The Fund is a fund of funds and invests primarily in shares or holds assets of other series of the Trust, which may include the GMO International Equity Funds, the GMO U.S. Equity Funds, the GMO Fixed Income Funds, GMO Alpha Only Fund, GMO Alternative Asset Opportunity Fund, GMO Flexible Equities Fund, GMO Short-Duration Collateral Fund, GMO Special Situations Fund, and GMO World Opportunity Overlay Fund (the GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). In addition, the Fund may hold securities (particularly asset-backed securities) directly or through one or more subsidiaries or other entities. The Fund may have exposure to foreign and U.S. equity securities (including emerging country equities, both growth and value style equities, and equities of any market capitalization), U.S. and foreign fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), the investment returns of commodities and, from time to time, other alternative asset classes. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
The financial statements of the underlying funds 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. As of August 31, 2009, shares of GMO Alternative Asset Opportunity Fund, GMO Flexible Equities Fund, GMO Short-Duration Collateral Fund, GMO Special Situations Fund, and GMO World Opportunity Overlay Fund were not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in
14
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
As of August 31, 2009, a portion of the Fund's return of capital received from certain other GMO funds is expected to be classified as dividend income for U.S. federal income tax purposes. Accordingly, "dividends from affiliated issuers" as reported in the Statement of Operations has been increased by the portion estimated to be dividend income as of August 31, 2009. The estimated increase in dividend income is $755,096. In addition, all applicable related income disclosures throughout this Semiannual Report have been adjusted by the additional income. The dividends from affiliated issuers are subject to change and will not be finalized until February 28, 2010, the Fund's fiscal year-end. Finally, in early 2010, applicable shareholders will receive Form 1099-DIV that will indicate the appropriate tax character of all distributions paid by the Fund in 2009.
Portfolio valuation
Shares of the underlying funds and other mutual funds are generally valued at their net asset value.
Investments held directly by the Fund and by the underlying funds are valued as follows. Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally 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 fa ir value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 40.13% of th e net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on models used by a third
15
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
party vendor. Those underlying funds classify such securities under SFAS 157 (as defined below) as Level 2.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by the Fund, those alternative sources would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fu nd. As of August 31, 2009, the total value of securities held directly and indirectly that were fair valued or for which no alternative pricing source was available represented 2.74% of the net assets of the Fund.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund valued certain debt securities using a specified spread above the LIBOR Rate.
16
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Asset-Backed Securities | $ | — | $ | 5,687,960 | $ | 30,491,004 | $ | 36,178,964 | |||||||||||
Corporate Debt | — | 138,665 | — | 138,665 | |||||||||||||||
U.S. Government Agency | — | — | 424,760 | 424,760 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 5,826,625 | 30,915,764 | 36,742,389 | |||||||||||||||
Mutual Funds | 1,348,895,848 | 84,784,959 | — | 1,433,680,807 | |||||||||||||||
Short-Term Investments | — | 33,483 | — | 33,483 | |||||||||||||||
Total Investments | 1,348,895,848 | 90,645,067 | 30,915,764 | 1,470,456,679 | |||||||||||||||
Total | $ | 1,348,895,848 | $ | 90,645,067 | $ | 30,915,764 | $ | 1,470,456,679 |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 9.81% and (0.02)% of total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||
Asset-Backed Securities | $ | 34,786,584 | $ | (4,160,783 | ) | $ | 614,580 | $ | 588,741 | $ | 4,349,842 | $ | (5,687,960 | ) | $ | 30,491,004 | |||||||||||||||
U.S. Government Agency | 476,336 | (58,333 | ) | 2,398 | 2,334 | 2,025 | — | 424,760 | |||||||||||||||||||||||
Total Debt Obligations | 35,262,920 | (4,219,116 | ) | 616,978 | 591,075 | 4,351,867 | (5,687,960 | ) | 30,915,764 | ||||||||||||||||||||||
Total | $ | 35,262,920 | $ | (4,219,116 | ) | $ | 616,978 | $ | 591,075 | $ | 4,351,867 | $ | (5,687,960 | ) | $ | 30,915,764 |
17
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $3,243,689.
18
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,646,479,132 | $ | 20,035,542 | $ | (196,057,995 | ) | $ | (176,022,453 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Income dividends and capital gain distributions from the underlying funds 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 asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
From prior to March 1, 2009 through June 29, 2009, the premium on cash purchases was 0.03% of the amount invested and the fee on cash redemptions was 2.00% of the amount redeemed. From June 30, 2009
19
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
through August 31, 2009, the purchase premium remained at 0.03% of the amount invested and the redemption fee was changed to 1.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospective or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and/or redemption fees may be waived at the Manager's discretion when they are de minimus and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and/or redemption fee imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of a Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are r eceived.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund, including those risks to which the Fund is exposed as a result of its investments in underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
20
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
• Market Risk — Equity Securities — Equity securities held by underlying funds may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Declines in stock market prices generally are likely to result in declines in the value of the underlying funds' investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. An underlying fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Market Risk — Fixed Income Securities — Typically, the value of an underlying fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent an underlying fund from selling securities or closing derivative positions at desirable prices.
• Derivatives Risk — The use of derivatives by underlying funds involves risks different from, and potentially greater than, risks associated with direct investments in securities and other assets. Derivatives may increase other Fund risks, including market risk, liquidity risk, and credit and counterparty risk, and their value may or may not correlate with the value of the relevant underlying asset.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests will not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, investments in underlying funds with higher fees or expenses than the underlying funds in which the Fund is invested will increase the Fund's total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may potentially be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
Other principal risks of an investment in the Fund include Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments by an underlying fund in companies with smaller market capitalizations), Commodities Risk (value of an underlying fund's shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments), Currency Risk (risk that fluctuations in exchange rates may adversely affect
21
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the value of an underlying fund's investments denominated in foreign currencies or that the U.S. dollar will decline in value relation to a foreign currency being hedged by an underlying fund), Leveraging Risk (increased risks from use of reversed repurchase agreements and other derivatives and securities lending by an underlying fund), Credit and Counterparty Risk (risk of default of an issuer of a portfolio security or a derivatives counterparty of an underlying fund or a borrower of an underlying fund's securities), Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real estate industry may cause the value of the underlying fund's investments to fluctuate more than if it invested in securities of companies in a broader range of industries), Short Sales Risk (risk that an underlying fund's loss on the short sale of securities that it does not own is unlimited), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). Some of the underlying funds are non-diversified investment companies under the 1940 Act, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified.
The Fund invests (including through investment in underlying funds) in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of u nderlying assets or other support available to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities generally. These events
22
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not continue or that they will not deteriorate further. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund adopted SFAS 161 on March 1, 2009. As of August 31, 2009, the Fund held no derivative contracts for the purposes of SFAS 161.
3. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent that the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.00% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses
23
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 | ||||||||||||
0.375 | % | 0.067 | % | 0.003 | % | 0.445 | % |
��
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $9,919 and $5,796, respectively. The compensation and expenses of the CCO are included expenses in the Statement of Operations. The Fund paid no remuneration 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 and class exchanges, for the period ended August 31, 2009 aggregated $245,979,951 and $118,937,823, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 32.90% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
24
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of August 31, 2009, less than 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 99.97% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 4,229,495 | $ | 71,744,587 | 21,710,901 | $ | 377,255,235 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 502,393 | 8,309,577 | 8,772,878 | 152,047,372 | |||||||||||||||
Shares repurchased | (990,270 | ) | (17,026,926 | ) | (1,914,307 | ) | (37,516,039 | ) | |||||||||||
Purchase premiums | — | 16,056 | — | 100,056 | |||||||||||||||
Redemption fees | — | 5,760 | — | 204,755 | |||||||||||||||
Net increase (decrease) | 3,741,618 | $ | 63,049,054 | 28,569,472 | $ | 492,091,379 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 IV | $ | 142,537,541 | $ | 26,546,129 | $ | 89,210,907 | $ | 6,698,690 | $ | — | $ | 68,456,011 | |||||||||||||||
GMO Asset Allocation Bond Fund, Class VI | — | 39,722,093 | 111,582 | — | — | 40,645,965 | |||||||||||||||||||||
GMO Domestic Bond Fund, Class VI | 50,663,671 | — | — | 625,454 | 2,921,246 | 41,279,161 | 5 | ||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | 4,571,097 | 93,844 | — | 93,844 | — | 6,120,331 | |||||||||||||||||||||
GMO Flexible Equities Fund, Class VI | 23,107,183 | 12,054,954 | — | — | — | 47,321,407 |
25
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Inflation Indexed Plus Bond Fund, Class VI | $ | 18,670,080 | $ | — | $ | — | $ | 1,157,641 | * | $ | — | $ | 21,143,521 | ||||||||||||||
GMO International Growth Equity Fund, Class IV | 150,367,034 | 35,429,437 | 12,553,109 | 5,492,236 | — | 230,067,534 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 142,927,020 | 30,311,441 | 12,758,109 | 2,864,373 | — | 238,641,276 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | — | 25,198,789 | — | 92,570 | — | 27,616,407 | |||||||||||||||||||||
GMO Quality Fund, Class VI | 349,870,292 | 75,059,985 | 85,000 | 5,420,743 | — | 525,358,439 | |||||||||||||||||||||
GMO Special Situations Fund, Class VI | 27,779,151 | 528,971 | — | — | — | 29,921,007 | |||||||||||||||||||||
GMO Strategic Fixed Income Fund, Class VI | 91,316,446 | — | — | 343,372 | — | 84,579,555 | t | ||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | 49,793,872 | 1,034,286 | — | 666,836 | — | 64,987,648 | |||||||||||||||||||||
GMO World Opportunity Overlay Fund | 7,149,055 | — | — | — | — | 7,542,545 | o | ||||||||||||||||||||
Totals | $ | 1,058,752,442 | $ | 245,979,929 | $ | 114,718,707 | $ | 23,455,759 | $ | 2,921,246 | $ | 1,433,680,807 |
5 The Fund received return of capital distributions in the amount of $11,980,199. Please note that in early 2010, Form 1099-DIV is anticipated to be sent to applicable shareholders that will state the actual tax characterization of all distributions paid in 2009.
* A significant portion of the dividend is expected to be a return of capital for tax purposes. Please note that in early 2010, Form 1099-DIV is anticipated to be sent to applicable shareholders that will state the actual tax characterization of all distributions paid in 2009.
t The Fund received return of capital distributions in the amount of $20,069,319. Please note that in early 2010, Form 1099-DIV is anticipated to be sent to applicable shareholders that will state the actual tax characterization of all distributions paid in 2009.
o The Fund received return of capital distributions in the amount of $653,296.
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. Effective September 14, 2009, the premium on cash purchases was 0.00% of the amount invested and the fee an cash redemptions was 0.00% of the amount redeemed.
26
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including a one-year period and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered that the Fund is intended to complement other strategies offered by the Manager and is not intended to stand on its own, and concluded that the usefulness of the Fund's performance relative to its benchmark was limited because the Fund is not managed to a benchmark. The Trustees also considered the qualifications and experience of the personnel resp onsible 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 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
27
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
advisory fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 and the Trust as a whole (including the effect of recent market events and changes in assets under management and revenues on such profitability); information prepared by third-party data services concerning fees paid to managers of funds deemed by those services 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 with similar objectives.
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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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
28
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
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.
Following their review, on June 15, 2009, 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, 2009.
29
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.45 | % | $ | 1,000.00 | $ | 1,274.70 | $ | 2.58 | |||||||||||
2) Hypothetical | 0.45 | % | $ | 1,000.00 | $ | 1,022.94 | $ | 2.29 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
30
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 101.1 | % | |||||
Loan Participations | 6.3 | ||||||
Short-Term Investments | 2.6 | ||||||
Loan Assignments | 1.9 | ||||||
Options Purchased | 0.5 | ||||||
Rights and Warrants | 0.3 | ||||||
Promissory Notes | 0.2 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Written Options | (0.1 | ) | |||||
Swaps (Market Value, see Schedule of Investments for Notional Values) | (1.4 | ) | |||||
Reverse Repurchase Agreements | (11.5 | ) | |||||
Other | 0.1 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Country/Region Summary** | % of Investments | ||||||
Russia | 11.9 | % | |||||
Argentina | 8.4 | ||||||
Brazil | 8.2 | ||||||
Philippines | 8.1 | ||||||
United States | 7.2 | ||||||
Mexico | 7.1 | ||||||
Venezuela | 6.0 | ||||||
Colombia | 5.6 | ||||||
Uruguay | 4.3 | ||||||
Turkey | 3.3 | ||||||
Indonesia | 3.1 | ||||||
Peru | 2.7 | ||||||
Ukraine | 2.1 | ||||||
Vietnam | 1.9 | ||||||
Congo Republic (Brazzaville) | 1.8 | ||||||
Ivory Coast | 1.8 | ||||||
Albania | 1.5 | ||||||
El Salvador | 1.5 | ||||||
Egypt | 1.5 | ||||||
Dominican Republic | 1.4 | ||||||
Aruba | 1.1 | ||||||
Iraq | 1.1 | ||||||
Pakistan | 0.9 | ||||||
South Korea | 0.9 | ||||||
Sri Lanka | 0.9 | ||||||
Serbia | 0.7 | ||||||
Africa | 0.7 | ||||||
Israel | 0.7 | ||||||
South Africa | 0.6 | ||||||
Trinidad and Tobago | 0.6 | ||||||
Bosnia | 0.5 | ||||||
Belize | 0.4 | ||||||
Jamaica | 0.4 | ||||||
Tunisia | 0.4 | ||||||
Nigeria | 0.4 | ||||||
Chile | 0.4 | ||||||
Gabon | 0.3 | ||||||
India | 0.3 | ||||||
Costa Rica | 0.2 | ||||||
Kazakhstan | 0.2 |
2
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Country/Region Summary** | % of Investments | ||||||
Nicaragua | 0.2 | % | |||||
Ecuador | 0.2 | ||||||
Panama | 0.2 | ||||||
Malaysia | 0.2 | ||||||
Qatar | 0.2 | ||||||
Georgia | 0.2 | ||||||
Bulgaria | 0.1 | ||||||
Lebanon | (0.1 | ) | |||||
Romania | (0.1 | ) | |||||
Austria | (0.4 | ) | |||||
United Kingdom | (0.6 | ) | |||||
Italy | (0.6 | ) | |||||
Greece | (0.6 | ) | |||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative contracts. Duration is based on the Manager's models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (positive for long positions and negative for short positions) are factored into the duration-adjusted exposure using the reference security and applying the same methodology to that security. The table reflects net country exposures, including exposures achieved with leveraging associated with reverse repurchase agreements.
3
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 96.5% | |||||||||||||||
Albania — 0.0% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 1,126,841 | Republic of Albania Par Bond, Zero Coupon, due 08/31/25 | 385,942 | ||||||||||||
Argentina — 9.8% | |||||||||||||||
Foreign Government Obligations — 8.1% | |||||||||||||||
USD | 9,000,000 | Province of Buenos Aires, Reg S, Step Up, 3.00%, due 05/15/35 | 2,385,000 | ||||||||||||
USD | 10,000,000 | Republic of Argentina, 8.88%, due 03/01/29 (a) | 2,500,000 | ||||||||||||
USD | 7,211,000 | Republic of Argentina, Series BGLO, 8.38%, due 12/20/03 (a) | 1,802,750 | ||||||||||||
USD | 46,000,000 | Republic of Argentina, Series F, 0.00%, due 10/15/04 (a) (b) | 5,152,000 | ||||||||||||
USD | 2,587,924 | Republic of Argentina Capitalization Bond, Series 2031, 12.00%, due 06/19/31 (a) | 646,981 | ||||||||||||
EUR | 7,455,374 | Republic of Argentina Discount Bond, 7.82%, due 12/31/33 | 5,237,129 | ||||||||||||
USD | 23,688,554 | Republic of Argentina Discount Bond, 8.28%, due 12/31/33 | 12,531,245 | ||||||||||||
DEM | 3,830,000 | Republic of Argentina Discount Bond, Series DM, 6 mo. DEM LIBOR + .81%, 3.00%, due 03/31/23 (a) | 1,347,525 | ||||||||||||
EUR | 214,800,000 | Republic of Argentina GDP Linked, 1.99%, due 12/15/35 (c) | 13,395,265 | ||||||||||||
USD | 71,474 | Republic of Argentina GDP Linked, 2.28%, due 12/15/35 (c) | 3,631 | ||||||||||||
ARS | 28,000,000 | Republic of Argentina GDP Linked, 2.45%, due 12/15/35 (b) (c) | 284,209 | ||||||||||||
DEM | 5,000,000 | Republic of Argentina Global Bond, Step Down, 9.00%, due 11/19/08 (a) (b) | 769,637 | ||||||||||||
USD | 31,390,000 | Republic of Argentina Global Bond, EMTN, Reg S, 3 mo. LIBOR + 5.75%, 6.36%, due 04/06/04 (a) | 5,807,150 | ||||||||||||
USD | 24,819,166 | Republic of Argentina Global Bond, Series 2018, 12.25%, due 06/19/18 (a) | 6,204,791 | ||||||||||||
EUR | 3,500,000 | Republic of Argentina Global Bond, Series FEB, Step Down, 8.00%, due 02/26/08 (a) | 1,128,959 | ||||||||||||
ARS | 28,000,000 | Republic of Argentina Global Par Bond, Step Up, 0.63%, due 12/31/38 (b) | 1,614,336 | ||||||||||||
USD | 21,000,000 | Republic of Argentina Par Bond, Step Up, 1.33%, due 12/31/38 | 4,914,000 | ||||||||||||
EUR | 284,000,000 | Republic of Argentina Par Bond, Step Up, 1.20%, due 12/31/38 | 95,678,415 | ||||||||||||
USD | 1,815,200 | Republic of Argentina Pro 4, 2.00%, due 12/28/10 (a) | 76,797 | ||||||||||||
161,479,820 |
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, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Judgments — 1.7% | |||||||||||||||
USD | 3,540,000 | Republic of Argentina, 8.88%, due 03/01/29 (a) (b) (d) | 663,750 | ||||||||||||
USD | 43,132,075 | Republic of Argentina Capitalization Bond, Series 2031, 12.00%, due 06/19/31 (a) (b) (d) | 8,087,264 | ||||||||||||
USD | 32,000,000 | Republic of Argentina Discount Bond, Series L-GL, 6 mo. LIBOR + .81%, 2.57%, due 03/31/23 (a) (b) (d) | 11,520,000 | ||||||||||||
USD | 26,545,000 | Republic of Argentina Global Bond, 12.13%, due 02/25/19 (a) (b) (d) | 4,977,187 | ||||||||||||
USD | 8,000,000 | Republic of Argentina Global Bond, 9.75%, due 09/19/27 (a) (b) (d) | 1,500,000 | ||||||||||||
USD | 6,931,000 | Republic of Argentina Global Bond, 12.00%, due 02/01/20 (a) (b) (d) | 1,299,563 | ||||||||||||
USD | 198,230 | Republic of Argentina Global Bond, Series 2008, Step Up, 15.50%, due 12/29/49 (a) (b) (d) | 37,168 | ||||||||||||
USD | 3,235,359 | Republic of Argentina Global Bond, Series 2018, 12.25%, due 06/19/18 (a) (b) (d) | 606,630 | ||||||||||||
USD | 15,000,000 | Republic of Argentina Global Par Bond, Series L-GP, Step Up, 6.00%, due 03/31/23 (a) (b) (d) | 5,400,000 | ||||||||||||
34,091,562 | |||||||||||||||
Total Argentina | 195,571,382 | ||||||||||||||
Aruba — 1.0% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 5,000,000 | Government of Aruba, 6.19%, due 10/30/12 (b) | 4,567,500 | ||||||||||||
USD | 1,752,000 | Government of Aruba, 6.80%, due 04/02/14 (b) | 1,770,050 | ||||||||||||
USD | 14,000,000 | Government of Aruba, Reg S, 6.40%, due 09/06/15 | 13,974,786 | ||||||||||||
Total Aruba | 20,312,336 | ||||||||||||||
Belize — 0.3% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 11,425,000 | Government of Belize, Reg S, Step Up, 4.25%, due 02/20/29 | 6,169,500 | ||||||||||||
Bosnia & Herzegovina — 0.5% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
DEM | 21,457,400 | Bosnia & Herzegovina, Series A, 6 mo. DEM LIBOR + .81%, 2.29%, due 12/11/17 | 10,380,486 |
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, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Brazil — 4.0% | |||||||||||||||
Corporate Debt — 0.5% | |||||||||||||||
USD | 9,000,000 | Petrobras International Finance Co., 7.88%, due 03/15/19 | 10,147,500 | ||||||||||||
Foreign Government Obligations — 3.5% | |||||||||||||||
USD | 7,575,000 | Brazilian Government International Exit Bonds, 6.00%, due 09/15/13 | 7,726,500 | ||||||||||||
USD | 84,778 | Brazilian Government International Exit Bonds, Odd Lot, 6.00%, due 09/15/13 | 82,659 | ||||||||||||
USD | 103,813 | Brazilian Government International Exit Bonds, Odd Lot, 6.00%, due 09/15/13 | 101,218 | ||||||||||||
USD | 107,999 | Brazilian Government International Exit Bonds, Odd Lot, 6.00%, due 09/15/13 | 105,299 | ||||||||||||
USD | 42,000,000 | Republic of Brazil, 8.25%, due 01/20/34 (e) | 51,975,000 | ||||||||||||
USD | 8,000,000 | Republic of Brazil, 7.13%, due 01/20/37 (e) | 8,840,000 | ||||||||||||
68,830,676 | |||||||||||||||
Total Brazil | 78,978,176 | ||||||||||||||
Colombia — 1.1% | |||||||||||||||
Foreign Government Agency — 0.4% | |||||||||||||||
USD | 8,000,000 | Ecopetrol SA, 144A, 7.63%, due 07/23/19 | 8,520,000 | ||||||||||||
Foreign Government Obligations — 0.7% | |||||||||||||||
USD | 8,000,000 | Republic of Colombia, 8.70%, due 02/15/16 | 9,200,000 | ||||||||||||
USD | 3,800,000 | Republic of Colombia, 11.85%, due 03/09/28 | 4,465,000 | ||||||||||||
13,665,000 | |||||||||||||||
Total Colombia | 22,185,000 | ||||||||||||||
Congo Republic (Brazzaville) — 2.2% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 109,865,600 | Republic of Congo, 144A, 3.00%, due 06/30/29 | 42,298,256 | ||||||||||||
USD | 1,425,000 | Republic of Congo, Reg S, 3.00%, due 06/30/29 | 548,625 | ||||||||||||
Total Congo Republic (Brazzaville) | 42,846,881 | ||||||||||||||
Costa Rica — 0.2% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 3,710,000 | Republic of Costa Rica, Reg S, 10.00%, due 08/01/20 | 4,581,850 |
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, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Dominican Republic — 2.3% | |||||||||||||||
Asset-Backed Securities — 0.5% | |||||||||||||||
USD | 15,251,174 | Autopistas Del Nordeste Ltd., Reg S, 9.39%, due 04/15/24 | 9,150,704 | ||||||||||||
Foreign Government Obligations — 1.8% | |||||||||||||||
USD | 9,000,000 | Dominican Republic, Reg S, 8.63%, due 04/20/27 | 6,840,000 | ||||||||||||
USD | 42,557,000 | Dominican Republic Discount Bond, 6 mo. LIBOR + .81%, 2.13%, due 08/30/24 | 28,938,760 | ||||||||||||
35,778,760 | |||||||||||||||
Total Dominican Republic | 44,929,464 | ||||||||||||||
Ecuador — 0.2% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 13,587,000 | Republic of Ecuador, Step Up, 10.00%, due 08/15/30 (a) | 4,076,100 | ||||||||||||
USD | 2,001,290 | Republic of Ecuador PDI (Global Bearer Capitalization Bond), PIK, 6 mo. LIBOR + .81%, 1.63%, due 02/27/15 (b) | 456,294 | ||||||||||||
Total Ecuador | 4,532,394 | ||||||||||||||
Egypt — 0.1% | |||||||||||||||
Corporate Debt | |||||||||||||||
USD | 1,189,522 | Petroleum Export, 144A, 5.27%, due 06/15/11 | 1,144,915 | ||||||||||||
El Salvador — 1.1% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 24,700,000 | Republic of El Salvador, Reg S, 7.65%, due 06/15/35 | 22,230,000 | ||||||||||||
Gabon — 0.4% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 7,000,000 | Gabonese Republic, Reg S, 8.20%, due 12/12/17 | 6,851,250 | ||||||||||||
Grenada — 0.1% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 6,000,000 | Republic of Grenada, Reg S, Step Up, 2.50%, due 09/15/25 | 2,220,000 |
��
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, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Indonesia — 1.4% | |||||||||||||||
Foreign Government Agency | |||||||||||||||
USD | 31,000,000 | Majapahit Holding BV, 144A, 7.88%, due 06/29/37 | 28,210,000 | ||||||||||||
Iraq — 0.5% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 15,000,000 | Republic of Iraq, Reg S, 5.80%, due 01/15/28 (e) | 10,350,000 | ||||||||||||
Israel — 0.7% | |||||||||||||||
Foreign Government Agency | |||||||||||||||
USD | 13,000,000 | Israel Electric Corp. Ltd., 144A, 7.25%, due 01/15/19 (e) | 13,601,250 | ||||||||||||
Ivory Coast — 2.0% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
FRF | 37,500,000 | Ivory Coast Discount Bond, Series FRF, Step Up, 4.00%, due 03/31/28 (a) | 3,196,306 | ||||||||||||
USD | 46,850,000 | Ivory Coast FLIRB, Step Up, 4.00%, due 03/31/18 (a) | 14,992,000 | ||||||||||||
FRF | 85,905,000 | Ivory Coast FLIRB, Series FRF, Step Up, 4.00%, due 03/31/18 (a) | 5,632,382 | ||||||||||||
FRF | 256,889,500 | Ivory Coast PDI, Series FRF, Step Up, 2.90%, due 03/30/18 (a) | 16,843,023 | ||||||||||||
Total Ivory Coast | 40,663,711 | ||||||||||||||
Jamaica — 0.3% | |||||||||||||||
Foreign Government Agency — 0.2% | |||||||||||||||
USD | 2,500,000 | Air Jamaica Ltd., Reg S, 8.13%, due 06/14/27 | 1,675,000 | ||||||||||||
USD | 3,857,143 | Air Jamaica Ltd., Reg S, 9.38%, due 07/08/15 | 3,394,286 | ||||||||||||
5,069,286 | |||||||||||||||
Foreign Government Obligations — 0.1% | |||||||||||||||
USD | 2,500,000 | Government of Jamaica, 8.00%, due 03/15/39 | 1,625,000 | ||||||||||||
Total Jamaica | 6,694,286 | ||||||||||||||
Malaysia — 1.2% | |||||||||||||||
Asset Backed Securities | |||||||||||||||
MYR | 45,000,000 | Transshipment Megahub Berhad, Series C, 5.45%, due 11/03/09 | 12,578,334 | ||||||||||||
MYR | 50,000,000 | Transshipment Megahub Berhad, Series F, 6.70%, due 11/02/12 | 11,992,780 | ||||||||||||
Total Malaysia | 24,571,114 |
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, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Mexico — 7.2% | |||||||||||||||
Foreign Government Agency — 4.6% | |||||||||||||||
GBP | 7,689,000 | Pemex Project Funding Master Trust, EMTN, 7.50%, due 12/18/13 | 13,330,943 | ||||||||||||
EUR | 26,500,000 | Pemex Project Funding Master Trust, Reg S, 5.50%, due 02/24/25 | 31,816,944 | ||||||||||||
EUR | 30,000,000 | Pemex Project Funding Master Trust, Reg S, 6.38%, due 08/05/16 | 45,911,016 | ||||||||||||
91,058,903 | |||||||||||||||
Foreign Government Obligations — 2.6% | |||||||||||||||
GBP | 29,994,000 | United Mexican States, GMTN, 6.75%, due 02/06/24 | 44,922,469 | ||||||||||||
USD | 8,000,000 | United Mexican States, 6.05%, due 01/11/40 (e) | 7,500,000 | ||||||||||||
52,422,469 | |||||||||||||||
Total Mexico | 143,481,372 | ||||||||||||||
Nicaragua — 0.2% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 4,926,395 | Republic of Nicaragua BPI, Series E, 5.00%, due 02/01/11 | 4,335,228 | ||||||||||||
Pakistan — 0.7% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 20,000,000 | Islamic Republic of Pakistan, Reg S, 7.88%, due 03/31/36 | 14,800,000 | ||||||||||||
Peru — 1.5% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 12,452,000 | Peru Enhanced Pass-Through Finance Ltd., Reg S, Zero Coupon, due 06/02/25 | 4,482,720 | ||||||||||||
USD | 25,000,000 | Peru Par Bond, Series 30 Yr., Step Up, 3.00%, due 03/07/27 | 20,250,000 | ||||||||||||
USD | 4,625,077 | Peru Trust, Series 97-I-P, Class A3, Zero Coupon, due 12/31/15 (a) (b) | 3,381,323 | ||||||||||||
USD | 1,595,995 | Peru Trust II, Series 98-A LB, Zero Coupon, due 02/09/16 (a) (b) | 1,166,807 | ||||||||||||
USD | 1,539,783 | Racers, Series 1998 I-P, Zero Coupon, due 03/10/16 (a) (b) | 1,125,712 | ||||||||||||
Total Peru | 30,406,562 | ||||||||||||||
Philippines — 7.3% | |||||||||||||||
Foreign Government Agency — 3.8% | |||||||||||||||
USD | 6,000,000 | National Power Corp., Global Bond, 9.88%, due 03/16/10 | 5,900,625 | ||||||||||||
USD | 8,500,000 | National Power Corp., Global Bond, 8.40%, due 12/15/16 | 9,392,500 |
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, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Foreign Government Agency — continued | |||||||||||||||
USD | 55,450,000 | National Power Corp., Global Bond, 9.63%, due 05/15/28 | 61,549,500 | ||||||||||||
76,842,625 | |||||||||||||||
Foreign Government Obligations — 3.5% | |||||||||||||||
USD | 35,651,000 | Central Bank of Philippines, Series A, 8.60%, due 06/15/27 | 39,438,919 | ||||||||||||
USD | 9,000,000 | Philippine Government International Bond, 8.38%, due 06/17/19 | 10,518,300 | ||||||||||||
EUR | 8,000,000 | Republic of Philippines, 9.13%, due 02/22/10 | 11,883,182 | ||||||||||||
USD | 6,843,000 | Republic of Philippines, 8.38%, due 02/15/11 | 7,390,440 | ||||||||||||
69,230,841 | |||||||||||||||
Total Philippines | 146,073,466 | ||||||||||||||
Qatar — 0.2% | |||||||||||||||
Foreign Government Agency | |||||||||||||||
USD | 3,500,000 | Qtel International Finance Ltd., 144A, 7.88%, due 06/10/19 | 3,815,000 | ||||||||||||
Russia — 9.9% | |||||||||||||||
Corporate Debt — 8.6% | |||||||||||||||
EUR | 11,000,000 | Gaz Capital (Gazprom), EMTN, 5.36%, due 10/31/14 | 14,961,400 | ||||||||||||
EUR | 33,000,000 | Gaz Capital (Gazprom), EMTN, Reg S, 5.88%, due 06/01/15 | 44,943,337 | ||||||||||||
EUR | 21,000,000 | Gaz Capital (Gazprom), Reg S, 5.44%, due 11/02/17 | 26,191,859 | ||||||||||||
USD | 17,000,000 | Gaz Capital SA, 144A, 8.13%, due 07/31/14 | 17,531,250 | ||||||||||||
USD | 11,838,796 | Gazprom International SA, Reg S, 7.20%, due 02/01/20 | 11,838,796 | ||||||||||||
USD | 16,474,234 | Gazstream SA, Reg S, 5.63%, due 07/22/13 | 16,515,420 | ||||||||||||
USD | 8,000,000 | Sberbank Capital SA, EMTN, 6.48%, due 05/15/13 | 8,112,000 | ||||||||||||
USD | 14,900,000 | Transcapital Ltd. (Transneft), 144A, 8.70%, due 08/07/18 | 15,458,750 | ||||||||||||
USD | 19,000,000 | VTB Capital SA, Reg S, 6.25%, due 06/30/35 | 16,910,000 | ||||||||||||
172,462,812 | |||||||||||||||
Foreign Government Agency — 1.3% | |||||||||||||||
USD | 22,500,000 | RSHB Capital SA, 144A, 6.30%, due 05/15/17 | 20,090,250 | ||||||||||||
USD | 2,300,000 | RSHB Capital SA, 144A, 7.75%, due 05/29/18 | 2,219,500 | ||||||||||||
USD | 2,500,000 | RSHB Capital SA, 144A, 9.00%, due 06/11/14 | 2,652,750 | ||||||||||||
24,962,500 | |||||||||||||||
Total Russia | 197,425,312 |
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, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Serbia — 0.7% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 14,966,026 | Republic of Serbia, Reg S, Step Up, 3.75%, due 11/01/24 | 13,619,084 | ||||||||||||
South Africa — 0.4% | |||||||||||||||
Foreign Government Agency — 0.1% | |||||||||||||||
ZAR | 163,000,000 | Eskom Holdings Ltd., Zero Coupon, due 12/31/32 | 1,549,228 | ||||||||||||
Foreign Government Obligations — 0.3% | |||||||||||||||
USD | 2,000,000 | Republic of South Africa, 5.88%, due 05/30/22 | 1,985,000 | ||||||||||||
USD | 4,000,000 | Republic of South Africa, 6.88%, due 05/27/19 | 4,295,000 | ||||||||||||
6,280,000 | |||||||||||||||
Total South Africa | 7,829,228 | ||||||||||||||
South Korea — 1.2% | |||||||||||||||
Foreign Government Agency — 0.4% | |||||||||||||||
USD | 4,000,000 | Korea Gas Corp, 144A, 6.00%, due 07/15/14 | 4,188,208 | ||||||||||||
USD | 4,000,000 | Korea Southern Power Co., Reg S, 5.38%, due 04/18/13 | 4,055,200 | ||||||||||||
8,243,408 | |||||||||||||||
Foreign Government Obligations — 0.8% | |||||||||||||||
USD | 15,000,000 | Republic of Korea, 5.75%, due 04/16/14 | 15,807,000 | ||||||||||||
Total South Korea | 24,050,408 | ||||||||||||||
Sri Lanka — 1.0% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 19,000,000 | Republic of Sri Lanka, 144A, 8.25%, due 10/24/12 | 18,857,500 | ||||||||||||
Trinidad and Tobago — 0.6% | |||||||||||||||
Foreign Government Agency | |||||||||||||||
USD | 11,000,000 | Petroleum Company of Trinidad and Tobago Ltd., 144A, 9.75%, due 08/14/19 | 11,948,750 |
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, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Tunisia — 0.2% | |||||||||||||||
Foreign Government Agency | |||||||||||||||
JPY | 360,000,000 | Banque Centrale De Tunisie, Series 6BR, 4.35%, due 08/15/17 | 3,605,029 | ||||||||||||
Turkey — 0.5% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 9,000,000 | Republic of Turkey, 7.50%, due 07/14/17 | 9,765,000 | ||||||||||||
Ukraine — 4.8% | |||||||||||||||
Foreign Government Agency — 0.8% | |||||||||||||||
USD | 9,000,000 | Credit Suisse First Boston, the EXIM of Ukraine, 6.80%, due 10/04/12 | 6,480,000 | ||||||||||||
USD | 10,000,000 | Dresdner Kleinwort Wasserstein for CJSC, the EXIM of Ukraine, 7.75%, due 09/23/09 | 9,800,000 | ||||||||||||
16,280,000 | |||||||||||||||
Foreign Government Obligations — 4.0% | |||||||||||||||
USD | 18,000,000 | City of Kyiv, Reg S, 8.25%, due 11/26/12 | 13,455,000 | ||||||||||||
CHF | 70,000,000 | Ukraine Government, 3.50%, due 09/15/18 | 66,106,337 | ||||||||||||
79,561,337 | |||||||||||||||
Total Ukraine | 95,841,337 | ||||||||||||||
United States — 19.4% | |||||||||||||||
Asset-Backed Securities — 7.6% | |||||||||||||||
USD | 4,000,000 | Aircraft Finance Trust, Series 99-1A, Class A1, 144A, 1 mo. LIBOR + .48%, 0.75%, due 05/15/24 | 1,160,000 | ||||||||||||
USD | 51,040,000 | Capital One Auto Finance Trust, Series 06-C, Class A4, FGIC, 1 mo. LIBOR + .03%, 0.30%, due 05/15/13 (e) | 48,239,484 | ||||||||||||
USD | 17,228,016 | Capital One Auto Finance Trust, Series 07-C, Class A3B, FGIC, 1 mo. LIBOR + .51%, 0.78%, due 04/16/12 | 17,035,752 | ||||||||||||
USD | 208,097 | Chevy Chase Mortgage Funding Corp., Series 03-4A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .34%, 0.61%, due 10/25/34 | 108,210 | ||||||||||||
USD | 1,070,431 | CHYPS CBO Ltd., Series 97-1A, Class A2A, 144A, 6.72%, due 01/15/10 (b) | — | ||||||||||||
USD | 25,000,000 | Citibank Credit Card Issuance Trust, Series 06-A8, Class A8, 3mo. LIBOR + .04%, 0.55%, due 12/17/18 (e) | 22,648,425 |
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, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Asset-Backed Securities — continued | |||||||||||||||
USD | 1,583,824 | CNL Commercial Mortgage Loan Trust, Series 03-2A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .44%, 0.71%, due 10/25/30 | 1,029,485 | ||||||||||||
USD | 23,631,239 | Countrywide Home Equity Loan Trust, Series 05-F, Class 2A, AMBAC, 1 mo. LIBOR + .24%, 0.51%, due 12/15/35 | 8,838,084 | ||||||||||||
USD | 17,760,585 | Countrywide Home Equity Loan Trust, Series 05-H, Class 2A, FGIC, 1 mo. LIBOR + .24%, 0.51%, due 12/15/35 | 5,328,175 | ||||||||||||
USD | 12,518,305 | Countrywide Home Equity Loan Trust, Series 06-D, Class 2A, XL, 1 mo. LIBOR + .20%, 0.47%, due 05/15/36 | 4,957,249 | ||||||||||||
USD | 5,291,278 | First Franklin Mortgage Loan Asset Backed Certificates, Series 05-FF10, Class A6M, 1 mo. LIBOR + .35%, 0.62%, due 11/25/35 | 1,055,081 | ||||||||||||
USD | 15,595,193 | Greenpoint Morgage Funding Trust, Series 07-HE1, Class A1, XL, 1 mo. LIBOR + .15%, 0.42%, due 12/13/32 | 1,803,678 | ||||||||||||
USD | 4,315,162 | GSAMP Trust, Series 05-HE6, Class A2B, 1 mo. LIBOR + .19%, 0.46%, due 11/25/35 | 3,823,794 | ||||||||||||
USD | 9,250,000 | Home Equity Asset Trust, Series 07-1, Class 2A4, 1 mo. LIBOR + .23%, 0.50%, due 05/25/37 | 925,000 | ||||||||||||
USD | 10,000,000 | IXIS Real Estate Capital Trust, Series 06-HE2, Class A3, 1 mo. LIBOR + .16%, 0.43%, due 08/25/36 | 3,300,000 | ||||||||||||
USD | 13,000,000 | Master Asset-Backed Securities Trust, Series 06-NC3, Class A4, 1 mo. LIBOR + .16%, 0.43%, due 10/25/36 | 3,748,290 | ||||||||||||
USD | 11,500,130 | Morgan Stanley ABS Capital I, Series 06-NC3, Class A2C, 1 mo. LIBOR + .17%, 0.44%, due 03/25/36 | 4,571,302 | ||||||||||||
USD | 10,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class I, 144A, 3 mo. LIBOR + .45%, 1.06%, due 12/20/09 | 9,505,000 | ||||||||||||
USD | 15,000,000 | Morgan Stanley IXIS Real Estate Capital Trust, Series 06-2, Class A3, 1 mo. LIBOR + .15%, 0.42%, due 11/25/36 | 4,050,000 | ||||||||||||
USD | 15,200,000 | Morgan Stanley IXIS Real Estate Capital Trust, Series 06-2, Class A4, 1 mo. LIBOR + .22%, 0.49%, due 11/25/36 | 4,788,000 | ||||||||||||
USD | 12,868,000 | Option One Mortgage Loan Turst, Series 06-3, Class 2A4, 1 mo. LIBOR + .22%, 0.49%, due 02/25/37 | 2,732,942 | ||||||||||||
USD | 8,000,000 | Wamu Asset-Backed Certificates, Series 07-HE2, Class 2A4, 1 mo. LIBOR + .36%, 0.63%, due 04/25/37 | 2,024,000 | ||||||||||||
151,671,951 |
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, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
U.S. Government — 11.8% | |||||||||||||||
USD | 50,000,000 | U.S. Treasury Bond, 5.25%, due 02/15/29 (f) | 57,281,250 | ||||||||||||
USD | 75,692,960 | U.S. Treasury Inflation Indexed Bond, 0.88%, due 04/15/10 (c) (f) | 75,574,728 | ||||||||||||
USD | 100,000,000 | U.S. Treasury Principal Strip Bond, due 11/15/21 (e) | 59,873,100 | ||||||||||||
USD | 30,000,000 | U.S. Treasury Strip Coupon Bond, due 05/15/23 (e) | 16,617,510 | ||||||||||||
USD | 50,000,000 | U.S. Treasury Strip Coupon Bond, due 11/15/23 (e) | 26,869,050 | ||||||||||||
236,215,638 | |||||||||||||||
Total United States | 387,887,589 | ||||||||||||||
Uruguay — 4.9% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 51,851,571 | Republic of Uruguay, 7.63%, due 03/21/36 | 52,758,973 | ||||||||||||
EUR | 2,000,000 | Republic of Uruguay, 7.00%, due 06/28/19 | 2,895,871 | ||||||||||||
USD | 14,533,294 | Republic of Uruguay, PIK, 7.88%, due 01/15/33 | 15,187,292 | ||||||||||||
EUR | 10,000,000 | Republica Oriental de Uruguay, 6.88%, due 01/19/16 | 14,586,873 | ||||||||||||
JPY | 1,153,600,000 | Republica Oriental de Uruguay, Series 3BR, Step Up, 2.50%, due 03/14/11 (b) | 12,002,324 | ||||||||||||
Total Uruguay | 97,431,333 | ||||||||||||||
Venezuela — 5.5% | |||||||||||||||
Foreign Government Agency — 0.3% | |||||||||||||||
USD | 16,000,000 | Petroleos de Venezuela, 5.38%, due 04/12/27 | 6,880,000 | ||||||||||||
Foreign Government Obligations — 5.2% | |||||||||||||||
EUR | 10,000,000 | Republic of Venezuela, 7.00%, due 03/16/15 | 9,891,835 | ||||||||||||
EUR | 7,400,000 | Republic of Venezuela, 11.13%, due 07/25/11 | 10,953,415 | ||||||||||||
USD | 22,000,000 | Republic of Venezuela, Reg S, 9.25%, due 05/07/28 | 15,180,000 | ||||||||||||
USD | 69,500,000 | Republic of Venezuela, Reg S, 9.00%, due 05/07/23 | 47,955,000 | ||||||||||||
USD | 34,000,000 | Venezuela Government International Bond, Reg S, 6.00%, due 12/09/20 | 19,006,000 | ||||||||||||
102,986,250 | |||||||||||||||
Total Venezuela | 109,866,250 |
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, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Vietnam — 0.9% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 19,750,000 | Socialist Republic of Vietnam, Series 30 Yr., Step Up, 4.00%, due 03/12/28 | 14,615,000 | ||||||||||||
USD | 4,000,000 | Socialist Republic of Vietnam, Series 30 Yr., 6 mo. LIBOR + .81%, 2.81%, due 03/13/28 | 3,080,000 | ||||||||||||
Total Vietnam | 17,695,000 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $2,262,496,357) | 1,926,143,385 | ||||||||||||||
LOAN ASSIGNMENTS — 1.9% | |||||||||||||||
Angola — 0.1% | |||||||||||||||
USD | 1,300,000 | Angolan Ministry of Finance Loan Agreement, 1 mo. LIBOR + 5.50%, due 07/08/13 | 970,320 | ||||||||||||
USD | 1,300,000 | Angolan Ministry of Finance Loan Agreement, 1 mo. LIBOR + 5.50%, due 03/07/13 | 983,320 | ||||||||||||
Total Angola | 1,953,640 | ||||||||||||||
Dominican Republic — 0.2% | |||||||||||||||
USD | 5,200,000 | Dominican Republic, 6 mo. LIBOR + 1.75%, 3.77%, due 08/15/15 | 3,380,000 | ||||||||||||
Indonesia — 0.9% | |||||||||||||||
JPY | 92,880,000 | Republic of Indonesia Loan Agreement, 6 mo. JPY LIBOR + .88%, 1.43%, due 03/28/13 | 848,447 | ||||||||||||
USD | 1,892,000 | Republic of Indonesia Loan Agreement, 6 mo. LIBOR +.88%, 1.50%, due 03/29/13 | 1,608,200 | ||||||||||||
USD | 3,665,533 | Republic of Indonesia Loan Agreement, dated June 14, 1995, 6 mo. LIBOR + .88%, 1.56%, due 12/14/19 | 2,565,872 | ||||||||||||
USD | 3,665,533 | Republic of Indonesia Loan Agreement, dated June 14, 1995, 6 mo. LIBOR + .88%, 1.56%, due 12/14/19 | 2,565,872 | ||||||||||||
USD | 4,888,936 | Republic of Indonesia Loan Agreement, dated June 14, 1995, 6 mo. LIBOR + .88%, 1.56%, due 12/14/19 | 3,422,255 | ||||||||||||
USD | 2,418,159 | Republic of Indonesia Loan Agreement, dated September 29, 1994, 7.24%, due 12/01/19 | 2,055,435 | ||||||||||||
USD | 2,663,791 | Republic of Indonesia Loan Agreement, dated September 29, 1994, 6 mo. LIBOR + .75%, 2.13%, due 12/14/19 | 2,264,222 | ||||||||||||
EUR | 2,299,088 | Republic of Indonesia, Indonesia Paris Club Debt, due 06/01/21 (g) | 2,455,498 | ||||||||||||
Total Indonesia | 17,785,801 |
See accompanying notes to the financial statements.
15
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Russia — 0.3% | |||||||||||||||
USD | 3,955,201 | Russia Foreign Trade Obligations (b) (g) | 4,860,750 | ||||||||||||
DEM | 45,916 | Russia Foreign Trade Obligations (b) (g) | 29,313 | ||||||||||||
FIM | 1,740,000 | Russia Foreign Trade Obligations (b) (g) | 386,013 | ||||||||||||
GBP | 14,162 | Russia Foreign Trade Obligations (b) (g) | 32,688 | ||||||||||||
USD | 80,572 | Russia Foreign Trade Obligations (b) (g) | 95,674 | ||||||||||||
USD | 265,723 | Russia Foreign Trade Obligations (b) (g) | 320,704 | ||||||||||||
Total Russia | 5,725,142 | ||||||||||||||
Vietnam — 0.4% | |||||||||||||||
USD | 16,000,000 | Vietnam Shipbuilding Industry Group Loan Agreement, 6 mo. LIBOR + 1.50%, 2.61%, due 06/26/15 (b) | 9,042,514 | ||||||||||||
TOTAL LOAN ASSIGNMENTS (COST $43,019,330) | 37,887,097 | ||||||||||||||
LOAN PARTICIPATIONS — 6.3% | |||||||||||||||
Egypt — 0.2% | |||||||||||||||
CHF | 4,866,695 | Paris Club Loan Agreement (Participation with Standard Chartered Bank), due 01/03/24 (g) | 3,979,155 | ||||||||||||
Indonesia — 1.6% | |||||||||||||||
USD | 451,142 | Republic of Indonesia Loan Agreement (Participation with Citibank), 6 mo. LIBOR +.88%, 1.56%, due 12/14/19 | 315,800 | ||||||||||||
USD | 451,142 | Republic of Indonesia Loan Agreement (Participation with Citibank), 6 mo. LIBOR +.88%, 1.56%, due 12/14/19 | 315,800 | ||||||||||||
USD | 601,715 | Republic of Indonesia Loan Agreement (Participation with Citibank), 6 mo. LIBOR +.88%, 1.56%, due 12/14/19 | 421,201 | ||||||||||||
USD | 18,185,473 | Republic of Indonesia Loan Agreement (Participation with Deutsche Bank), 3 mo. LIBOR + 1.25%, 1.71%, due 02/12/13 | 15,457,652 | ||||||||||||
JPY | 549,107,990 | Republic of Indonesia Loan Agreement (Participation with Deutsche Bank), 6 mo. LIBOR +.88%, 1.43%, due 03/29/13 | 5,016,032 | ||||||||||||
USD | 12,059,515 | Republic of Indonesia Loan Agreement (Participation with Deutsche Bank), 6 mo. LIBOR +.88%, 2.67%, due 09/29/19 | 10,250,588 | ||||||||||||
Total Indonesia | 31,777,073 |
See accompanying notes to the financial statements.
16
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Iraq — 1.9% | |||||||||||||||
JPY | 630,296,819 | Republic of Iraq Paris Club Loan, T Chatani (Participation with Deutsche Bank), 4.85%, due 01/01/28 | 4,089,783 | ||||||||||||
USD | 3,402,097 | Republic of Iraq Paris Club Loan Agreement (Participation with Credit Suisse), 6 mo. LIBOR +.50%, 1.30%, due 01/01/28 | 1,244,827 | ||||||||||||
JPY | 4,823,814,739 | Republic of Iraq Paris Club Loan Agreement (Participation with Deutsche Bank), 4.85%, due 01/01/28 | 31,641,218 | ||||||||||||
Total Iraq | 36,975,828 | ||||||||||||||
Russia — 1.4% | |||||||||||||||
EUR | 57,042,402 | Russian Foreign Trade Obligations (Participation with GML International Ltd.) (g) (b) | 20,994,040 | ||||||||||||
USD | 5,599,139 | Russian Foreign Trade Obligations (Participation with GML International Ltd.) (g) | 7,296,286 | ||||||||||||
Total Russia | 28,290,326 | ||||||||||||||
Vietnam — 1.2% | |||||||||||||||
JPY | 2,624,491,076 | Socialist Republic of Vietnam Loan Agreement (Participation with Deutsche Bank), 6 mo. JPY LIBOR + .60%, 1.40%, due 09/01/17 | 23,974,395 | ||||||||||||
TOTAL LOAN PARTICIPATIONS (COST $109,171,206) | 124,996,777 | ||||||||||||||
PROMISSORY NOTES — 0.2% | |||||||||||||||
Dominican Republic — 0.1% | |||||||||||||||
USD | 1,089,012 | Dominican Republic Promissory Notes, 0.00%, due 09/15/09 | 1,078,122 | ||||||||||||
USD | 817,249 | Dominican Republic Promissory Notes, 0.00%, due 09/15/11 | 506,695 | ||||||||||||
USD | 817,249 | Dominican Republic Promissory Notes, 0.00%, due 09/15/10 | 653,799 | ||||||||||||
Total Dominican Republic | 2,238,616 | ||||||||||||||
Ghana — 0.0% | |||||||||||||||
USD | 3,312,500 | Republic of Ghana Promissory Notes, 0.00%, due 08/09/10 (a) (b) (h) (k) | 331,250 | ||||||||||||
Nigeria — 0.1% | |||||||||||||||
USD | 33,450,000 | Central Bank of Nigeria Promissory Notes, Series RC, 5.09%, due 01/05/10 | 836,250 | ||||||||||||
TOTAL PROMISSORY NOTES (COST $15,689,845) | 3,406,116 |
See accompanying notes to the financial statements.
17
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Principal Amount / Shares | Description | Value ($) | |||||||||||||
OPTIONS PURCHASED — 0.1% | |||||||||||||||
Options on Interest Rates — 0.0% | |||||||||||||||
TWD | 1,849,200,000 | TWD Interest Rate Cap Call Option, Expires 03/16/10, Strike 2.19% | 56 | ||||||||||||
TWD | 1,849,200,000 | TWD Interest Rate Floor Call Option, Expires 03/16/10, Strike 2.19% | 668,356 | ||||||||||||
Total Options on Interest Rates | 668,412 | ||||||||||||||
Options on Interest Rate Swaps — 0.1% | |||||||||||||||
KRW | 50,000,000,000 | KRW Swaption Call, Expires 03/21/11, Strike 5.64% | 1,785,771 | ||||||||||||
KRW | 50,000,000,000 | KRW Swaption Put, Expires 03/21/11, Strike 5.64% | 273,681 | ||||||||||||
Total Options on Interest Rate Swaps | 2,059,452 | ||||||||||||||
TOTAL OPTIONS PURCHASED (COST $4,251,983) | 2,727,864 | ||||||||||||||
MUTUAL FUNDS — 5.0% | |||||||||||||||
United States — 5.0% | |||||||||||||||
Affiliated Issuers | |||||||||||||||
3,976,082 | GMO Short-Duration Collateral Fund | 63,816,116 | |||||||||||||
21,409 | GMO Special Purpose Holding Fund (i) | 13,488 | |||||||||||||
264,323 | GMO U.S. Treasury Fund | 6,610,711 | |||||||||||||
1,515,449 | GMO World Opportunity Overlay Fund | 29,339,087 | |||||||||||||
�� | Total United States | 99,779,402 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $115,658,633) | 99,779,402 | ||||||||||||||
RIGHTS AND WARRANTS — 0.5% | |||||||||||||||
Nigeria — 0.1% | |||||||||||||||
25,000 | Central Bank of Nigeria Warrants, Expires 11/15/20 * | 2,875,000 | |||||||||||||
Uruguay — 0.0% | |||||||||||||||
4,000,000 | Banco Central Del Uruguay Value Recovery Rights, VRRB, Expires 01/02/21 (b) * | — |
See accompanying notes to the financial statements.
18
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Venezuela — 0.4% | |||||||||||||||
6,660 | Republic of Venezuela Oil Warrants, Expires 04/15/20 * | 166,500 | |||||||||||||
214,770 | Republic of Venezuela Oil Warrants, Expires 04/15/20 (b) (j) * | 2,684,625 | |||||||||||||
205,145 | Republic of Venezuela Oil Warrants, Expires 04/15/20 * | 5,128,625 | |||||||||||||
Total Venezuela | 7,979,750 | ||||||||||||||
TOTAL RIGHTS AND WARRANTS (COST $0) | 10,854,750 | ||||||||||||||
SHORT-TERM INVESTMENTS — 2.2% | |||||||||||||||
Money Market Funds — 2.2% | |||||||||||||||
14,927,221 | State Street Institutional Liquid Reserves Fund-Institutional Class | 14,927,221 | |||||||||||||
28,277,588 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 28,277,588 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $43,204,809) | 43,204,809 | ||||||||||||||
TOTAL INVESTMENTS — 112.7% (Cost $2,593,492,163) | 2,249,000,200 | ||||||||||||||
Other Assets and Liabilities (net) — (12.7%) | (253,037,898 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,995,962,302 |
See accompanying notes to the financial statements.
19
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales # | |||||||||||||||||||
9/29/09 | CHF | 60,000,000 | $ | 56,675,099 | $ | (202,916 | ) | ||||||||||||
10/06/09 | EUR | 300,000,000 | 430,093,619 | 1,768,381 | |||||||||||||||
9/15/09 | GBP | 20,000,000 | 32,557,985 | 432,014 | |||||||||||||||
10/13/09 | JPY | 5,500,000,000 | 59,124,679 | (1,032,427 | ) | ||||||||||||||
$ | 578,451,382 | $ | 965,052 |
# Fund sells foreign currency; buys USD.
Reverse Repurchase Agreements
Face Value | Description | Market Value | |||||||||||||
USD | 15,975,000 | Barclays Bank, 0.40%, dated 08/20/09, to be repurchased on demand at face value plus accrued interest. | $ | (15,975,678 | ) | ||||||||||
USD | 25,812,500 | Barclays Bank, 0.40%, dated 08/20/09, to be repurchased on demand at face value plus accrued interest. | (25,812,787 | ) | |||||||||||
USD | 28,750,000 | Barclays Bank, 0.40%, dated 08/20/09, to be repurchased on demand at face value plus accrued interest. | (28,750,319 | ) | |||||||||||
USD | 24,901,667 | Deutsche Bank, 1.00%, dated 07/14/09, to be repurchased on demand at face value plus accrued interest. | (24,934,177 | ) | |||||||||||
USD | 27,391,833 | JP Morgan Chase Bank, 1.00%, dated 07/14/09, to be repurchased on demand at face value plus accrued interest. | (27,427,595 | ) | |||||||||||
USD | 1,968,931 | JP Morgan Chase Bank, 0.50%, dated 02/26/09, to be repurchased on demand at face value plus accrued interest. | (1,996,455 | ) | |||||||||||
USD | 16,462,000 | JP Morgan Chase Bank, 1.75%, dated 08/05/09, to be repurchased on demand at face value plus accrued interest. | (16,479,605 | ) |
See accompanying notes to the financial statements.
20
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Reverse Repurchase Agreements — continued
Face Value | Description | Market Value | |||||||||||||
USD | 11,192,500 | JP Morgan Chase Bank, 1.25%, dated 07/13/09, to be repurchased on demand at face value plus accrued interest. | $ | (11,211,154 | ) | ||||||||||
USD | 27,562,500 | JP Morgan Chase Bank, 0.55%, dated 08/07/09, to be repurchased on demand at face value plus accrued interest. | (27,572,527 | ) | |||||||||||
USD | 7,226,722 | JP Morgan Chase Bank, 1.00%, dated 07/14/09, to be repurchased on demand at face value plus accrued interest. | (7,236,157 | ) | |||||||||||
USD | 9,712,500 | JP Morgan Chase Bank, 2.00%, dated 07/13/09, to be repurchased on demand at face value plus accrued interest. | (9,738,400 | ) | |||||||||||
USD | 19,278,000 | JP Morgan Chase Bank, 1.75%, dated 08/05/09, to be repurchased on demand at face value plus accrued interest. | (19,298,617 | ) | |||||||||||
USD | 8,783,750 | JP Morgan Chase Bank, 1.75%, dated 08/03/09, to be repurchased on demand at face value plus accrued interest. | (8,795,279 | ) | |||||||||||
$ | (225,228,750 | ) |
Average balance outstanding | $ | (67,081,461 | ) | ||||
Average interest rate | 1.00 | % | |||||
Maximum balance outstanding | $ | (227,019,903 | ) | ||||
Average shares outstanding | 295,876,992 | ||||||
Average balance per share outstanding | $ | (0.23 | ) | ||||
Days outstanding | 184 |
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund has entered into reverse repurchase agreements.
See accompanying notes to the financial statements.
21
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
10,000,000 | USD | 9/20/2009 | JP Morgan | (Pay) | 0.97 | % | 1.16 | % | Gazprom | N/A | $ | (43,139 | ) | ||||||||||||||||||||||||||||||
Chase Bank | OAO | ||||||||||||||||||||||||||||||||||||||||||
70,000,000 | CHF | 9/20/2009 | Morgan Stanley | (Pay) | 0.78 | % | 12.14 | % | Government of Ukraine | N/A | 180,301 | ||||||||||||||||||||||||||||||||
849,572,575 | RUB | 11/5/2009 | Deutsche Bank AG | Receive | 1.45 | % | 3.77 | % | Russia Post Office | 849,572,575 | RUB | 13,903 | |||||||||||||||||||||||||||||||
10,000,000 | USD | 11/20/2009 | JP Morgan Chase Bank | (Pay) | 0.90 | % | 0.49 | % | United Mexican States | N/A | (34,945 | ) | |||||||||||||||||||||||||||||||
10,000,000 | USD | 11/20/2009 | JP Morgan Chase Bank | (Pay) | 0.88 | % | 0.49 | % | United Mexican States | N/A | (33,924 | ) | |||||||||||||||||||||||||||||||
7,000,000 | USD | 2/5/2010 | Deutsche Bank AG | Receive | 4.85 | % | 17.12 | % | Government of Ukraine | 7,000,000 | USD | (333,968 | ) | ||||||||||||||||||||||||||||||
3,000,000 | USD | 3/29/2010 | JP Morgan Chase Bank | Receive | 4.70 | % | 0.8 | % | Arab Republic of Egypt | 3,000,000 | USD | 128,242 | |||||||||||||||||||||||||||||||
85,000,000 | USD | 6/20/2010 | Deutsche Bank AG | (Pay) | 2.10 | % | N/A | Reference security within CDX Index | N/A | (738,083 | ) | ||||||||||||||||||||||||||||||||
75,000,000 | USD | 6/20/2010 | Deutsche Bank AG | (Pay) | 1.47 | % | 0.67 | % | Republic of Brazil | N/A | (701,860 | ) | |||||||||||||||||||||||||||||||
12,000,000 | USD | 6/20/2010 | JP Morgan Chase Bank | (Pay) | 3.87 | % | 13.36 | % | Republic of Argentina | N/A | 784,525 | ||||||||||||||||||||||||||||||||
12,000,000 | USD | 6/20/2010 | JP Morgan Chase Bank | (Pay) | 4.00 | % | 13.36 | % | Republic of Argentina | N/A | 769,508 | ||||||||||||||||||||||||||||||||
6,000,000 | USD | 7/20/2010 | Deutsche Bank AG | (Pay) | 3.80 | % | 13.87 | % | Republic of Argentina | N/A | 480,870 | ||||||||||||||||||||||||||||||||
10,000,000 | USD | 7/20/2010 | Deutsche Bank AG | (Pay) | 3.77 | % | 13.87 | % | Republic of Argentina | N/A | 804,320 |
See accompanying notes to the financial statements.
22
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
140,000,000 | USD | 7/20/2010 | UBS AG | (Pay) | 0.89 | % | 1.27 | % | Republic of | N/A | $ | 333,744 | |||||||||||||||||||||||||||||||
Turkey | |||||||||||||||||||||||||||||||||||||||||||
5,000,000 | USD | 7/23/2010 | Deutsche Bank AG | Receive | 4.56 | % | 17.66 | % | Government of Ukraine | 5,000,000 | USD | (509,653 | ) | ||||||||||||||||||||||||||||||
7,000,000 | USD | 8/5/2010 | Deutsche Bank AG | Receive | 4.90 | % | 17.72 | % | Government of Ukraine | 7,000,000 | USD | (733,052 | ) | ||||||||||||||||||||||||||||||
3,000,000 | USD | 8/25/2010 | Deutsche Bank AG | Receive | 3.40 | % | 54.52 | % | Deutsche Bank Loan to Ukrtelekom | 3,000,000 | USD | (1,090,943 | ) | ||||||||||||||||||||||||||||||
30,000,000 | USD | 9/20/2010 | JP Morgan Chase Bank | (Pay) | 0.97 | % | 2.73 | % | Gazprom OAO | N/A | 422,076 | ||||||||||||||||||||||||||||||||
35,000,000 | USD | 9/20/2010 | JP Morgan Chase Bank | (Pay) | 0.70 | % | 1.28 | % | Republic of Philippines | N/A | 167,747 | ||||||||||||||||||||||||||||||||
20,000,000 | USD | 10/18/2010 | JP Morgan Chase Bank | Receive | 2.00 | % | 4.76 | % | VTB Leasing | 20,000,000 | USD | (462,863 | ) | ||||||||||||||||||||||||||||||
20,000,000 | USD | 10/20/2010 | Goldman Sachs | (Pay) | 2.74 | % | 1.44 | % | Petroleos Mexicanos | N/A | (496,872 | ) | |||||||||||||||||||||||||||||||
5,000,000 | USD | 10/25/2010 | Deutsche Bank AG | Receive | 4.60 | % | 17.3 | % | Government of Ukraine | 5,000,000 | USD | (567,174 | ) | ||||||||||||||||||||||||||||||
10,000,000 | USD | 12/20/2010 | JP Morgan Chase Bank | (Pay) | 3.57 | % | 15.14 | % | Republic of Argentina | N/A | 1,301,565 | ||||||||||||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | JP Morgan Chase Bank | (Pay) | 3.43 | % | 15.14 | % | Republic of Argentina | N/A | 660,436 | ||||||||||||||||||||||||||||||||
5,000,000 | USD | 1/25/2011 | Deutsche Bank AG | Receive | 4.63 | % | 16.76 | % | Government of Ukraine | 5,000,000 | USD | (711,146 | ) | ||||||||||||||||||||||||||||||
7,000,000 | USD | 2/7/2011 | Deutsche Bank AG | Receive | 4.95 | % | 16.71 | % | Government of Ukraine | 7,000,000 | USD | (994,099 | ) | ||||||||||||||||||||||||||||||
3,000,000 | USD | 2/25/2011 | Deutsche Bank AG | Receive | 3.50 | % | 50.94 | % | Deutsche Bank Loan to Ukrtelekom | 3,000,000 | USD | (1,362,557 | ) | ||||||||||||||||||||||||||||||
8,000,000 | USD | 3/20/2011 | Citigroup | (Pay) | 3.70 | % | 5.87 | % | Republic of Iraq | N/A | 116,032 | ||||||||||||||||||||||||||||||||
8,000,000 | USD | 3/20/2011 | UBS AG | (Pay) | 3.55 | % | 7.89 | % | Republic of Iraq | N/A | 359,722 |
See accompanying notes to the financial statements.
23
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
5,000,000 | USD | 4/26/2011 | Deutsche | Receive | 4.66 | % | 16.5 | % | Government | 5,000,000 | USD | $ | (739,477 | ) | |||||||||||||||||||||||||||||
Bank AG | of Ukraine | ||||||||||||||||||||||||||||||||||||||||||
10,000,000 | USD | 6/20/2011 | Deutsche Bank AG | (Pay) | 1.89 | % | 7.75 | % | Islamic Republic of Pakistan | N/A | 908,983 | ||||||||||||||||||||||||||||||||
34,000,000 | USD | 6/20/2011 | Deutsche Bank AG | (Pay) | 1.35 | % | N/A | Reference security within CDX Index | N/A | 1,284,350 | |||||||||||||||||||||||||||||||||
11,000,000 | USD | 6/20/2011 | JP Morgan Chase Bank | (Pay) | 1.35 | % | N/A | Reference security within CDX Index | N/A | 415,525 | |||||||||||||||||||||||||||||||||
6,000,000 | USD | 6/20/2011 | JP Morgan Chase Bank | Receive | 3.75 | % | 9.45 | % | Republic of Georgia | 6,000,000 | USD | (513,657 | ) | ||||||||||||||||||||||||||||||
9,000,000 | USD | 7/17/2011 | UBS AG | Receive | 5.05 | % | 17.16 | % | Government of Ukraine | 9,000,000 | USD | (1,566,618 | ) | ||||||||||||||||||||||||||||||
5,000,000 | USD | 7/25/2011 | Deutsche Bank AG | Receive | 4.68 | % | 16.4 | % | Government of Ukraine | 5,000,000 | USD | (887,391 | ) | ||||||||||||||||||||||||||||||
7,000,000 | USD | 8/5/2011 | Deutsche Bank AG | Receive | 5.00 | % | 16.4 | % | Government of Ukraine | 7,000,000 | USD | (1,229,437 | ) | ||||||||||||||||||||||||||||||
20,000,000 | USD | 8/20/2011 | Deutsche Bank AG | (Pay) | 0.57 | % | 1.35 | % | United Mexican States | N/A | 298,239 | ||||||||||||||||||||||||||||||||
620,000,000 | MXN | 8/20/2011 | Deutsche Bank AG | Receive | 0.40 | % | 0.83 | % | United Mexican States | 620,000,000 | MXN | (357,718 | ) | ||||||||||||||||||||||||||||||
3,000,000 | USD | 8/25/2011 | Deutsche Bank AG | Receive | 3.60 | % | 49.06 | % | Deutsche Bank Loan to Ukrtelekom | 3,000,000 | USD | (1,556,053 | ) | ||||||||||||||||||||||||||||||
45,000,000 | USD | 10/20/2011 | Goldman Sachs | (Pay) | 12.35 | % | 16.37 | % | Republic of Argentina | N/A | 860,102 | ||||||||||||||||||||||||||||||||
7,000,000 | USD | 10/20/2011 | JP Morgan Chase Bank | (Pay) | 2.75 | % | 16.37 | % | Republic of Argentina | N/A | 1,617,217 |
See accompanying notes to the financial statements.
24
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
5,000,000 | USD | 10/25/2011 | Deutsche | Receive | 4.70 | % | 16.33 | % | Government | 5,000,000 | USD | $ | (915,012 | ) | |||||||||||||||||||||||||||||
Bank AG | of Ukraine | ||||||||||||||||||||||||||||||||||||||||||
19,000,000 | USD | 10/30/2011 | Deutsche Bank AG | Receive | 4.00 | % | 48.57 | % | Naftofaz Ukraine | 19,000,000 | USD | (10,026,482 | ) | ||||||||||||||||||||||||||||||
8,000,000 | USD | 11/20/2011 | JP Morgan Chase Bank | (Pay) | 2.16 | % | 16.3 | % | Republic of Argentina | N/A | 2,013,357 | ||||||||||||||||||||||||||||||||
7,083,420 | USD | 12/20/2011 | Deutsche Bank AG | Receive | 1.60 | % | 1.92 | % | Stemcor UK Ltd. | 7,083,420 | USD | 74,047 | |||||||||||||||||||||||||||||||
5,000,000 | USD | 12/20/2011 | JP Morgan Chase Bank | (Pay) | 0.66 | % | 1.6 | % | Petroleos Mexicanos | N/A | 99,611 | ||||||||||||||||||||||||||||||||
65,000,000 | USD | 12/20/2011 | JP Morgan Chase Bank | (Pay) | 1.40 | % | N/A | Reference security within CDX Index | N/A | 3,112,056 | |||||||||||||||||||||||||||||||||
4,100,000,000 | KZT | 1/20/2012 | Deutsche Bank AG | Receive | 0.32 | % | 2.34 | % | Republic of Kazakhstan | 4,100,000,000 | KZT | (1,128,432 | ) | ||||||||||||||||||||||||||||||
8,500,000 | EUR | 1/20/2012 | Duetsche Bank AG | (Pay) | 0.42 | % | 3.11 | % | Republic of Kazakhstan | N/A | 728,786 | ||||||||||||||||||||||||||||||||
3,000,000 | USD | 2/25/2012 | Deutsche Bank AG | Receive | 3.68 | % | 53.96 | % | Deutsche Bank Loan to Ukrtelekom | 3,000,000 | USD | (1,684,822 | ) | ||||||||||||||||||||||||||||||
19,000,000 | USD | 5/5/2012 | Deutsche Bank AG | Receive | 4.00 | % | 49.44 | % | Naftofaz Ukraine | 19,000,000 | USD | (10,719,642 | ) | ||||||||||||||||||||||||||||||
14,000,000 | EUR | 5/30/2012 | Deutsche Bank AG | Receive | 8.00 | % | 8.12 | % | Republic of Albania | 14,000,000 | USD | 206,307 | |||||||||||||||||||||||||||||||
50,000,000 | USD | 6/20/2012 | Morgan Stanley | (Pay) | 1.25 | % | N/A | Reference security within CDX Index | N/A | 3,143,472 | |||||||||||||||||||||||||||||||||
5,000,000 | USD | 7/30/2012 | JP Morgan Chase Bank | Receive | 3.05 | % | 0.58 | % | Republic of Chile | 5,000,000 | USD | 365,845 | |||||||||||||||||||||||||||||||
5,000,000 | USD | 8/20/2012 | JP Morgan Chase Bank | Receive | 3.50 | % | 7.5 | % | Republic of Jamaica | 5,000,000 | USD | (503,528 | ) |
See accompanying notes to the financial statements.
25
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
3,000,000 | USD | 8/25/2012 | Deutsche | Receive | 3.75 | % | 54.42 | % | Deutsche | 3,000,000 | USD | $ | (1,777,420 | ) | |||||||||||||||||||||||||||||
Bank AG | Bank Loan to | ||||||||||||||||||||||||||||||||||||||||||
Ukrtelekom | |||||||||||||||||||||||||||||||||||||||||||
2,000,000 | USD | 9/20/2012 | Goldman Sachs | (Pay) | 9.20 | % | 16.02 | % | Republic of Argentina | N/A | 229,678 | ||||||||||||||||||||||||||||||||
15,000,000 | USD | 9/20/2012 | JP Morgan Chase Bank | (Pay) | 1.15 | % | 1.16 | % | Republic of Peru | N/A | (76,224 | ) | |||||||||||||||||||||||||||||||
10,000,000 | USD | 9/20/2012 | JP Morgan Chase Bank | (Pay) | 1.25 | % | 3.58 | % | Gazprom OAO | N/A | 602,779 | ||||||||||||||||||||||||||||||||
85,000,000 | PEN | 9/20/2012 | JP Morgan Chase Bank | Receive | 0.92 | % | 0.87 | % | Republic of Peru | 85,000,000 | PEN | 162,359 | |||||||||||||||||||||||||||||||
10,000,000 | USD | 10/4/2012 | JP Morgan Chase Bank | Receive | 2.95 | % | 0.6 | % | Republic of Chile | 10,000,000 | USD | 831,352 | |||||||||||||||||||||||||||||||
15,000,000 | USD | 10/20/2012 | JP Morgan Chase Bank | Receive | 0.80 | % | 1.06 | % | Republic of Brazil | 15,000,000 | USD | (72,582 | ) | ||||||||||||||||||||||||||||||
20,000,000 | USD | 10/20/2012 | JP Morgan Chase Bank | Receive | 0.80 | % | 1.06 | % | Republic of Brazil | 20,000,000 | USD | (96,775 | ) | ||||||||||||||||||||||||||||||
4,000,000 | USD | 10/20/2012 | UBS AG | (Pay) | 3.90 | % | 13.56 | % | Petroleos de Venezuela | N/A | 807,205 | ||||||||||||||||||||||||||||||||
4,000,000 | USD | 10/20/2012 | UBS AG | (Pay) | 4.13 | % | 13.56 | % | Petroleos de Venezuela | N/A | 783,211 | ||||||||||||||||||||||||||||||||
5,000,000 | USD | 11/5/2012 | Deutsche Bank AG | Receive | 6.50 | % | 6.98 | % | Republic of Jamaica | 5,000,000 | USD | 42,875 | |||||||||||||||||||||||||||||||
50,000,000 | USD | 12/20/2012 | JP Morgan Chase Bank | (Pay) | 1.75 | % | N/A | Reference security within CDX Index | N/A | 2,809,861 | |||||||||||||||||||||||||||||||||
42,000,000 | USD | 12/20/2012 | Morgan Stanley | (Pay) | 1.20 | % | 0.65 | % | Reference security within CDX Index | N/A | (844,424 | ) | |||||||||||||||||||||||||||||||
204,179,760 | USD | 12/20/2012 | Morgan Stanley | Receive | 0.71 | % | 0.3 | % | Reference security within CDX Index | 204,179,760 | USD | 3,024,773 |
See accompanying notes to the financial statements.
26
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
20,000,000 | USD | 3/20/2013 | Deutsche | (Pay) | 1.48 | % | 1.58 | % | United | N/A | $ | (65,743 | ) | ||||||||||||||||||||||||||||||
Bank AG | Mexican | ||||||||||||||||||||||||||||||||||||||||||
States | |||||||||||||||||||||||||||||||||||||||||||
22,000,000 | USD | 6/20/2013 | Deutsche Bank AG | (Pay) | 5.79 | % | 15.99 | % | Republic of Argentina | N/A | 5,714,573 | ||||||||||||||||||||||||||||||||
14,000,000 | USD | 6/20/2013 | JP Morgan Chase Bank | Receive | 3.72 | % | 3.21 | % | Russia AG Bank | 14,000,000 | USD | 347,397 | |||||||||||||||||||||||||||||||
200,759,555 | RUB | 6/21/2013 | Deutsche Bank AG | Receive | 2.35 | % | 11.87 | % | VTB Leasing | 200,759,555 | RUB | (329,905 | ) | ||||||||||||||||||||||||||||||
23,694,322 | USD | 6/24/2013 | JP Morgan Chase Bank | Receive | 1.37 | % | 6.81 | % | VTB Leasing | 23,694,322 | USD | (2,122,572 | ) | ||||||||||||||||||||||||||||||
50,000,000 | USD | 8/20/2013 | JP Morgan Chase Bank | (Pay) | 1.20 | % | 1.31 | % | Republic of Peru | N/A | 179,859 | ||||||||||||||||||||||||||||||||
277,250,000 | PEN | 8/20/2013 | JP Morgan Chase Bank | Receive | 0.96 | % | 0.99 | % | Republic of Peru | 277,250,000 | PEN | (65,911 | ) | ||||||||||||||||||||||||||||||
13,050,000,000 | JPY | 10/20/2013 | Deutsche Bank AG | (Pay) | 3.20 | % | 1.24 | % | Republic of Brazil | N/A | (12,341,511 | ) | |||||||||||||||||||||||||||||||
7,830,000,000 | JPY | 10/20/2013 | Deutsche Bank AG | (Pay) | 3.95 | % | 1.24 | % | Republic of Brazil | N/A | (9,981,624 | ) | |||||||||||||||||||||||||||||||
130,000,000 | USD | 10/20/2013 | Deutsche Bank AG | Receive | 3.30 | % | 1.23 | % | Republic of Brazil | 130,000,000 | USD | 12,139,862 | |||||||||||||||||||||||||||||||
80,000,000 | USD | 10/20/2013 | Deutsche Bank AG | Receive | 4.05 | % | 1.23 | % | Republic of Brazil | 80,000,000 | USD | 10,040,583 | |||||||||||||||||||||||||||||||
10,000,000 | USD | 12/24/2013 | JP Morgan Chase Bank | Receive | 3.80 | % | 2.04 | % | Republic of Turkey | 10,000,000 | USD | 774,359 | |||||||||||||||||||||||||||||||
10,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 1.85 | % | 0.71 | % | Republic of Italy | N/A | (524,604 | ) | |||||||||||||||||||||||||||||||
14,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 1.45 | % | 0.54 | % | United Kingdom Government | N/A | (591,941 | ) | |||||||||||||||||||||||||||||||
14,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 2.80 | % | 1.09 | % | Hellenic Republic of Greece | N/A | (1,087,183 | ) |
See accompanying notes to the financial statements.
27
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
28,000,000 | USD | 3/20/2014 | Deutsche | (Pay) | 1.70 | % | 0.71 | % | Republic of | N/A | $ | (1,280,342 | ) | ||||||||||||||||||||||||||||||
Bank AG | Italy | ||||||||||||||||||||||||||||||||||||||||||
39,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 1.49 | % | 0.68 | % | Republic of Austria | N/A | (1,463,231 | ) | |||||||||||||||||||||||||||||||
39,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 2.39 | % | 1.09 | % | Hellenic Republic of Greece | N/A | (2,320,404 | ) | |||||||||||||||||||||||||||||||
39,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 1.28 | % | 0.54 | % | United Kingdom Government | N/A | (1,349,477 | ) | |||||||||||||||||||||||||||||||
14,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 1.68 | % | 0.71 | % | Republic of Italy | N/A | (627,601 | ) | |||||||||||||||||||||||||||||||
10,000,000 | USD | 5/14/2014 | Deutsche Bank AG | Receive | 6.64 | % | 2.09 | % | Republic of Turkey | 10,000,000 | USD | 2,156,646 | |||||||||||||||||||||||||||||||
5,000,000 | USD | 5/19/2014 | Deutsche Bank AG | Receive | 6.42 | % | 2.09 | % | Republic of Turkey | 5,000,000 | USD | 1,025,200 | |||||||||||||||||||||||||||||||
10,000,000 | USD | 6/16/2014 | Deutsche Bank AG | Receive | 6.22 | % | 2.1 | % | Republic of Turkey | 10,000,000 | USD | 1,930,657 | |||||||||||||||||||||||||||||||
2,000,000 | USD | 8/24/2014 | Deutsche Bank AG | (Pay) | 4.25 | % | 3 | % | Lebanese Republic | N/A | (107,982 | ) | |||||||||||||||||||||||||||||||
15,000,000 | USD | 9/20/2014 | Deutsche Bank AG | (Pay) | 4.03 | % | 2.95 | % | Sberbank | N/A | (782,170 | ) | |||||||||||||||||||||||||||||||
15,000,000 | USD | 9/20/2014 | Deutsche Bank AG | Receive | 3.77 | % | 2.72 | % | Russian Federation | 15,000,000 | USD | 787,109 | |||||||||||||||||||||||||||||||
575,500,000 | EUR | 3/20/2015 | Deutsche Bank AG | (Pay) | 3.72 | % | 11.48 | % | Venezuela Eurobond | N/A | 220,940,892 | ||||||||||||||||||||||||||||||||
765,000,000 | USD | 3/20/2015 | Deutsche Bank AG | Receive | 3.80 | % | 11.59 | % | Bolivarian Republic of Venezuela | 765,000,000 | USD | (205,516,452 | ) | ||||||||||||||||||||||||||||||
300,000,000 | EUR | 4/20/2015 | Deutsche Bank AG | (Pay) | 4.32 | % | 11.46 | % | Bolivarian Republic of Venezuela | N/A | 106,701,998 | ||||||||||||||||||||||||||||||||
412,500,000 | USD | 4/20/2015 | Deutsche Bank AG | Receive | 4.40 | % | 11.57 | % | Bolivarian Republic of Venezuela | 412,500,000 | USD | (102,710,697 | ) |
See accompanying notes to the financial statements.
28
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
56,950,000,000 | COP | 11/20/2015 | Citigroup | Receive | 1.81 | % | 1.14 | % | Republic of | 56,950,000,000 | COP | $ | 1,013,106 | ||||||||||||||||||||||||||||||
Colombia | |||||||||||||||||||||||||||||||||||||||||||
15,000,000 | USD | 2/20/2016 | Citigroup | (Pay) | 2.16 | % | 1.77 | % | Republic of Colombia | N/A | (337,801 | ) | |||||||||||||||||||||||||||||||
56,700,000,000 | COP | 2/20/2016 | Citigroup | Receive | 1.46 | % | 1.15 | % | Republic of Colombia | 56,700,000,000 | COP | 431,002 | |||||||||||||||||||||||||||||||
25,000,000 | USD | 4/20/2016 | Citigroup | (Pay) | 1.90 | % | 1.78 | % | Republic of Colombia | N/A | (347,243 | ) | |||||||||||||||||||||||||||||||
114,800,000,000 | COP | 4/20/2016 | Citigroup | Receive | 1.33 | % | 1.15 | % | Republic of Colombia | 114,800,000,000 | COP | 763,276 | |||||||||||||||||||||||||||||||
22,000,000 | EUR | 6/17/2016 | Deutsche Bank AG | Receive | 5.60 | % | 19.04 | % | Republic of Angola | 22,000,000 | EUR | (6,311,780 | ) | ||||||||||||||||||||||||||||||
20,000,000 | USD | 8/20/2016 | Citigroup | (Pay) | 2.15 | % | 1.8 | % | Republic of Colombia | N/A | (438,158 | ) | |||||||||||||||||||||||||||||||
97,680,000,000 | COP | 8/20/2016 | Citigroup | Receive | 1.51 | % | 1.16 | % | Republic of Colombia | 97,680,000,000 | COP | 849,156 | |||||||||||||||||||||||||||||||
20,000,000 | USD | 8/20/2016 | Deutsche Bank AG | (Pay) | 0.87 | % | 1.8 | % | United Mexican States | N/A | 1,106,717 | ||||||||||||||||||||||||||||||||
620,000,000 | MXN | 8/20/2016 | Deutsche Bank AG | Receive | 0.61 | % | 1.17 | % | United Mexican States | 620,000,000 | MXN | (1,331,873 | ) | ||||||||||||||||||||||||||||||
22,000,000 | USD | 8/20/2016 | JP Morgan Chase Bank | Receive | 1.99 | % | 1.48 | % | Republic of Brazil | 22,000,000 | USD | 692,002 | |||||||||||||||||||||||||||||||
87,500,000 | USD | 2/20/2017 | Deutsche Bank AG | Receive | 2.43 | % | 11.22 | % | Bolivarian Republic of Venezuela | 87,500,000 | USD | (32,750,018 | ) | ||||||||||||||||||||||||||||||
2,500,000 | USD | 5/20/2017 | Deutsche Bank AG | (Pay) | 1.05 | % | 1.61 | % | Republic of Peru | N/A | 83,304 | ||||||||||||||||||||||||||||||||
32,000,000 | PEN | 5/20/2017 | Deutsche Bank AG | Receive | 0.79 | % | 1.53 | % | Republic of Peru | 32,000,000 | PEN | (443,041 | ) | ||||||||||||||||||||||||||||||
4,500,000 | USD | 7/20/2017 | JP Morgan Chase Bank | Receive | 3.30 | % | 7.45 | % | Republic of Jamaica | 4,500,000 | USD | (924,079 | ) |
See accompanying notes to the financial statements.
29
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
35,000,000 | USD | 7/20/2017 | UBS AG | Receive | 2.26 | % | 2.25 | % | Republic of | 35,000,000 | USD | $ | 125,050 | ||||||||||||||||||||||||||||||
Turkey | |||||||||||||||||||||||||||||||||||||||||||
8,000,000 | USD | 8/20/2017 | JP Morgan Chase Bank | Receive | 2.20 | % | 1.83 | % | Republic of Colombia | 8,000,000 | USD | 200,794 | |||||||||||||||||||||||||||||||
17,000,000 | USD | 9/20/2017 | JP Morgan Chase Bank | Receive | 1.74 | % | 1.92 | % | Republic of Philippines | 17,000,000 | USD | (144,005 | ) | ||||||||||||||||||||||||||||||
30,000,000 | USD | 9/20/2017 | JP Morgan Chase Bank | Receive | 1.77 | % | 1.92 | % | Republic of Philippines | 30,000,000 | USD | (202,619 | ) | ||||||||||||||||||||||||||||||
21,000,000 | USD | 10/20/2017 | Deutsche Bank AG | Receive | 1.78 | % | 4.94 | % | Vneshtorg Bank Bond & Loan | 21,000,000 | USD | (3,678,782 | ) | ||||||||||||||||||||||||||||||
4,000,000 | USD | 11/20/2017 | JP Morgan Chase Bank | Receive | 4.85 | % | 11.07 | % | Bolivarian Republic of Venezuela | 4,000,000 | USD | (1,052,931 | ) | ||||||||||||||||||||||||||||||
4,000,000 | USD | 11/20/2017 | JP Morgan Chase Bank | Receive | 4.90 | % | 11.07 | % | Bolivarian Republic of Venezuela | 4,000,000 | USD | (1,043,444 | ) | ||||||||||||||||||||||||||||||
25,000,000 | USD | 1/20/2018 | Deutsche Bank AG | Receive | 1.50 | % | 1.55 | % | Republic of Brazil | 25,000,000 | USD | (46,755 | ) | ||||||||||||||||||||||||||||||
45,000,000 | USD | 10/20/2018 | Goldman Sachs | Receive | 12.20 | % | 13.8 | % | Republic of Argentina | 45,000,000 | USD | (970,068 | ) | ||||||||||||||||||||||||||||||
10,000,000 | USD | 12/20/2018 | Deutsche Bank AG | Receive | 0.44 | % | 0.60 | % | United Kingdom Government | 10,000,000 | USD | (117,375 | ) | ||||||||||||||||||||||||||||||
10,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.62 | % | 0.77 | % | Republic of Italy | 10,000,000 | USD | 707,294 | |||||||||||||||||||||||||||||||
10,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.70 | % | 0.77 | % | Republic of Italy | 10,000,000 | USD | 772,416 | |||||||||||||||||||||||||||||||
10,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 2.61 | % | 1.17 | % | Hellenic Republic of Greece | 10,000,000 | USD | 1,162,230 | |||||||||||||||||||||||||||||||
10,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.35 | % | 0.60 | % | United Kingdom Government | 10,000,000 | USD | 629,852 |
See accompanying notes to the financial statements.
30
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
20,000,000 | USD | 3/20/2019 | Deutsche | Receive | 1.66 | % | 0.77 | % | Republic of | 20,000,000 | USD | $ | 1,479,711 | ||||||||||||||||||||||||||||||
Bank AG | Italy | ||||||||||||||||||||||||||||||||||||||||||
30,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 2.25 | % | 1.17 | % | Hellenic Republic of Greece | 30,000,000 | USD | 2,632,339 | |||||||||||||||||||||||||||||||
30,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.25 | % | 0.60 | % | United Kingdom Government | 30,000,000 | USD | 1,642,340 | |||||||||||||||||||||||||||||||
30,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.46 | % | 0.76 | % | Republic of Austria | 30,000,000 | USD | 1,754,611 | |||||||||||||||||||||||||||||||
20,000,000 | USD | 8/15/2031 | Goldman Sachs | (Pay) | 1.84 | % | 2.06 | % | United Mexican States | N/A | 518,219 | ||||||||||||||||||||||||||||||||
$ | (26,671,759 | ) | |||||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | (7,822,662 | ) |
^ Receive - Fund receives premium and sells credit protection.
(Pay) - Fund pays premium and buys credit protection.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2009, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider (i.e. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to make as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
See accompanying notes to the financial statements.
31
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
20,000,000 | USD | 1/4/2010 | JP Morgan Chase Bank | Receive | 5.62 | % | 6 month LIBOR | $ | 2,893,522 | ||||||||||||||||||||||
43,000,000 | PEN | 2/19/2010 | JP Morgan Chase Bank | (Pay) | 3.15 | % | 6 month LIBOR | 103,489 | |||||||||||||||||||||||
90,000,000,000 | KRW | 5/29/2010 | Bank of America | (Pay) | 4.79 | % | 3 month KRW LIBOR | (1,190,875 | ) | ||||||||||||||||||||||
51,000,000 | BRL | 1/2/2013 | JP Morgan Chase Bank | Receive | 13.80 | % | Floating Rate CDI | 734,585 | |||||||||||||||||||||||
46,800,000 | PEN | 4/21/2014 | JP Morgan Chase Bank | Receive | 5.03 | % | 6 month LIBOR | (1,680,866 | ) | ||||||||||||||||||||||
75,000,000 | USD | 12/17/2018 | Bank of America | Receive | 2.75 | % | 3 month LIBOR | (4,809,453 | ) | ||||||||||||||||||||||
$ | (3,949,598 | ) | |||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | (749,683 | ) |
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
100,000,000 | USD | 10/13/2009 | JP Morgan | 3 month | EMBI + Total Return | $ | 10,696,463 | ||||||||||||||||||||
Chase Bank | LIBOR + 0.75% | ||||||||||||||||||||||||||
50,000,000 | USD | 7/2/2010 | JP Morgan Chase Bank | 3 month LIBOR + 1.00% | EMBI + Total Return | 1,934,727 | |||||||||||||||||||||
100,000,000 | USD | 7/29/2010 | JP Morgan Chase Bank | 3 month LIBOR + 1.00% | EMBI + Total Return | 1,870,574 | |||||||||||||||||||||
38,167,808 | USD | 12/19/2011 | JP Morgan Chase Bank | 3 month LIBOR + 0.35% | Return on Prestamos Garatizados | (11,287,968) | |||||||||||||||||||||
23,307,880 | USD | 12/19/2011 | JP Morgan Chase Bank | 3 month LIBOR + 0.35% | Return on Prestamos Garatizados | (5,024,614) | |||||||||||||||||||||
37,782,943 | USD | 12/19/2011 | JP Morgan Chase Bank | CER Index + 1.24% | 3 month LIBOR | 5,242,301 | |||||||||||||||||||||
23,307,898 | USD | 12/19/2011 | JP Morgan Chase Bank | CER Index + 3.59% | 3 month LIBOR | 2,477,758 | |||||||||||||||||||||
300,000,000 | RUB | 3/26/2017 | Morgan Stanley | 3 month LIBOR + 0.25% | Return on Sukhoi | (1,974,223) | |||||||||||||||||||||
$ | 3,935,018 | ||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | (650,694 | ) |
See accompanying notes to the financial statements.
32
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
As of August 31, 2009, for the swap contracts held, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
144A - Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
BPI - Indemnification payment bonds
CBO - Collateralized Bond Obligation
CDI - Certificado de Deposito Interbancario
CER - Coeficiente de Estabilizacion de Referencia
DEM LIBOR - London Interbank Offered Rate denominated in Deutsche Marks
EMBI - Emerging Markets Bond Index
EMTN - Euromarket Medium Term Note
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FLIRB - Front Loaded Interest Reduction Bond
GDP - Gross Domestic Product
GMTN - Global Medium Term Note
JPY LIBOR - London Interbank Offered Rate denominated in Japanese Yen
KRW LIBOR - London Interbank Offered Rate denominated in South Korean Won
LIBOR - London Interbank Offered Rate
PDI - Past Due Interest
PIK - Payment In Kind
VRRB - Variable Rate Reduction Bond
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at August 31, 2009, which are subject to change based on the terms of the security.
* Non-income producing security.
(a) Security is in default.
(b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(c) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic.
See accompanying notes to the financial statements.
33
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
(d) In July 2005, the Fund entered into litigation against the Government of Argentina ("Argentina") relating to Argentina's failure to make payments on sovereign debt held by the Fund. That debt, which continues to be valued according to the Fund's valuation policy, represents 1.71% of the net assets of the Fund as of August 31, 2009. Judgments were awarded in the Fund's favor on September 24, 2007; however, the Fund's ability to collect on those judgments remains uncertain and transfer of those judgements requires court approval. Costs associated with this action are being borne by the Fund. (Note 2).
(e) All or a portion of this security has been segregated to cover collateral requirements on reverse repurchase agreements (Note 2).
(f) All or a portion of this security has been segregated to cover collateral requirements on open swap contracts (Note 2).
(g) Non-performing. Borrower not currently paying interest.
(h) Past due maturity payment.
(i) Underlying investment represents interests in defaulted securities.
(j) Although the Fund acquired the warrants between 2000 and 2002 (in connection with the Fund's purchase of Venezuelan bonds), the warrants (and related payments on the warrants) have not been received in custody. The Fund's trading counterparties have acknowledged their delivery obligations. However, because there can be no assurance that the Fund will receive the warrants (and related payments), the Fund values the warrants (and related payments) at a discount from their market value.
(k) In July 2008, the Fund entered into litigation against GNPA Limited ("GNPA") (an entity wholly owned by the government of Ghana) seeking payment on an unconditional promissory note issued by GNPA. The defaulted promissory note, which continues to be valued according to the Fund's valuation policy, represented less than 0.1% of the net assets of the Fund as of August 31, 2009. Costs associated with this action are borne by the Fund.
Currency Abbreviations:
ARS - Argentine Peso BRL - Brazilian Dollar CHF - Swiss Franc COP - Colombian Peso DEM - Deutsche Mark EUR - Euro FIM - Finnish Markka FRF - French Franc GBP - British Pound JPY - Japanese Yen | KRW - South Korean Won KZT - Kazakhstan Tenge MXN - Mexican Peso MYR - Malaysian Ringgit PEN - Peruvian Sol RUB - Russian Ruble TWD - Taiwan Dollar USD - United States Dollar ZAR - South African Rand | ||||||
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, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $2,477,833,530) (Note 2) | $ | 2,149,220,798 | |||||
Investments in affiliated issuers, at value (cost $115,658,633) (Notes 2 and 8) | 99,779,402 | ||||||
Foreign currency, at value (cost $1,817,841) (Note 2) | 1,371,373 | ||||||
Receivable for investments sold | 53,557 | ||||||
Dividends and interest receivable | 33,208,215 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 2,200,395 | ||||||
Interest receivable for open swap contracts | 1,109,261 | ||||||
Receivable for open swap contracts (Note 2) | 436,200,954 | ||||||
Total assets | 2,723,143,955 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 5,667,763 | ||||||
Payable for Fund shares repurchased | 13,275,147 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 591,253 | ||||||
Shareholder service fee | 195,818 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 4,179 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 1,235,343 | ||||||
Payable for open swap contracts (Note 2) | 462,887,293 | ||||||
Payable for reverse repurchase agreements (Note 2) | 225,228,750 | ||||||
Miscellaneous payable | 17,475,582 | ||||||
Accrued expenses | 620,525 | ||||||
Total liabilities | 727,181,653 | ||||||
Net assets | $ | 1,995,962,302 |
See accompanying notes to the financial statements.
35
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 2,501,720,107 | |||||
Accumulated undistributed net investment income | 4,813,378 | ||||||
Accumulated net realized loss | (131,236,300 | ) | |||||
Net unrealized depreciation | (379,334,883 | ) | |||||
$ | 1,995,962,302 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 604,963,359 | |||||
Class IV shares | $ | 1,390,998,943 | |||||
Shares outstanding: | |||||||
Class III | 78,545,014 | ||||||
Class IV | 180,675,638 | ||||||
Net asset value per share: | |||||||
Class III | $ | 7.70 | |||||
Class IV | $ | 7.70 |
See accompanying notes to the financial statements.
36
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Interest | $ | 68,237,826 | |||||
Dividends from affiliated issuers (Note 8) | 531,431 | ||||||
Dividends | 513,276 | ||||||
Total investment income | 69,282,533 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 3,504,956 | ||||||
Shareholder service fee – Class III (Note 3) | 454,420 | ||||||
Shareholder service fee – Class IV (Note 3) | 698,469 | ||||||
Custodian, fund accounting agent and transfer agent fees | 449,052 | ||||||
Interest expense (Note 2) | 337,236 | ||||||
Legal fees | 96,324 | ||||||
Audit and tax fees | 64,768 | ||||||
Trustees fees and related expenses (Note 3) | 20,555 | ||||||
Registration fees | 8,924 | ||||||
Miscellaneous | 14,997 | ||||||
Total expenses | 5,649,701 | ||||||
Expense reductions (Note 2) | (21 | ) | |||||
Net expenses | 5,649,680 | ||||||
Net investment income (loss) | 63,632,853 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (22,529,153 | ) | |||||
Investments in affiliated issuers | 4,398 | ||||||
Closed futures contracts | 9,103 | ||||||
Closed swap contracts | 18,820,878 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (22,054,810 | ) | |||||
Net realized gain (loss) | (25,749,584 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 475,201,728 | ||||||
Investments in affiliated issuers | 13,210,375 | ||||||
Open futures contracts | 29,089 | ||||||
Open swap contracts | 74,599,525 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (30,042,730 | ) | |||||
Net unrealized gain (loss) | 532,997,987 | ||||||
Net realized and unrealized gain (loss) | 507,248,403 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 570,881,256 |
See accompanying notes to the financial statements.
37
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 63,632,853 | $ | 153,709,007 | |||||||
Net realized gain (loss) | (25,749,584 | ) | (26,166,295 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 532,997,987 | (1,026,863,672 | ) | ||||||||
Net increase (decrease) in net assets from operations | 570,881,256 | (899,320,960 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (10,931,713 | ) | (44,778,489 | ) | |||||||
Class IV | (23,292,115 | ) | (170,454,066 | ) | |||||||
Total distributions from net investment income | (34,223,828 | ) | (215,232,555 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (14,329,630 | ) | ||||||||
Class IV | — | (44,349,438 | ) | ||||||||
Total distributions from net realized gains | — | (58,679,068 | ) | ||||||||
(34,223,828 | ) | (273,911,623 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (95,189,154 | ) | 74,710,846 | ||||||||
Class IV | (280,189,541 | ) | 75,473,817 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (375,378,695 | ) | 150,184,663 | ||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 2,613,424 | 95,851 | |||||||||
Class IV | 5,618,689 | 301,304 | |||||||||
Increase in net assets resulting from purchase premiums and redemption fees | 8,232,113 | 397,155 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | (367,146,582 | ) | 150,581,818 | ||||||||
Total increase (decrease) in net assets | 169,510,846 | (1,022,650,765 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 1,826,451,456 | 2,849,102,221 | |||||||||
End of period (including accumulated undistributed net investment income of $4,813,378 and distributions in excess of net investment income of $24,595,647, respectively) | $ | 1,995,962,302 | $ | 1,826,451,456 |
See accompanying notes to the financial statements.
38
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 5.85 | $ | 10.06 | $ | 10.73 | $ | 11.30 | $ | 11.09 | $ | 10.51 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.21 | 0.54 | 0.68 | 0.86 | 0.88 | 0.89 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 1.76 | (3.77 | ) | (0.13 | ) | 0.30 | 1.14 | 1.16 | |||||||||||||||||||
Total from investment operations | 1.97 | (3.23 | ) | 0.55 | 1.16 | 2.02 | 2.05 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.12 | ) | (0.77 | ) | (0.76 | ) | (0.94 | ) | (1.26 | ) | (1.18 | ) | |||||||||||||||
From net realized gains | — | (0.21 | ) | (0.46 | ) | (0.79 | ) | (0.55 | ) | (0.29 | ) | ||||||||||||||||
Total distributions | (0.12 | ) | (0.98 | ) | (1.22 | ) | (1.73 | ) | (1.81 | ) | (1.47 | ) | |||||||||||||||
Net asset value, end of period | $ | 7.70 | $ | 5.85 | $ | 10.06 | $ | 10.73 | $ | 11.30 | $ | 11.09 | |||||||||||||||
Total Return(a) | 33.90 | %** | (32.75 | )% | 5.07 | % | 10.98 | % | 19.50 | % | 20.58 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 604,963 | $ | 535,194 | $ | 734,921 | $ | 876,598 | $ | 1,020,976 | $ | 1,088,609 | |||||||||||||||
Net operating expenses to average daily net assets(b) | 0.57 | %(c)* | 0.59 | %(c) | 0.57 | %(c) | 0.57 | % | 0.57 | % | 0.57 | % | |||||||||||||||
Interest expense to average daily net assets(d) | 0.03 | %* | 0.23 | % | 0.74 | % | 0.48 | % | 0.22 | % | 0.08 | % | |||||||||||||||
Total net expenses to average daily net assets | 0.60 | %(c)* | 0.82 | %(c) | 1.31 | %(c) | 1.05 | % | 0.79 | % | 0.65 | % | |||||||||||||||
Net investment income to average daily net assets | 6.33 | %* | 6.36 | % | 6.36 | % | 7.91 | % | 7.75 | % | 8.22 | % | |||||||||||||||
Portfolio turnover rate | 13 | %** | 38 | % | 53 | % | 83 | % | 144 | % | 121 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.03 | $ | 0.00 | (e) | $ | 0.01 | $ | 0.01 | $ | 0.01 | $ | 0.01 |
(a) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder and assumes the effect of reinvested distributions.
(b) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(c) The net expense ratio does not include the effect of expense reductions.
(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) 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)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 5.85 | $ | 10.06 | $ | 10.73 | $ | 11.30 | $ | 11.09 | $ | 10.51 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.21 | 0.53 | 0.69 | 0.87 | 0.88 | 0.90 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 1.76 | (3.76 | ) | (0.13 | ) | 0.29 | 1.15 | 1.16 | |||||||||||||||||||
Total from investment operations | 1.97 | (3.23 | ) | 0.56 | 1.16 | 2.03 | 2.06 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.12 | ) | (0.77 | ) | (0.77 | ) | (0.94 | ) | (1.27 | ) | (1.19 | ) | |||||||||||||||
From net realized gains | — | (0.21 | ) | (0.46 | ) | (0.79 | ) | (0.55 | ) | (0.29 | ) | ||||||||||||||||
Total distributions | (0.12 | ) | (0.98 | ) | (1.23 | ) | (1.73 | ) | (1.82 | ) | (1.48 | ) | |||||||||||||||
Net asset value, end of period | $ | 7.70 | $ | 5.85 | $ | 10.06 | $ | 10.73 | $ | 11.30 | $ | 11.09 | |||||||||||||||
Total Return(a) | 33.89 | %** | (32.66 | )% | 5.13 | % | 11.06 | % | 19.57 | % | 20.64 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,390,999 | $ | 1,291,258 | $ | 2,114,181 | $ | 1,996,230 | $ | 1,799,792 | $ | 1,550,402 | |||||||||||||||
Net operating expenses to average daily net assets(b) | 0.52 | %(c)* | 0.54 | %(c) | 0.53 | %(c) | 0.52 | % | 0.52 | % | 0.52 | % | |||||||||||||||
Interest expense to average daily net assets(d) | 0.03 | %* | 0.23 | % | 0.74 | % | 0.48 | % | 0.22 | % | 0.08 | % | |||||||||||||||
Total net expenses to average daily net assets | 0.55 | %(c)* | 0.77 | %(c) | 1.27 | %(c) | 1.00 | % | 0.74 | % | 0.60 | % | |||||||||||||||
Net investment income to average daily net assets | 6.36 | %* | 6.46 | % | 6.45 | % | 7.97 | % | 7.75 | % | 8.29 | % | |||||||||||||||
Portfolio turnover rate | 13 | %** | 38 | % | 53 | % | 83 | % | 144 | % | 121 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.03 | $ | 0.00 | (e) | $ | 0.00 | (e) | $ | 0.01 | $ | 0.00 | (e) | $ | 0.01 |
(a) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder and assumes the effect of reinvested distributions.
(b) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(c) The net expense ratio does not include the effect of expense reductions.
(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) 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.
40
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Emerging Country Debt Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the J.P. Morgan Emerging Markets Bond Index Global (EMBIG). The Fund invests primarily in sovereign debt of emerging countries, although it may also make investments in entities related to, but not guaranteed by, emerging countries or in entities wholly unrelated to emerging countries. Under normal circumstances, the Fund invests (including through investment in other GMO Funds) at least 80% of its assets in debt investments tied economically to emerging countries. Debt investments include (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by using a futures contract, swap contract, currency forward and/or option. The Fund typically gains its investment exposure by purchasing debt securities of sovereign issuers of emerging countries or by using derivatives, typically credit default swaps. The Fund also invests in asset-backed securities (including through GMO Short-Duration Collateral Fund ("SDCF") and GMO World Opportunity Overlay Fund ("Overlay Fund")). During the six-month period ended August 31, 2009, the Fund invested a substantial portion of its assets in below investment grade securities (also known as "junk bonds"). Generally, at least 75% of the Fund's assets are denominated in, or hedged into, U.S. dollars. In pursuing its investment objective, the Fund typically uses exchange-traded and over-the-counter ("OTC") derivatives, including options, swap contracts (in addition to credit default swaps), currency forwards, and futures. The Fund also invests in unaffiliated money market funds and in GMO U.S. Treasury Fund.
Throughout the period ended August 31, 2009, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder service fee.
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). As of August 31, 2009, shares of SDCF, GMO Special Purpose Holding Fund ("SPHF") and Overlay Fund were not publicly available for direct purchase.
The Fund will, if deemed prudent by the Manager, take temporary defensive measures (until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in
41
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
accordance with the Fund's normal investment strategies) and may not achieve its investment objectives during those periods. Recent changes in the credit markets have reduced the liquidity of all types of fixed income securities, including asset-backed securities.
As of August 31, 2009, the Fund expected to effect redemptions of its shares in-kind above de minimis levels. The Fund has established de minimis amounts below which redemptions would be honored for cash.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
As of August 31, 2009, a significant portion of the Fund's dividends received from other GMO funds is expected to be a return of capital for U.S. federal income tax purposes. Accordingly, "dividends from affiliated issuers" reported in the Statement of Operations has been reduced by the portion estimated to be a return of capital as of August 31, 2009. The estimated return of capital is $13,317,599. In addition, all applicable related income disclosures throughout this Semiannual Report have been adjusted by the estimated return of capital. The dividends from affiliated issuers are subject to change and will not be finalized until February 28, 2010, the Fund's upcoming fiscal year-end. Finally, in early 2010, applicable shareholders will receive Form 1099-DIV that will indicate the appropriate tax character of all distributions paid by the Fund in 2009.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended
42
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by the Fund, those alternative sources would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fu nd. As of August 31, 2009, the total value of securities held directly and indirectly that were fair valued or for which no alternative pricing source was available represented 47.14% of the net assets of the Fund.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using indicative bids received from primary pricing sources. In certain cases, bids received from primary pricing sources or prices calculated by using industry models are adjusted by a specified discount for liquidity or other considerations. In addition, the Fund valued certain sovereign debt securities using comparable securities issued by the sovereign adjusted by a specified spread. The Fund also utilizes third party valuation services (which use industry standard models and inputs from pricing vendors) to value credit default swaps. The Fund valued certain debt securities using a specified spread above the LIBOR Rate. The Fund considered certain defaulted securities to be worthless.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
43
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Asset-Backed Securities | $ | — | $ | 22,648,425 | $ | 162,745,344 | $ | 185,393,769 | |||||||||||
Corporate Debt | — | — | 183,755,227 | 183,755,227 | |||||||||||||||
Foreign Government Agency | — | — | 300,585,979 | 300,585,979 | |||||||||||||||
Foreign Government Obligations | — | — | 986,101,210 | 986,101,210 | |||||||||||||||
Judgments | — | — | 34,091,562 | 34,091,562 | |||||||||||||||
U.S. Government | 57,281,250 | 178,934,388 | — | 236,215,638 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | 57,281,250 | 201,582,813 | 1,667,279,322 | 1,926,143,385 | |||||||||||||||
Loan Assignments | — | — | 37,887,097 | 37,887,097 | |||||||||||||||
Loan Participations | — | — | 124,996,777 | 124,996,777 | |||||||||||||||
Promissory Notes | — | — | 3,406,116 | 3,406,116 | |||||||||||||||
Options Purchased | — | 2,727,864 | — | 2,727,864 | |||||||||||||||
Mutual Funds | 6,610,711 | 93,168,691 | — | 99,779,402 | |||||||||||||||
Rights and Warrants | — | — | 10,854,750 | 10,854,750 | |||||||||||||||
Short-Term Investments | — | 43,204,809 | — | 43,204,809 | |||||||||||||||
Total Investments | 63,891,961 | 340,684,177 | 1,844,424,062 | 2,249,000,200 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | — | 2,200,395 | — | 2,200,395 | |||||||||||||||
Swap Agreements | — | 15,339,838 | 420,861,116 | 436,200,954 | |||||||||||||||
Total | $ | 63,891,961 | $ | 358,224,410 | $ | 2,265,285,178 | $ | 2,687,401,549 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | $ | — | $ | (1,235,343 | ) | $ | — | $ | (1,235,343 | ) | |||||||||
Swap Agreements | — | (9,655,417 | ) | (453,231,876 | ) | (462,887,293 | ) | ||||||||||||
Total | $ | — | $ | (10,890,760 | ) | $ | (453,231,876 | ) | $ | (464,122,636 | ) |
44
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 95.90% and (1.63)% of total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||
Asset-Backed Securities | $ | 209,397,142 | $ | (62,437,142 | ) | $ | (61,080 | ) | $ | (3,403,568 | ) | $ | 41,898,417 | $ | (22,648,425 | ) | $ | 162,745,344 | |||||||||||||
Corporate Debt | 147,174,450 | (31,011,844 | ) | 122,202 | (3,104,921 | ) | 70,575,340 | — | 183,755,227 | ||||||||||||||||||||||
Foreign Government Agency | 186,865,558 | 38,222,299 | 8,459 | (2,323,660 | ) | 77,813,323 | — | 300,585,979 | |||||||||||||||||||||||
Foreign Government Obligation | 797,136,895 | (56,876,048 | ) | 7,009,388 | (10,460,233 | ) | 249,291,208 | — | 986,101,210 | ||||||||||||||||||||||
Judgments | 29,629,895 | — | 366,898 | — | 4,094,769 | — | 34,091,562 | ||||||||||||||||||||||||
Total Debt Obligations | 1,370,203,940 | (112,102,735 | ) | 7,445,867 | (19,292,382 | ) | 443,673,057 | (22,648,425 | ) | 1,667,279,322 | |||||||||||||||||||||
Loan Assignments | 31,003,330 | 2,280,057 | 346,804 | 697,465 | 3,559,441 | — | 37,887,097 | ||||||||||||||||||||||||
Loan Participations | 109,399,494 | (4,345,964 | ) | 809,326 | 583,188 | 18,550,733 | — | 124,996,777 | |||||||||||||||||||||||
Mutual Funds | 15,629 | — | — | — | (2,141 | ) | (13,488 | ) | — | ||||||||||||||||||||||
Promissory Notes | 4,404,484 | (1,280,131 | ) | (2,995,700 | ) | 831,589 | 2,445,874 | — | 3,406,116 | ||||||||||||||||||||||
Rights and Warrants | 5,276,876 | — | — | — | 5,577,874 | — | 10,854,750 | ||||||||||||||||||||||||
Total Investments | 1,520,303,753 | (115,448,773 | ) | 5,606,297 | (17,180,140 | ) | 473,804,838 | (22,661,913 | ) | 1,844,424,062 | |||||||||||||||||||||
Derivatives | |||||||||||||||||||||||||||||||
Swap Agreements | (62,892,483 | ) | (21,391,217 | ) | — | 21,391,217 | 39,243,963 | (8,722,240 | ) | (32,370,760 | ) | ||||||||||||||||||||
Total | $ | 1,457,411,270 | $ | (136,839,990 | ) | $ | 5,606,297 | $ | 4,211,077 | $ | 513,048,801 | $ | (31,384,153 | ) | $ | 1,812,053,302 |
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included
45
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. 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. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
46
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. Options contracts purchased by the Fund and outstanding at the end of the period are listed in the Fund's Schedule of Investments.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts outstanding at the end of the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Loan agreements
The Fund may invest in loans to corporate, governmental, or other borrowers. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans. A loan is
47
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
often administered by a bank or other financial institution 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, (i) the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the party from whom the Fund has purchased the participation and only upon receipt by that party of payments from the borrower and (ii) the Fund generally has no right to enforce compliance by the borrower with the terms of the loan agreement. As a result, the Fund may be subject to credit risk both of the party from whom it purchased the loan participation and the borrower. When the Fund purchases assignments of loans, it acquires direct rights against the borrower. Loan agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
48
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at a later date at a fixed price. The Fund can use the proceeds received from entering into a reverse repurchase agreement to
49
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
make additional investments, which can cause the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. As of August 31, 2009, the Fund had entered into reverse repurchase agreements, p lus accrued interest, amounting to $225,228,750, selling securities with a market value, plus accrued interest, of $239,066,755. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. Rights and warrants held by the Fund 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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and
50
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (105,395,789 | ) | ||||
Total | $ | (105,395,789 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 2,613,648,286 | $ | 114,682,960 | $ | (479,331,046 | ) | $ | (364,648,086 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon
51
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 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 incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
From prior to March 1, 2009, the premium on cash purchases of Fund shares was 0.50% of the amount invested and the fee on cash redemptions was 2.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund 's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant
52
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. Many of these risks are more pronounced as a result of current global economic conditions that began to unfold in 2008. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries. Investments in emerging co untry debt present risks that are not presented by many other securities. Many emerging countries are subject to 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 expropriate, or impose various types of foreign currency regulations or controls that impede the Fund's ability to repatriate, amounts it is entitled to receive. These factors may result in significant volatility in the values of the Fund's holdings. The markets for emerging country debt are typically less liquid than those of developed markets. In addition, fluctuations in exchange rates may adversely affect the U.S. dollar value of the Fund's investments denominated in foreign currencies and its foreign currency holdings.
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to a repurchase or reverse repurchase agreement or other OTC derivatives contracts, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it invests primarily in sovereign debt of emerging countries, which is typically below investment grade. Below investment grade bonds ("junk bonds") have speculative characteristics, and changes in economic conditions or other circumstances are
53
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
more likely to lead to an issuer's weakened capacity to make principal and interest payments than is the case with investment grade bonds. This risk is also particularly pronounced for the Fund because it typically uses OTC derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Because the Fund typically invests in securities that are of lesser quality than those in its benchmark, in rapidly declining markets the percentage decline in the value of the Fund is likely to exceed that of its benchmark.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. The Fund may be required to sell less liquid securities at distressed prices or to meet redemption requests in-kind. Recent changes in credit markets have reduced the liquidity of all types of fixed income securities, including in particular the asset-backed securities held by the Fund through SDCF and Overlay Fund. These risks are particularly pronounced for the Fund because it invests primarily in sovereign debt of emerging countries, which is not widely traded and which may be subject to purchase and sale restrictions. In addition, because the Fund typically invests in securities that are less liquid than those in its benchmark, in rapidly declining markets the percentage decline in the Fund's investments is likely to exceed that of its benchmark.
• Leveraging Risk — The Fund's use of reverse repurchase agreements and other derivatives and securities lending may cause the portfolio to be leveraged. The Fund is not limited in the extent to which it may use derivatives or in the absolute face value of its derivative positions. Leverage increases the Fund's portfolio losses when the value of its investments declines.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
Other principal risks of an investment in the Fund include Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Focused Investment Risk (increased risk from the Fund's focus on investments in a limited number of countries, regions, or sectors), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. For more information about reverse repurchase agreements and other
54
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
derivatives, please refer to the descriptions of financial instruments (e.g. reverse repurchase agreements, swaps, futures and other types of derivative contracts) in Note 2 above as well as the discussion of the Fund's use of derivatives below.
Investments in emerging country debt present risks that are not presented by many other securities. Many emerging countries are subject to 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 expropriate, or impose various types of foreign currency regulations or controls that impede the Fund's ability to repatriate, amounts it receives. These factors may result in significant volatility in the values of the Fund's holdings. The markets for emerging country debt are typically less liquid than those of developed markets. In addition, fluctuations in exchange rates may adversely affect the U.S. dollar value of the Fund's investments denominated in foreign currencies and its foreign currency holdings.
The Fund's investments in many countries and credit default swaps it has written expose the Fund to a significant risk of loss. The Fund's financial position could be adversely affected (depending on whether the Fund sold or bought the credit protection) in the event of a default by any of these countries on obligations held by the Fund, obligations referenced in those credit default swaps or obligations issued by them generally.
The Fund invests (including through investment in underlying funds) in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of u nderlying assets or other support available to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of
55
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
financial institutions to make markets in many fixed income securities generally. These events reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not continue or that they will not deteriorate further. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
The Fund uses its cash balance to meet its collateral obligations and for other purposes. There is no assurance that the Fund's cash balance will be sufficient to meet those obligations. If it is not, the Fund would be required to liquidate portfolio positions. To manage the Fund's cash collateral needs, the Manager reserves the right to reduce or eliminate the Fund's derivative exposures. A reduction in those exposures may cause the performance of the Fund to track its benchmark less closely and make the Fund's performance more dependent on the performance of the asset-backed securities it holds directly or indirectly.
Among other trading agreements, the Fund is party to International Swaps and Derivatives Association, Inc. Master Agreements ("ISDA Agreements") with select counterparties that generally govern over-the-counter derivative transactions entered into by the Fund. The ISDA Master Agreements typically include representations and warranties as well as contractual terms related to collateral, events of default, termination events, and other provisions. Termination events include the decline in the net assets of the Fund below a certain level over a specified period of time and entitle a counterparty to elect to terminate early with respect to some or all the transactions under the ISDA Agreement with that counterparty. Such an election by one or more of the counterparties could have a material adverse impact on the Fund's operations. Due to declines in the net assets of the Fund prior to August 31, 2009, one or more counterparties are entitled to terminate early but none has taken such action.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
56
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund uses derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund uses derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps (including credit default swaps) or other derivatives on an index, a single security or a basket of securities to gain investment exposures. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. For example, the Fund may use credit default swaps to take an active short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may attempt to alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed vs. variable and shorter duration vs. longer duration. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
57
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
58
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options, rights and warrants) | $ | 2,727,864 | $ | — | $ | — | $ | — | $ | 10,854,750 | $ | 13,582,614 | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 2,200,395 | — | — | — | 2,200,395 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | 3,731,596 | — | 410,247,535 | — | 22,221,823 | 436,200,954 | |||||||||||||||||||||
Total | $ | 6,459,460 | $ | 2,200,395 | $ | 410,247,535 | $ | — | $ | 33,076,573 | $ | 451,983,963 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | (1,235,343 | ) | — | — | — | (1,235,343 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | (7,681,194 | ) | — | (436,919,294 | ) | — | (18,286,805 | ) | (462,887,293 | ) | |||||||||||||||||
Total | $ | (7,681,194 | ) | $ | (1,235,343 | ) | $ | (436,919,294 | ) | $ | — | $ | (18,286,805 | ) | $ | (464,122,636 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables. The foregoing does not include the Fund's reverse repurchase agreements.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
59
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options, rights and warrants) | $ | (3,721,230 | ) | $ | — | $ | — | $ | — | $ | — | $ | (3,721,230 | ) | |||||||||||||
Futures contracts | 9,103 | — | — | — | — | 9,103 | |||||||||||||||||||||
Swap contracts | 3,246,119 | — | 23,163,389 | — | (7,588,630 | ) | 18,820,878 | ||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | (22,626,987 | ) | — | — | — | (22,626,987 | ) | |||||||||||||||||||
Total | $ | (466,008 | ) | $ | (22,626,987 | ) | $ | 23,163,389 | $ | — | $ | (7,588,630 | ) | $ | (7,518,236 | ) | |||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options, rights and warrants) | $ | 8,294,217 | $ | — | $ | — | $ | — | $ | — | $ | 8,294,217 | |||||||||||||||
Futures contracts | 29,089 | — | — | — | — | 29,089 | |||||||||||||||||||||
Swap contracts | (5,143,565 | ) | — | 33,759,405 | — | 45,983,685 | 74,599,525 | ||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | (31,245,195 | ) | — | — | — | (31,245,195 | ) | |||||||||||||||||||
Total | $ | 3,179,741 | $ | (31,245,195 | ) | $ | 33,759,405 | $ | — | $ | 45,983,685 | $ | 51,677,636 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables. The foregoing does not include the Fund's reverse repurchase agreements.
60
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Forwards | Futures | Swaps | Options | Rights/ Warrants | |||||||||||||||||||
Average notional amount outstanding | $ | 520,855,706 | $ | 344,454,340 | $ | 6,304,432,435 | $ | 217,869,325 | $ | 8,639,544 | |||||||||||||
Highest notional amount outstanding | 578,451,382 | 2,411,180,379 | 6,458,424,506 | 296,742,706 | 10,854,750 | ||||||||||||||||||
Lowest notional amount outstanding | 485,048,962 | — | 6,228,333,145 | 184,377,444 | 5,276,876 |
Other matters
In July 2005, the Fund entered into litigation against the Government of Argentina ("Argentina") relating to Argentina's failure to make payments on sovereign debt held by the Fund. That debt, which continues to be valued according to the Fund's valuation policy, represented 1.71% of the net assets of the Fund as of August 31, 2009. Judgments were awarded in the Fund's favor on September 24, 2007; however, the Fund's ability to collect on those judgments remains uncertain, and the Fund is not able to transfer or sell the judgments without court consent. Costs associated with this action are borne by the Fund.
In July 2008, the Fund entered into litigation against GNPA Limited ("GNPA") (an entity wholly owned by the government of Ghana) seeking payment on an unconditional promissory note issued by GNPA. The defaulted promissory note, which continues to be valued according to the Fund's valuation policy, represented less than 0.1% of the net assets of the Fund as of August 31, 2009. Costs associated with this action are borne by the Fund.
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF.
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 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 expenses incurred by the Fund through at least June 30, 2010 for an amount equal to the fees and expenses incurred indirectly by the Fund through its investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses, which include fees and expenses of the independent Trustees of the Trust, fees and expenses for legal
61
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes)).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 Trust's independent Trustees and Chief Compliance Officer ("CCO") during the period ended August 31, 2009 was $16,323 and $9,384, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $269,480,621 and $318,513,409, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
62
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2009, 44.43% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 0.31% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 14.97% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 3,314,262 | $ | 22,982,213 | 29,283,609 | $ | 176,799,786 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 877,471 | 6,115,971 | 8,768,892 | 57,123,655 | |||||||||||||||
Shares repurchased | (17,136,497 | ) | (124,287,338 | ) | (19,580,527 | ) | (159,212,595 | ) | |||||||||||
Purchase premiums | — | 38,090 | — | 3,273 | |||||||||||||||
Redemption fees | — | 2,575,334 | — | 92,578 | |||||||||||||||
Net increase (decrease) | (12,944,764 | ) | $ | (92,575,730 | ) | 18,471,974 | $ | 74,806,697 | |||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 12,951,169 | $ | 96,871,777 | 8,624,354 | $ | 56,358,374 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 233,337 | 1,626,358 | 32,907,567 | 209,783,649 | |||||||||||||||
Shares repurchased | (53,386,083 | ) | (378,687,676 | ) | (30,713,578 | ) | (190,668,206 | ) | |||||||||||
Purchase premiums | — | 75,297 | — | 7,071 | |||||||||||||||
Redemption fees | — | 5,543,392 | — | 294,233 | |||||||||||||||
Net increase (decrease) | (40,201,577 | ) | $ | (274,570,852 | ) | 10,818,343 | $ | 75,775,121 |
63
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 | $ | 67,991,002 | $ | — | $ | — | $ | 517,430 | $ | — | $ | 63,816,116 | |||||||||||||||
GMO Special Purpose Holding Fund | 15,629 | — | — | — | — | 13,488 | |||||||||||||||||||||
GMO U.S. Treasury Fund | — | 17,608,312 | 11,000,000 | 14,001 | — | 6,610,711 | |||||||||||||||||||||
GMO World Opportunity Overlay Fund | 27,808,483 | — | — | — | — | 29,339,087 | o | ||||||||||||||||||||
Totals | $ | 95,815,114 | $ | 17,608,312 | $ | 11,000,000 | $ | 531,431 | $ | — | $ | 99,779,402 |
o The Fund received return of capital distributions in the amount of $2,541,198.
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. Beginning October 1, 2009, the Fund ordinarily expected to pay redemption requests with cash (less a redemption fee).
64
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those p ersonnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
65
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement — (Continued)
August 31, 2009 (Unaudited)
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trust ees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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, the Trustees concluded, within the context of their overall conclusions regarding the agreement, th at 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered
66
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement — (Continued)
August 31, 2009 (Unaudited)
the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
67
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.60 | % | $ | 1,000.00 | $ | 1,339.00 | $ | 3.54 | |||||||||||
2) Hypothetical | 0.60 | % | $ | 1,000.00 | $ | 1,022.18 | $ | 3.06 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.55 | % | $ | 1,000.00 | $ | 1,338.90 | $ | 3.24 | |||||||||||
2) Hypothetical | 0.55 | % | $ | 1,000.00 | $ | 1,022.43 | $ | 2.80 |
* Expenses are calculated using each Class's annualized expense ratio (including interest expense and indirect expenses incurred) for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
68
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 97.0 | % | |||||
Short-Term Investments | 2.0 | ||||||
Futures | 0.3 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Preferred Stocks | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | 0.6 | ||||||
100.0 | % | ||||||
Country / Region Summary** | % of Investments | ||||||
Euro Region*** | 27.3 | % | |||||
Japan | 26.8 | ||||||
United Kingdom | 22.7 | ||||||
Switzerland | 8.7 | ||||||
Sweden | 4.5 | ||||||
Australia | 4.3 | ||||||
Canada | 1.8 | ||||||
Singapore | 1.4 | ||||||
Denmark | 1.1 | ||||||
Hong Kong | 0.9 | ||||||
Norway | 0.3 | ||||||
New Zealand | 0.2 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia 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, 2009 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuers — 100.0% | |||||||||||
645,840 | GMO Flexible Equities Fund, Class VI | 13,194,512 | |||||||||
14,630,119 | GMO International Growth Equity Fund, Class IV | 280,166,787 | |||||||||
13,966,152 | GMO International Intrinsic Value Fund, Class IV | 287,283,748 | |||||||||
1,587,308 | GMO International Small Companies Fund, Class III | 10,920,679 | |||||||||
TOTAL MUTUAL FUNDS (COST $830,069,382) | 591,565,726 | ||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||
31,497 | State Street Eurodollar Time Deposit, 0.01%, due 09/01/09 | 31,497 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $31,497) | 31,497 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $830,100,879) | 591,597,223 | ||||||||||
Other Assets and Liabilities (net) — (0.0%) | (42,002 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 591,555,221 |
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, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $31,497) (Note 2) | $ | 31,497 | |||||
Investments in affiliated issuers, at value (cost $830,069,382) (Notes 2 and 8) | 591,565,726 | ||||||
Receivable for investments sold | 62,683 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 8,773 | ||||||
Total assets | 591,668,679 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 62,683 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 1,015 | ||||||
Accrued expenses | 49,760 | ||||||
Total liabilities | 113,458 | ||||||
Net assets | $ | 591,555,221 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 908,952,186 | |||||
Accumulated undistributed net investment income | 9,949,642 | ||||||
Accumulated net realized loss | (88,842,951 | ) | |||||
Net unrealized depreciation | (238,503,656 | ) | |||||
$ | 591,555,221 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 591,555,221 | |||||
Shares outstanding: | |||||||
Class III | 45,267,664 | ||||||
Net asset value per share: | |||||||
Class III | $ | 13.07 |
See accompanying notes to the financial statements.
3
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 9,957,925 | |||||
Total investment income | 9,957,925 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 24,768 | ||||||
Audit and tax fees | 16,376 | ||||||
Legal fees | 9,476 | ||||||
Trustees fees and related expenses (Note 3) | 4,895 | ||||||
Registration fees | 1,104 | ||||||
Miscellaneous | 3,864 | ||||||
Total expenses | 60,483 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (51,704 | ) | |||||
Expense reductions (Note 2) | (496 | ) | |||||
Net expenses | 8,283 | ||||||
Net investment income (loss) | 9,949,642 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (45,686,239 | ) | |||||
Net realized gain (loss) | (45,686,239 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in affiliated issuers | 211,558,940 | ||||||
Net realized and unrealized gain (loss) | 165,872,701 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 175,822,343 |
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
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 9,949,642 | $ | 24,903,946 | |||||||
Net realized gain (loss) | (45,686,239 | ) | (16,891,869 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 211,558,940 | (351,591,999 | ) | ||||||||
Net increase (decrease) in net assets from operations | 175,822,343 | (343,579,922 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (24,913,805 | ) | ||||||||
Net realized gains | |||||||||||
Class III | — | (81,291,869 | ) | ||||||||
— | (106,205,674 | ) | |||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 6,449,492 | 140,586,628 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 5,113 | 87,418 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 6,454,605 | 140,674,046 | |||||||||
Total increase (decrease) in net assets | 182,276,948 | (309,111,550 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 409,278,273 | 718,389,823 | |||||||||
End of period (including accumulated undistributed net investment income of $9,949,642 and $0, respectively) | $ | 591,555,221 | $ | 409,278,273 |
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 each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 9.20 | $ | 20.63 | $ | 22.16 | $ | 20.00 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)(b)† | 0.22 | 0.65 | 0.47 | 0.53 | |||||||||||||||
Net realized and unrealized gain (loss) | 3.65 | (9.20 | ) | 0.52 | 2.45 | ||||||||||||||
Total from investment operations | 3.87 | (8.55 | ) | 0.99 | 2.98 | ||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | — | (0.62 | ) | (1.24 | ) | (0.72 | ) | ||||||||||||
From net realized gains | — | (2.26 | ) | (1.28 | ) | (0.10 | ) | ||||||||||||
Total distributions | — | (2.88 | ) | (2.52 | ) | (0.82 | ) | ||||||||||||
Net asset value, end of period | $ | 13.07 | $ | 9.20 | $ | 20.63 | $ | 22.16 | |||||||||||
Total Return(c) | 42.07 | %** | (46.05 | )% | 3.57 | % | 14.93 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 591,555 | $ | 409,278 | $ | 718,390 | $ | 440,431 | |||||||||||
Net expenses to average daily net assets(d)(e) | 0.00 | %(f)* | 0.00 | %(f) | 0.00 | %(f) | 0.00 | %* | |||||||||||
Net investment income to average daily net assets(b) | 3.91 | %* | 4.12 | % | 2.04 | % | 3.32 | %* | |||||||||||
Portfolio turnover rate | 9 | %** | 33 | % | 4 | % | 1 | %** | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.01 | % | 0.02 | % | 0.03 | %* | |||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 0.01 |
(a) Period from June 5, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(d) Net expenses to average daily net assets were less than 0.01%.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(f) The net expense ratio does not include the effect of expense reductions.
(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.
6
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO International Opportunities Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, 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. The Fund also may invest in shares of other series of the Trust, including the GMO Fixed Income Funds, GMO Alpha Only Fund, GMO Flexible Equities Fund, and GMO Alternative Asset Opportunity Fund (the GMO Funds in which the Fund invests are collectively referred to as "underlying funds") . Although the Fund's primary exposure is to foreign equity securities (including emerging country equities, both growth and value style equities, and equities of any market capitalization), the Fund also may have exposure to foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), as well as to the investment returns of commodities and, from time to ti me, other alternative asset classes. Under normal circumstances, the Fund invests at least 80% of its assets in equity investments (which include common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depository receipts). The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and other cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
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. As of August 31, 2009, shares of GMO Flexible Equities Fund were not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP
7
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Shares of the underlying funds and other mutual funds are generally valued at their net asset value.
Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 93.17% of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on models used by a third party vendor. Those underlying funds classify such securities under SFAS 157 (as defined below) as Level 2.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities
8
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | 578,371,214 | $ | 13,194,512 | $ | — | $ | 591,565,726 | |||||||||||
Short-Term Investments | 31,497 | — | — | 31,497 | |||||||||||||||
Total | $ | 578,402,711 | $ | 13,194,512 | $ | — | $ | 591,597,223 |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements.
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
9
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $7,394,778.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 909,259,565 | $ | 1,275,652 | $ | (318,937,994 | ) | $ | (317,662,342 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Income dividends and capital gain distributions from the underlying funds 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 asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
10
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the six-month period ended August 31, 2009, the premium on cash purchases and the fee on cash redemptions were each 0.04% of the amount invested or redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospective or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and/or redemption fees may be waived at the Manager's discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premium and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and/or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of a Fund's shares if the Fund will not incur transaction costs or will incur/reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a
11
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities held by underlying funds may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and its underlying funds generally seek to be fully invested and normally do not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's and the underlying funds' investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. An underlying fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of an underlying fund's foreign currency holdings and investments denominated in foreign currencies.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent an underlying fund from selling securities or closing derivative positions at desirable prices.
• Derivatives Risk — The use of derivatives by underlying funds involves risks different from, and potentially greater than, risks associated with direct investments in securities and other assets. Derivatives may increase other Fund risks, including market risk, liquidity risk, and credit and counterparty risk, and their value may or may not correlate with the value of the relevant underlying asset.
12
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests will not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, investments in underlying funds with higher fees or expenses than the underlying funds in which the Fund is invested will increase the Fund's total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may potentially be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
Other principal risks of an investment in the Fund include Market Risk – Fixed Income Securities (risk that the value of an underlying fund's fixed income securities will decline during periods of rising interest rates and/or widening of credit spreads), Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments by an underlying fund in companies with smaller market capitalizations), Commodities Risk (value of an underlying fund's shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments), Leveraging Risk (increased risks from use of reverse repurchase agreements and other derivatives and securities lending by an underlying fund), Credit and Counterparty Risk (risk of default of an issuer of a portfolio security or a derivatives counterparty of an underlying fund or a borrower of an underlying fund's securities), and Short Sales Risk (risk that an underlying fund's loss on the short sale of securities that it does not own is unlimited). Some of the underlying funds are non-diversified investment companies under the 1940 Act, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund adopted SFAS 161 on March 1, 2009. As of August 31, 2009, the Fund held no derivative contracts for the purposes of SFAS 161.
3. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
13
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.00% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment co mpany under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, nonrecurring and certain other unusual expenses (including taxes).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 | |||||||||
0.505 | % | 0.090 | % | 0.595 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $3,883 and $2,300, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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 and class exchanges, for the period ended August 31, 2009 aggregated $62,302,289 and $45,919,462, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
14
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2009, 34.15% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, less than 0.01% of the Fund's shares were held senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 4,464,788 | $ | 46,186,956 | 9,740,750 | $ | 162,721,575 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 7,405,391 | 104,659,498 | |||||||||||||||
Shares repurchased | (3,704,862 | ) | (39,737,464 | ) | (7,459,920 | ) | (126,794,445 | ) | |||||||||||
Purchase premiums | — | 5,113 | — | 55,087 | |||||||||||||||
Redemption fees | — | — | — | 32,331 | |||||||||||||||
Net increase (decrease) | 759,926 | $ | 6,454,605 | 9,686,221 | $ | 140,674,046 |
15
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Flexible Equities Fund, Class VI | $ | 10,036,327 | $ | 438,376 | $ | 450,000 | $ | — | $ | — | $ | 13,194,512 | |||||||||||||||
GMO International Growth Equity Fund, Class IV | 204,565,281 | 32,866,251 | 25,780,093 | 6,548,910 | — | 280,166,787 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 194,708,590 | 19,030,209 | 19,689,369 | 3,372,390 | — | 287,283,748 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | — | 9,967,453 | — | 36,625 | — | 10,920,679 | |||||||||||||||||||||
Totals | $ | 409,310,198 | $ | 62,302,289 | $ | 45,919,462 | $ | 9,957,925 | $ | — | $ | 591,565,726 |
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. Effective September 14, 2009, the premiums on cash purchases and fee on cash redemptions were 0.00%.
16
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including a one-year period and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 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
17
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
considered so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 and the Trust as a whole (including the effect of recent market events and changes in assets under management and revenues on such profitability); information prepared by third-party data services concerning fees paid to managers of funds deemed by those services 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 with similar objectives.
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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
18
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (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.
Following their review, on June 15, 2009, 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, 2009.
19
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.60 | % | $ | 1,000.00 | $ | 1,420.70 | $ | 3.66 | |||||||||||
2) Hypothetical | 0.60 | % | $ | 1,000.00 | $ | 1,022.18 | $ | 3.06 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, 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 U.S. Equity Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 95.5 | % | |||||
Short-Term Investments | 3.0 | ||||||
Futures | 0.1 | ||||||
Other | 1.4 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 100.0% | |||||||||||||||
Affiliated Issuers — 100.0% | |||||||||||||||
3,236,590 | GMO Quality Fund, Class VI | 56,931,620 | |||||||||||||
5,771,861 | GMO U.S. Core Equity Fund, Class VI | 56,448,798 | |||||||||||||
96,623 | GMO U.S. Small/Mid Cap Growth Fund, Class III | 945,938 | |||||||||||||
183,134 | GMO U.S. Small/Mid Cap Value Fund, Class III | 1,043,863 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $133,256,094) | 115,370,219 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||||||
28,573 | State Street Eurodollar Time Deposit, 0.01%, due 09/01/09 | 28,573 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $28,573) | 28,573 | ||||||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $133,284,667) | 115,398,792 | ||||||||||||||
Other Assets and Liabilities (net) — (0.0%) | (21,964 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 115,376,828 |
See accompanying notes to the financial statements.
2
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $28,573) (Note 2) | $ | 28,573 | |||||
Investments in affiliated issuers, at value (cost $133,256,094) (Notes 2 and 8) | 115,370,219 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 4,185 | ||||||
Total assets | 115,402,977 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 255 | ||||||
Accrued expenses | 25,894 | ||||||
Total liabilities | 26,149 | ||||||
Net assets | $ | 115,376,828 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 140,596,302 | |||||
Accumulated undistributed net investment income | 1,190,685 | ||||||
Accumulated net realized loss | (8,524,284 | ) | |||||
Net unrealized depreciation | (17,885,875 | ) | |||||
$ | 115,376,828 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 115,376,828 | |||||
Shares outstanding: | |||||||
Class III | 27,308,068 | ||||||
Net asset value per share: | |||||||
Class III | $ | 4.23 |
See accompanying notes to the financial statements.
3
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 1,191,842 | |||||
Total investment income | 1,191,842 | ||||||
Expenses: | |||||||
Audit and tax fees | 15,640 | ||||||
Custodian, fund accounting agent and transfer agent fees | 4,692 | ||||||
Registration fees | 2,024 | ||||||
Legal fees | 1,840 | ||||||
Trustees fees and related expenses (Note 3) | 993 | ||||||
Miscellaneous | 826 | ||||||
Total expenses | 26,015 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (24,564 | ) | |||||
Expense reductions (Note 2) | (294 | ) | |||||
Net expenses | 1,157 | ||||||
Net investment income (loss) | 1,190,685 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 2,738 | ||||||
Investments in affiliated issuers | (116,873 | ) | |||||
Net realized gain (loss) | (114,135 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in affiliated issuers | 22,267,929 | ||||||
Net realized and unrealized gain (loss) | 22,153,794 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 23,344,479 |
See accompanying notes to the financial statements.
4
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,190,685 | $ | 1,642,157 | |||||||
Net realized gain (loss) | (114,135 | ) | (7,896,007 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 22,267,929 | (27,592,432 | ) | ||||||||
Net increase (decrease) in net assets from operations | 23,344,479 | (33,846,282 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (1,637,551 | ) | ||||||||
Net realized gains | |||||||||||
Class III | — | (1,644,462 | ) | ||||||||
— | (3,282,013 | ) | |||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 22,612,116 | 11,468,444 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 4,778 | 8,571 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 22,616,894 | 11,477,015 | |||||||||
Total increase (decrease) in net assets | 45,961,373 | (25,651,280 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 69,415,455 | 95,066,735 | |||||||||
End of period (including accumulated undistributed net investment income of $1,190,685 and $0, respectively) | $ | 115,376,828 | $ | 69,415,455 |
See accompanying notes to the financial statements.
5
GMO 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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 3.31 | $ | 5.11 | $ | 6.38 | $ | 6.56 | $ | 6.41 | $ | 6.40 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.05 | 0.09 | 0.11 | 0.10 | 0.10 | 0.11 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.87 | (1.70 | ) | (0.42 | ) | 0.28 | 0.31 | 0.34 | |||||||||||||||||||
Total from investment operations | 0.92 | (1.61 | ) | (0.31 | ) | 0.38 | 0.41 | 0.45 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.08 | ) | (0.32 | ) | (0.15 | ) | (0.12 | ) | (0.14 | ) | ||||||||||||||||
From net realized gains | — | (0.11 | ) | (0.64 | ) | (0.41 | ) | (0.14 | ) | (0.30 | ) | ||||||||||||||||
Total distributions | — | (0.19 | ) | (0.96 | ) | 0.56 | (0.26 | ) | (0.44 | ) | |||||||||||||||||
Net asset value, end of period | $ | 4.23 | $ | 3.31 | $ | 5.11 | $ | 6.38 | $ | 6.56 | $ | 6.41 | |||||||||||||||
Total Return(b) | 27.79 | %** | (32.42 | )% | (6.43 | )% | 6.48 | % | 6.45 | % | 7.18 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 115,377 | $ | 69,415 | $ | 95,067 | $ | 149,312 | $ | 173,146 | $ | 151,378 | |||||||||||||||
Net expenses to average daily net assets(c) | 0.00 | %(d)(e)* | 0.00 | %(d)(e) | 0.00 | %(d)(e) | 0.04 | % | 0.01 | % | 0.00 | %(e) | |||||||||||||||
Net investment income to average daily net assets(a) | 2.36 | %* | 1.94 | % | 1.78 | % | 1.63 | % | 1.52 | % | 1.75 | % | |||||||||||||||
Portfolio turnover rate | 1 | %** | 39 | % | 26 | % | 35 | % | 13 | % | 16 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.05 | %* | 0.06 | % | 0.04 | % | 0.18 | % | 0.51 | % | 0.54 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:(f)† | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds 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 and assumes the effect of reinvested distributions. 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 funds (See Note 3).
(d) The net expense ratio does not include the effect of expense reductions.
(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
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO U.S. Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, 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 also may invest in shares of GMO Flexible Equities Fund (the GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). The Fund seeks exposure to U.S. equity securities (including both growth and value style equities and equities of any market capitalization) in the Wilshire 5000 Stock Index through its investments in the underlying funds. Although the Fund's primary exposure is to U.S. equity securities, the Fund also may have exposure to foreign equity securities. Under normal circumstances, the Fund invests at least 80% of its assets in equity investments (which include common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depository receipts) tied economically t o the U.S. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and other cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
The financial statements of the 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 followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
7
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Portfolio valuation
Shares of the underlying funds and other mutual funds are generally valued at their net asset value.
Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 4.70% of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on models used by a third party vendor. Those underlying funds classify such securities under SFAS 157 (as defined below) as Level 2.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based on inputs that are unobservable and significant.
8
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | 115,370,219 | $ | — | $ | — | $ | 115,370,219 | |||||||||||
Short-Term Investments | 28,573 | — | — | 28,573 | |||||||||||||||
Total | $ | 115,398,792 | $ | — | $ | — | $ | 115,398,792 |
Underlying funds are classified above as either Level 1 or Level 2. For the underlying funds' summary of valuation inputs (including Level 3 inputs, if any) please refer to the respective fund's portfolio valuation note.
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
9
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $62,690.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/29/2012 | $ | (136,192 | ) | ||||
2/28/2017 | (4,328,424 | ) | |||||
Total | $ | (4,464,616 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 137,167,509 | $ | — | $ | (21,768,717 | ) | $ | (21,768,717 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Income dividends and capital gain distributions from the underlying funds 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 asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
10
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund, including those risks to which the Fund is exposed as a result of its investments in underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities held by underlying funds may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and its underlying funds generally seek to be fully invested and normally do not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's and the underlying funds' investments.
• Smaller Company Risk — The securities of small- and mid-cap companies typically are less widely held, trade less frequently and in lesser quantities, and have market prices that may fluctuate more than those of securities of larger capitalization companies.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests will not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, investments in underlying funds with higher fees or expenses than the underlying funds in which the Fund is invested will increase the Fund's total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may potentially be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
11
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extend than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. An underlying fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of an underlying fund's foreign currency holdings and investments denominated in foreign currencies.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent an underlying fund from selling securities or closing derivative positions at desirable prices.
Other principal risks of an investment in the Fund include Derivatives Risk (use of derivatives by an underlying fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by underlying funds), Credit and Counterparty Risk (risk of default of an underlying fund's derivatives counterparty or a borrower of an underlying fund's securities), Real Estate Risk (risk to an underlying fund that concentrates it s assets in real estate-related investments that factors affecting the real estate industry may cause the value of the underlying fund's investments to fluctuate more than if it invested in securities of companies in a broader range of industries), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). The Fund and some of the underlying funds are non-diversified investment companies under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund or an underlying fund may affect the Fund's or the underlying fund's performance more than if the Fund or the underlying fund were diversified.
Purchases and redemptions of Fund shares
For the six months ended August 31, 2009, the premium on cash purchases and the fee on cash redemptions were each 0.02% of the amount invested or redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of share s by the Fund shareholders or other prospective or existing shareholders of
12
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and /or redemption fees may be waived at the Manager's discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and /or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and /or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redempt ion of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund adopted SFAS 161 on March 1, 2009. As of August 31, 2009, the Fund held no derivative contracts for the purposes of SFAS 161.
3. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund
13
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Fees and Expenses", as defined below) exceed 0.00% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and c ertain other unusual expenses (including taxes).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 | |||||||||
0.323 | % | 0.057 | % | 0.380 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $809 and $460, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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 and class exchanges, for the period ended August 31, 2009 aggregated $24,434,308 and $634,000, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
14
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
6. Principal shareholders and related parties
As of August 31, 2009, 73.60% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, less than 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 6,500,859 | $ | 23,248,877 | 7,356,216 | $ | 34,747,429 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 743,764 | 3,203,902 | |||||||||||||||
Shares repurchased | (151,910 | ) | (636,761 | ) | (5,738,257 | ) | (26,482,887 | ) | |||||||||||
Purchase premiums | — | 4,651 | — | 3,848 | |||||||||||||||
Redemption fees | — | 127 | — | 4,723 | |||||||||||||||
Net increase (decrease) | 6,348,949 | $ | 22,616,894 | 2,361,723 | $ | 11,477,015 |
15
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Quality Equity Fund, Class VI | $ | 36,936,978 | $ | 10,207,587 | $ | 634,000 | $ | 607,587 | $ | — | $ | 56,931,620 | |||||||||||||||
GMO U.S. Core Equity Fund, Class VI | 31,320,002 | 13,818,127 | — | 575,661 | — | 56,448,798 | |||||||||||||||||||||
GMO U.S. Small/Mid Cap Growth Fund, Class III | 542,365 | 201,042 | — | 1,042 | — | 945,938 | |||||||||||||||||||||
GMO U.S. Small/Mid Cap Value Fund, Class III | 619,508 | 207,552 | — | 7,552 | — | 1,043,863 | |||||||||||||||||||||
Totals | $ | 69,418,853 | $ | 24,434,308 | $ | 634,000 | $ | 1,191,842 | $ | — | $ | 115,370,219 |
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. Effective September 14, 2009, the Fund's purchase premium and redemption fees were each 0.00%.
16
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 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
17
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
considered so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 and the Trust as a whole (including the effect of recent market events and changes in assets under management and revenues on such profitability); information prepared by third-party data services concerning fees paid to managers of funds deemed by those services 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 with similar objectives.
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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
18
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (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.
Following their review, on June 15, 2009, 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, 2009.
19
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.38 | % | $ | 1,000.00 | $ | 1,277.90 | $ | 2.18 | |||||||||||
2) Hypothetical | 0.38 | % | $ | 1,000.00 | $ | 1,023.29 | $ | 1.94 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, 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 World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 96.0 | % | |||||
Short-Term Investments | 2.5 | ||||||
Futures | 0.2 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Preferred Stocks | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | 1.3 | ||||||
100.0 | % | ||||||
Country / Region Summary** | % of Investments | ||||||
United States | 49.3 | % | |||||
Japan | 14.0 | ||||||
Euro Region*** | 13.4 | ||||||
United Kingdom | 11.6 | ||||||
Switzerland | 5.1 | ||||||
Sweden | 2.1 | ||||||
Australia | 2.0 | ||||||
Canada | 0.8 | ||||||
Singapore | 0.6 | ||||||
Denmark | 0.5 | ||||||
Hong Kong | 0.4 | ||||||
New Zealand | 0.1 | ||||||
Norway | 0.1 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
1
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 100.0% | |||||||||||||||
Affiliated Issuers — 100.0% | |||||||||||||||
1,042,013 | GMO Flexible Equities Fund, Class VI | 21,288,327 | |||||||||||||
10,469,235 | GMO International Growth Equity Fund, Class IV | 200,485,859 | |||||||||||||
10,105,751 | GMO International Intrinsic Value Fund, Class IV | 207,875,288 | |||||||||||||
2,647,960 | GMO International Small Companies Fund, Class III | 18,217,962 | |||||||||||||
19,886,760 | GMO Quality Fund, Class VI | 349,808,111 | |||||||||||||
16,237,710 | GMO U.S. Core Equity Fund, Class VI | 158,804,799 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $1,181,608,136) | 956,480,346 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||||||
31,838 | State Street Eurodollar Time Deposit, 0.01%, due 09/01/09 | 31,838 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $31,838) | 31,838 | ||||||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $1,181,639,974) | 956,512,184 | ||||||||||||||
Other Assets and Liabilities (net) — (0.0%) | (41,593 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 956,470,591 |
See accompanying notes to the financial statements.
2
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $31,838) (Note 2) | $ | 31,838 | |||||
Investments in affiliated issuers, at value (cost $1,181,608,136) (Notes 2 and 8) | 956,480,346 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 10,075 | ||||||
Total assets | 956,522,259 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 1,557 | ||||||
Accrued expenses | 50,111 | ||||||
Total liabilities | 51,668 | ||||||
Net assets | $ | 956,470,591 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 1,273,565,466 | |||||
Accumulated undistributed net investment income | 12,794,461 | ||||||
Accumulated net realized loss | (104,761,546 | ) | |||||
Net unrealized depreciation | (225,127,790 | ) | |||||
$ | 956,470,591 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 956,470,591 | |||||
Shares outstanding: | |||||||
Class III | 58,337,190 | ||||||
Net asset value per share: | |||||||
Class III | $ | 16.40 |
See accompanying notes to the financial statements.
3
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 12,805,226 | |||||
Total investment income | 12,805,226 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 23,460 | ||||||
Audit and tax fees | 16,376 | ||||||
Legal fees | 15,180 | ||||||
Trustees fees and related expenses (Note 3) | 7,838 | ||||||
Chief Compliance Officer (Note 3) | 3,680 | ||||||
Registration fees | 1,472 | ||||||
Miscellaneous | 2,391 | ||||||
Total expenses | 70,397 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (58,880 | ) | |||||
Expense reductions (Note 2) | (752 | ) | |||||
Net expenses | 10,765 | ||||||
Net investment income (loss) | 12,794,461 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (36,978,800 | ) | |||||
Net realized gain (loss) | (36,978,800 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in affiliated issuers | 261,622,443 | ||||||
Net realized and unrealized gain (loss) | 224,643,643 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 237,438,104 |
See accompanying notes to the financial statements.
4
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 12,794,461 | $ | 27,359,899 | |||||||
Net realized gain (loss) | (36,978,800 | ) | (67,041,232 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 261,622,443 | (387,000,660 | ) | ||||||||
Net increase (decrease) in net assets from operations | 237,438,104 | (426,681,993 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (27,428,339 | ) | ||||||||
Net realized gains | |||||||||||
Class III | — | (48,768,521 | ) | ||||||||
— | (76,196,860 | ) | |||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 20,507,611 | 256,821,808 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | — | 207,495 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 20,507,611 | 257,029,303 | |||||||||
Total increase (decrease) in net assets | 257,945,715 | (245,849,550 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 698,524,876 | 944,374,426 | |||||||||
End of period (including accumulated undistributed net investment income of $12,794,461 and $0, respectively) | $ | 956,470,591 | $ | 698,524,876 |
See accompanying notes to the financial statements.
5
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 12.29 | $ | 21.71 | $ | 24.25 | $ | 22.49 | $ | 20.00 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(b)† | 0.22 | 0.53 | 0.43 | 0.40 | 0.37 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 3.89 | (8.50 | ) | 0.01 | (c) | 2.93 | 2.78 | ||||||||||||||||
Total from investment operations | 4.11 | (7.97 | ) | 0.44 | 3.33 | 3.15 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | — | (0.54 | ) | (1.10 | ) | (0.73 | ) | (0.46 | ) | ||||||||||||||
From net realized gains | — | (0.91 | ) | (1.88 | ) | (0.84 | ) | (0.20 | ) | ||||||||||||||
Total distributions | — | (1.45 | ) | (2.98 | ) | (1.57 | ) | (0.66 | ) | ||||||||||||||
Net asset value, end of period | $ | 16.40 | $ | 12.29 | $ | 21.71 | $ | 24.25 | $ | 22.49 | |||||||||||||
Total Return(d) | 33.44 | %** | (38.63 | )% | 0.72 | % | 14.94 | % | 15.90 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 956,471 | $ | 698,525 | $ | 944,374 | $ | 902,324 | $ | 407,230 | |||||||||||||
Net expenses to average daily net assets(e)(f) | 0.00 | %(g)* | 0.00 | %(g) | 0.00 | %(g) | 0.00 | % | 0.00 | %* | |||||||||||||
Net investment income to average daily net assets(b) | 3.04 | %* | 2.89 | % | 1.72 | % | 1.68 | % | 2.42 | %* | |||||||||||||
Portfolio turnover rate | 8 | %** | 35 | % | 20 | % | 12 | % | 5 | %** | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.01 | % | 0.02 | % | 0.06 | %* | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (h) | $ | 0.00 | (i) | $ | 0.00 | (i) | $ | 0.01 | $ | 0.02 |
(a) Period from June 16, 2005 (commencement of operations) through February 28, 2006.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) 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.
(d) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(f) Net expenses to average daily net assets were less than 0.01%.
(g) The net expense ratio does not include the effect of expense reductions.
(h) There were no redemption fees during the period.
(i) 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 World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO World Opportunities Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the MSCI World Index. The Fund is a fund of funds and invests primarily in shares of the GMO International Equity Funds and the GMO U.S. Equity Funds. The Fund also may invest in shares of other series of the Trust, including the GMO Fixed Income Funds, GMO Alpha Only Fund, GMO Flexible Equities Fund, and GMO Alternative Asset Opportunity Fund (the GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). Although the Fund's primary exposure is to foreign and U.S. equity securities (including emerging country equities, both growth and value style equities, and equities of any market capitalization), the Fund also may have exposure to foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), the investment returns of commodities and, from time to time, other a lternative asset classes. Under normal circumstances, the Fund invests at least 80% of its assets in equity investments (which include common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depository receipts). The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and other cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
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. As of August 31, 2009, shares of GMO Flexible Equities Fund were not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP
7
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Shares of the underlying funds and other mutual funds are generally valued at their net asset value.
Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 47.22% of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on models used by that third party vendor. Those underlying funds classify such securities under SFAS 157 (as defined below) as Level 2.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
8
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Level 3 – Valuations based on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | 935,192,019 | $ | 21,288,327 | $ | — | $ | 956,480,346 | |||||||||||
Short-Term Investments | 31,838 | — | — | 31,838 | |||||||||||||||
Total | $ | 935,223,857 | $ | 21,288,327 | $ | — | $ | 956,512,184 |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities using Level 3 inputs was less than 0.01% of total 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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
9
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $17,086,019.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,264,708,148 | $ | 3,564,005 | $ | (311,759,969 | ) | $ | (308,195,964 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Income dividends and capital gain distributions from the underlying funds 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 asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
10
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the six-month period ended August 31, 2009, the premium on cash purchases and the fee on cash redemptions were each 0.04% of the amount invested or redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospective or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premium and/or redemption fees may be waived at the Manager's discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premium and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premium and/or redemption fee imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of a Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders a re received.
11
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities held by underlying funds may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and its underlying funds generally seek to be fully invested and normally do not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's and the underlying funds' investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. An underlying fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent an underlying fund from selling securities or closing derivative positions at desirable prices.
• Derivatives Risk — The use of derivatives by underlying funds involves risks different from, and potentially greater than, risks associated with direct investments in securities and other assets. Derivatives may increase other Fund risks, including market risk, liquidity risk, and credit and counterparty risk, and their value may or may not correlate with the value of the relevant underlying asset.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests will not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, investments in underlying funds with higher fees or expenses than the underlying funds in which the Fund is invested will increase the Fund's total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may potentially be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
12
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
• Market Risk — Fixed Income Securities — Typically, the value of an underlying fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
Other principal risks of an investment in the Fund include Smaller Company Risk (greater market risk and liquidity risk resulting from investments by an underlying fund in companies with smaller market capitalizations), Commodities Risk (value of an underlying fund's shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments), Currency Risk (risk that fluctuations in exchange rates m ay adversely affect the value of an underlying fund's investments denominated in foreign currencies or that the U.S. dollar will decline in value relative to a foreign currency being hedged by an underlying fund), Leveraging Risk (increased risks from use of reverse repurchase agreements and other derivatives and securities lending by an underlying fund), Credit and Counterparty Risk (risk of default of an issuer of a portfolio security or a derivatives counterparty of an underlying fund or a borrower of an underlying fund's securities), Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real estate industry may cause the value of the underlying fund's investments to fluctuate more than if it invested in securities of companies in a broader range of industries), Short Sales Risk (risk that an underlying fund's loss on the short sale of securities that it does not own is unlimited), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). Some of the underlying funds are non-diversified investment companies under the 1940 Act, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund adopted SFAS 161 on March 1, 2009. As of August 31, 2009, the Fund held no derivative contracts for the purposes of SFAS 161.
13
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
3. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.00% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment co mpany under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 | |||||||||
0.408 | % | 0.070 | % | 0.478 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $6,273 and $3,680, respectively. The compensation and expenses of the CCO are included in the Statement of Operations. The Fund paid no remuneration 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 and class exchanges, for the period ended August 31, 2009 aggregated $98,325,087 and $65,033,308, respectively.
14
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 10.59% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, less than 0.01% of the Fund's shares were held senior management of the Manager and GMO Trust officers and 9.19% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 4,709,319 | $ | 69,085,850 | 21,444,708 | $ | 386,255,390 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 4,310,232 | 76,196,861 | |||||||||||||||
Shares repurchased | (3,201,957 | ) | (48,578,239 | ) | (12,427,876 | ) | (205,630,443 | ) | |||||||||||
Purchase premiums | — | — | — | 147,229 | |||||||||||||||
Redemption fees | — | — | — | 60,266 | |||||||||||||||
Net increase (decrease) | 1,507,362 | $ | 20,507,611 | 13,327,064 | $ | 257,029,303 |
15
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Flexible Equities Fund, Class VI | $ | 14,631,268 | $ | 2,212,702 | $ | 529,688 | $ | — | $ | — | $ | 21,288,327 | |||||||||||||||
GMO International Growth Equity Fund, Class IV | 146,275,269 | 23,096,561 | 17,716,191 | 4,854,807 | — | 200,485,859 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 140,086,040 | 18,756,571 | 17,961,102 | 2,510,767 | — | 207,875,288 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | — | 16,611,749 | — | 60,792 | — | 18,217,962 | |||||||||||||||||||||
GMO Quality Fund, Class VI | 275,208,643 | 27,684,460 | 20,376,753 | 3,729,667 | — | 349,808,111 | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | 122,343,703 | 9,963,044 | 8,449,574 | 1,649,193 | — | 158,804,799 | |||||||||||||||||||||
Totals | $ | 698,544,923 | $ | 98,325,087 | $ | 65,033,308 | $ | 12,805,226 | $ | — | $ | 956,480,346 |
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. Effective September 14, 2009, the premium on cash purchases was 0.00% of the amount invested and the fee on cash redemptions was 0.00% of the amount redeemed.
16
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including a one-year period and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 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
17
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
considered so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 and the Trust as a whole (including the effect of recent market events and changes in assets under management and revenues on such profitability); information prepared by third-party data services concerning fees paid to managers of funds deemed by those services 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 with similar objectives.
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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
18
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (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.
Following their review, on June 15, 2009, 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, 2009.
19
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.48 | % | $ | 1,000.00 | $ | 1,334.40 | $ | 2.82 | |||||||||||
2) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.79 | $ | 2.45 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, 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 Alpha Only Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Alpha Only Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 86.6 | % | |||||
Cash and Cash Equivalents | 70.9 | ||||||
Short-Term Investments | 7.1 | ||||||
Preferred Stocks | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Forward Currency Contracts | (0.1 | ) | |||||
Swaps | (28.9 | ) | |||||
Futures | (52.1 | ) | |||||
Other | 16.5 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds"). Swaps and futures concentrations assume the notional value of the respective contracts.
1
GMO Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 93.0% | |||||||||||||||
United States — 93.0% | |||||||||||||||
Affiliated Issuers | |||||||||||||||
14,212,745 | GMO International Growth Equity Fund, Class IV | 272,174,076 | |||||||||||||
13,221,980 | GMO International Intrinsic Value Fund, Class IV | 271,976,138 | |||||||||||||
1,995,286 | GMO International Small Companies Fund, Class III | 13,727,571 | |||||||||||||
20,380,503 | GMO Quality Fund, Class VI | 358,493,048 | |||||||||||||
20,187,482 | GMO U.S. Core Equity Fund, Class VI | 197,433,573 | |||||||||||||
1,400,129 | GMO U.S. Treasury Fund | 35,017,216 | |||||||||||||
Total United States | 1,148,821,622 | ||||||||||||||
TOTAL MUTUAL FUNDS (COST $1,021,009,573) | 1,148,821,622 | ||||||||||||||
SHORT-TERM INVESTMENTS — 2.0% | |||||||||||||||
62,152 | Bank of Ireland Time Deposit, 0.03%, due 09/01/09 | 62,152 | |||||||||||||
24,200,000 | HSBC Bank (USA) Time Deposit, 0.13%, due 09/01/09 | 24,200,000 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $24,262,152) | 24,262,152 | ||||||||||||||
TOTAL INVESTMENTS — 95.0% (Cost $1,045,271,725) | 1,173,083,774 | ||||||||||||||
Other Assets and Liabilities (net) — 5.0% | 61,794,951 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,234,878,725 |
See accompanying notes to the financial statements.
2
GMO Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys † | |||||||||||||||||||
10/23/09 | AUD | 386,000 | $ | 324,914 | $ | 1,760 | |||||||||||||
10/23/09 | DKK | 47,353,830 | 9,110,861 | 134,428 | |||||||||||||||
10/23/09 | EUR | 3,484,000 | 4,994,774 | 6,035 | |||||||||||||||
10/23/09 | EUR | 12,694,008 | 18,198,538 | 301,624 | |||||||||||||||
10/23/09 | NOK | 34,153,159 | 5,667,032 | 112,993 | |||||||||||||||
10/23/09 | SEK | 127,015,741 | 17,847,005 | 275,241 | |||||||||||||||
10/23/09 | SEK | 37,968,000 | 5,334,891 | (69,986 | ) | ||||||||||||||
$ | 61,478,015 | $ | 762,095 | ||||||||||||||||
Sales # | |||||||||||||||||||
10/23/09 | AUD | 18,393,469 | $ | 15,482,627 | $ | (418,376 | ) | ||||||||||||
10/23/09 | AUD | 18,393,469 | 15,482,627 | (401,086 | ) | ||||||||||||||
10/23/09 | AUD | 15,238,000 | 12,826,524 | (317,543 | ) | ||||||||||||||
10/23/09 | CHF | 14,689,900 | 13,879,294 | (266,241 | ) | ||||||||||||||
10/23/09 | CHF | 11,803,000 | 11,151,696 | (65,216 | ) | ||||||||||||||
10/23/09 | EUR | 19,537,000 | 28,008,871 | (209,381 | ) | ||||||||||||||
10/23/09 | GBP | 12,219,709 | 19,891,472 | 197,486 | |||||||||||||||
10/23/09 | GBP | 12,219,709 | 19,891,472 | 302,172 | |||||||||||||||
10/23/09 | GBP | 14,073,000 | 22,908,293 | 308,132 | |||||||||||||||
10/23/09 | HKD | 30,878,000 | 3,985,654 | (265 | ) | ||||||||||||||
10/23/09 | HKD | 74,097,248 | 9,564,286 | 525 | |||||||||||||||
10/23/09 | JPY | 2,770,060,000 | 29,780,237 | (245,217 | ) | ||||||||||||||
10/23/09 | JPY | 2,349,722,580 | 25,261,292 | (450,431 | ) | ||||||||||||||
10/23/09 | JPY | 2,349,722,580 | 25,261,292 | (458,183 | ) | ||||||||||||||
10/23/09 | JPY | 2,349,722,580 | 25,261,293 | (425,282 | ) | ||||||||||||||
10/23/09 | JPY | 2,349,722,580 | 25,261,293 | (445,085 | ) | ||||||||||||||
10/23/09 | NZD | 598,268 | 409,220 | (9,009 | ) | ||||||||||||||
10/23/09 | SGD | 7,685,463 | 5,331,011 | (35,312 | ) | ||||||||||||||
10/23/09 | SGD | 3,325,000 | 2,306,382 | (13,819 | ) | ||||||||||||||
$ | 311,944,836 | $ | (2,952,131 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
3
GMO Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
119 | Amsterdam Exchanges | September 2009 | $ | 10,139,607 | $ | 469,861 | |||||||||||||
93 | DAX | September 2009 | 18,257,799 | 1,466,651 | |||||||||||||||
49 | IBEX 35 | September 2009 | 7,996,157 | 506,099 | |||||||||||||||
1,548 | OMXS 30 | September 2009 | 19,739,390 | 851,706 | |||||||||||||||
$ | 56,132,953 | $ | 3,294,317 | ||||||||||||||||
Sales | |||||||||||||||||||
441 | CAC 40 | September 2009 | $ | 23,164,980 | $ | (1,508,777 | ) | ||||||||||||
835 | FTSE 100 | September 2009 | 66,378,200 | (5,886,290 | ) | ||||||||||||||
104 | Hang Seng | September 2009 | 13,171,046 | 543,136 | |||||||||||||||
179 | MSCI Singapore | September 2009 | 7,781,869 | 88,938 | |||||||||||||||
5,553 | S&P 500 E-Mini Index | September 2009 | 283,133,587 | (14,353,421 | ) | ||||||||||||||
107 | S&P/MIB | September 2009 | 17,269,450 | (2,012,613 | ) | ||||||||||||||
476 | SPI 200 | September 2009 | 44,922,686 | (4,611,043 | ) | ||||||||||||||
1,288 | TOPIX | September 2009 | 132,914,689 | (4,291,055 | ) | ||||||||||||||
$ | 588,736,507 | $ | (32,031,125 | ) |
Swap Agreements
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
96,053,920 | USD | 1/11/2010 | Morgan Stanley | Custom Low | Daily Federal Funds | ||||||||||||||||||||||
Quality Equity Basket | Rate -0.52% | $ | (56,780,011 | ) | |||||||||||||||||||||||
57,246,978 | USD | 2/3/2010 | Goldman Sachs | Custom Low Quality Equity Basket | Daily Federal Funds Rate -0.80% | (37,936,661 | ) | ||||||||||||||||||||
154,123,854 | USD | 8/9/2010 | Citigroup | Custom Low Quality Equity Basket | 3 month LIBOR -0.90% | (2,033,724 | ) | ||||||||||||||||||||
49,659,736 | USD | 8/9/2010 | JP Morgan Chase Bank | Custom Low Quality Equity Basket | 3 month LIBOR -1.35% | (494,364 | ) | ||||||||||||||||||||
$ | (97,244,760 | ) | |||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
As of August 31, 2009, for the futures and/or swap contracts held, 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 Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Notes to Schedule of Investments:
LIBOR - London Interbank Offered Rate
Currency Abbreviations:
AUD - Australian 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
USD - United States Dollar
See accompanying notes to the financial statements.
5
GMO Alpha Only Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $24,262,152) (Note 2) | $ | 24,262,152 | |||||
Investments in affiliated issuers, at value (cost $1,021,009,573) (Notes 2 and 8) | 1,148,821,622 | ||||||
Foreign currency, at value (cost $735,871) (Note 2) | 735,871 | ||||||
Receivable for investments sold | 34,700,000 | ||||||
Dividends and interest receivable | 657 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 1,640,396 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 50,936,000 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 3,327,992 | ||||||
Receivable for collateral on open swap contracts (Note 2) | 96,885,576 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 434,000 | ||||||
Total assets | 1,361,744,266 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 25,000,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 473,874 | ||||||
Shareholder service fee | 98,699 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 3,848 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 3,830,432 | ||||||
Payable for open swap contracts (Note 2) | 97,244,760 | ||||||
Accrued expenses | 213,928 | ||||||
Total liabilities | 126,865,541 | ||||||
Net assets | $ | 1,234,878,725 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 2,331,995,431 | |||||
Distributions in excess of net investment income | (13,924,335 | ) | |||||
Accumulated net realized loss | (1,082,832,816 | ) | |||||
Net unrealized depreciation | (359,555 | ) | |||||
$ | 1,234,878,725 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 96,434,673 | |||||
Class IV shares | $ | 1,138,444,052 | |||||
Shares outstanding: | |||||||
Class III | 19,379,232 | ||||||
Class IV | 228,768,412 | ||||||
Net asset value per share: | |||||||
Class III | $ | 4.98 | |||||
Class IV | $ | 4.98 |
See accompanying notes to the financial statements.
6
GMO Alpha Only Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 13,130,093 | |||||
Interest | 70,928 | ||||||
Total investment income | 13,201,021 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 2,606,539 | ||||||
Shareholder service fee – Class III (Note 3) | 71,319 | ||||||
Shareholder service fee – Class IV (Note 3) | 473,761 | ||||||
Custodian and fund accounting agent fees | 128,576 | ||||||
Legal fees | 43,056 | ||||||
Audit and tax fees | 35,236 | ||||||
Transfer agent fees | 21,160 | ||||||
Trustees fees and related expenses (Note 3) | 13,843 | ||||||
Registration fees | 3,588 | ||||||
Miscellaneous | 11,592 | ||||||
Total expenses | 3,408,670 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (219,196 | ) | |||||
Expense reductions (Note 2) | (189 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (1,786,734 | ) | |||||
Shareholder service fee waived (Note 3) | (315,530 | ) | |||||
Net expenses | 1,087,021 | ||||||
Net investment income (loss) | 12,114,000 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (542,422,735 | ) | |||||
Closed futures contracts | 33,089,321 | ||||||
Closed swap contracts | 8,233,163 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 5,746,162 | ||||||
Net realized gain (loss) | (495,354,089 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in affiliated issuers | 722,985,548 | ||||||
Open futures contracts | (110,187,522 | ) | |||||
Open swap contracts | (204,277,005 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (10,913,897 | ) | |||||
Net unrealized gain (loss) | 397,607,124 | ||||||
Net realized and unrealized gain (loss) | (97,746,965 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (85,632,965 | ) |
See accompanying notes to the financial statements.
7
GMO Alpha Only Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 12,114,000 | $ | 67,634,088 | |||||||
Net realized gain (loss) | (495,354,089 | ) | 630,224,954 | ||||||||
Change in net unrealized appreciation (depreciation) | 397,607,124 | (332,733,684 | ) | ||||||||
Net increase (decrease) in net assets from operations | (85,632,965 | ) | 365,125,358 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (6,172,043 | ) | (57,987,423 | ) | |||||||
Class IV | (87,315,114 | ) | (869,600,332 | ) | |||||||
Total distributions from net investment income | (93,487,157 | ) | (927,587,755 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (30,565,835 | ) | ||||||||
Class IV | — | (445,995,777 | ) | ||||||||
Total distributions from net realized gains | — | (476,561,612 | ) | ||||||||
(93,487,157 | ) | (1,404,149,367 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (10,555,381 | ) | 7,583,957 | ||||||||
Class IV | (551,310,024 | ) | 272,747,018 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (561,865,405 | ) | 280,330,975 | ||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | — | 73,187 | |||||||||
Class IV | — | 447,577 | |||||||||
Increase in net assets resulting from purchase premiums and redemption fees | — | 520,764 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | (561,865,405 | ) | 280,851,739 | ||||||||
Total increase (decrease) in net assets | (740,985,527 | ) | (758,172,270 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 1,975,864,252 | 2,734,036,522 | |||||||||
End of period (including distributions in excess of net investment income of $13,924,335 and accumulated undistributed net investment income of $67,448,822, respectively) | $ | 1,234,878,725 | $ | 1,975,864,252 |
See accompanying notes to the financial statements.
8
GMO Alpha Only Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 5.77 | $ | 11.11 | $ | 10.42 | $ | 10.36 | $ | 10.26 | $ | 9.99 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.06 | 0.23 | 0.21 | 0.17 | 0.16 | 0.19 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.55 | ) | 0.93 | 0.70 | 0.10 | 0.31 | 0.08 | ||||||||||||||||||||
Total from investment operations | (0.49 | ) | 1.16 | 0.91 | 0.27 | 0.47 | 0.27 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.30 | ) | (4.41 | ) | (0.22 | ) | (0.21 | ) | (0.37 | ) | — | ||||||||||||||||
From net realized gains | — | (2.09 | ) | — | — | — | — | ||||||||||||||||||||
Total distributions | (0.30 | ) | (6.50 | ) | (0.22 | ) | (0.21 | ) | (0.37 | ) | — | ||||||||||||||||
Net asset value, end of period | $ | 4.98 | $ | 5.77 | $ | 11.11 | $ | 10.42 | $ | 10.36 | $ | 10.26 | |||||||||||||||
Total Return(b) | (9.03 | )%** | 11.92 | % | 8.74 | % | 2.64 | % | 4.63 | % | 2.70 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 96,435 | $ | 121,711 | $ | 176,067 | $ | 166,626 | $ | 1,460,161 | $ | 179,488 | |||||||||||||||
Net expenses to average daily net assets(c) | 0.25 | %(d)* | 0.23 | %(d) | 0.16 | %(d) | 0.15 | % | 0.10 | % | 0.18 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 2.45 | %* | 2.37 | % | 1.91 | % | 1.66 | % | 1.52 | % | 1.94 | % | |||||||||||||||
Portfolio turnover rate | 49 | %** | 87 | % | 44 | % | 22 | % | 40 | % | 19 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.45 | %* | 0.44 | % | 0.51 | % | 0.53 | % | 0.59 | % | 0.62 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (e) | $ | 0.00 | (f) | $ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.01 |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds 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 and assumes the effect of reinvested distributions. 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 funds (See Note 3).
(d) The net expense ratio does not include the effect of expense reductions.
(e) There were no redemption fees during the period.
(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.
9
GMO Alpha Only Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 5.77 | $ | 11.11 | $ | 10.41 | $ | 10.37 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)(b)† | 0.06 | 0.24 | 0.21 | 0.20 | |||||||||||||||
Net realized and unrealized gain (loss) | (0.55 | ) | 0.92 | 0.71 | 0.06 | ||||||||||||||
Total from investment operations | (0.49 | ) | 1.16 | 0.92 | 0.26 | ||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.30 | ) | (4.41 | ) | (0.22 | ) | (0.22 | ) | |||||||||||
From net realized gains | — | (2.09 | ) | — | — | ||||||||||||||
Total distributions | (0.30 | ) | (6.50 | ) | (0.22 | ) | (0.22 | ) | |||||||||||
Net asset value, end of period | $ | 4.98 | $ | 5.77 | $ | 11.11 | $ | 10.41 | |||||||||||
Total Return(c) | (9.02 | )%** | 12.00 | % | 8.90 | % | 2.54 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 1,138,444 | $ | 1,854,153 | $ | 2,557,970 | $ | 1,693,793 | |||||||||||
Net expenses to average daily net assets(d) | 0.20 | %(e)* | 0.18 | %(e) | 0.11 | %(e) | 0.10 | %* | |||||||||||
Net investment income to average daily net assets(b) | 2.31 | %* | 2.52 | % | 1.96 | % | 1.93 | %* | |||||||||||
Portfolio turnover rate | 49 | %** | 87 | % | 44 | % | 22 | %†† | |||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.44 | %* | 0.44 | % | 0.51 | % | 0.53 | %* | |||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.00 | (g) | $ | 0.01 | $ | 0.00 | (g) |
(a) Period from March 2, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds 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 and assumes the effect of reinvested distributions. 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 funds (See Note 3).
(e) The net expense ratio does not include the effect of expense reductions.
(f) There were no redemption fees during the period.
(g) 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 year ended February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
10
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Alpha Only Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 its benchmark, the Citigroup 3 Month Treasury Bill Index. The Fund invests in shares of the GMO U.S. Equity Funds and the GMO International Equity Funds, and also may invest in shares of GMO Emerging Country Debt Fund ("ECDF") and GMO Flexible Equities Fund (the GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). In addition, the Fund may invest in securities. The Fund implements its strategy with investments in a combination of U.S., foreign, and emerging country equities and emerging country debt. The Manager seeks to hedge some or all of the broad market exposure of the underlying funds and assets in which the Fund invests by using futures, swap contracts, and currency forwards and by making short sales of securities (e.g., shares of an exchange-traded fund). 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 underlying funds and assets in which the Fund invests. Instead, the Fund's performance is expected to approximate the performance of the underlying funds and assets in which the Fund invests relative to the broader securities markets. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and other cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
Throughout the period ended August 31, 2009, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder service fee.
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 followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in
11
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Shares of the underlying funds and other mutual funds are generally valued at their net asset value.
Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the creditworthiness of a counterparty. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjust ments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 44.79% of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on models used by a third party vendor. Those underlying funds classify such securities under SFAS 157 (as defined below) as Level 2.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
12
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Level 3 – Valuations based on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | |||||||||||||||||||
United States | $ | 1,148,821,622 | $ | — | $ | — | $ | 1,148,821,622 | |||||||||||
Short-Term Investments | 24,262,152 | — | — | 24,262,152 | |||||||||||||||
Total Investments | 1,173,083,774 | — | — | 1,173,083,774 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | — | 1,640,396 | — | 1,640,396 | |||||||||||||||
Futures Contracts | — | 3,926,391 | — | 3,926,391 | |||||||||||||||
Total | $ | 1,173,083,774 | $ | 5,566,787 | $ | — | $ | 1,178,650,561 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | $ | — | $ | (3,830,432 | ) | $ | — | $ | (3,830,432 | ) | |||||||||
Futures Contracts | (14,353,421 | ) | (18,309,778 | ) | — | (32,663,199 | ) | ||||||||||||
Swap Agreements | — | (97,244,760 | ) | — | (97,244,760 | ) | |||||||||||||
Total | $ | (14,353,421 | ) | $ | (119,384,970 | ) | $ | — | $ | (133,738,391 | ) |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's indirect investments in securities using Level 3 inputs was less than 0.01% of total net assets.
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
13
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. 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. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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
14
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because many foreign exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign futures on those exchanges do not reflect events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor based on that vendor's proprietary models. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
15
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exp osure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the
16
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. Because many foreign exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for certain swap contracts in those markets or on 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, the Fund generally values certain swap contracts using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor based on that vendor's proprietary models. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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
17
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $96,558,266.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,450,426,293 | — | $ | (277,342,519 | ) | $ | (277,342,519 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
18
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Income dividends and capital gain distributions from the underlying funds 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 asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 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 incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
Brown Brothers Harriman & Co. ("BBH") serves as custodian and fund accounting agent of the Fund. State Street Bank and Trust Company ("State Street") serves as transfer agent of the Fund. BBH and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
During the six month period ended August 31, 2009, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemptio n of shares by the Fund shareholders or other prospective or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and/or redemption fees may be waived at the Manager's discretion when they are de minimis and/or the
19
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and/or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of a Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities held by the Fund or underlying funds may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. The Manager attempts to offset the movement of the equity markets by establishing hedging positions, but there is no guarantee that the hedging positions will produce the desired results. In addition, as a result of the Fund's hedging positions, the value of the Fund's shares will be adversely affected if the return on the Fund's equity positions is lower than the returns that are the subject of the Fund's hedging positions.
• Derivatives Risk — The use of derivatives by the Fund or underlying funds involves risks different from, and potentially greater than, risks associated with direct investments in securities and other assets. Derivatives may increase other Fund risks, including market risk, liquidity risk, and credit and counterparty risk, and their value may or may not correlate with the value of the relevant underlying asset. This risk is particularly pronounced because the Fund uses various types of exchange-traded and over-the counter derivatives to attempt to implement its investment strategy.
20
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. .markets. The Fund or an underlying fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are g reater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund or an underlying fund from selling securities or closing derivative positions at desirable prices.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests will not perform as expected.
• Market Risk — Fixed Income Securities — Typically, the value of an underlying fund's fixed income securities will decline during periods of rising interest rates and widening credit spreads on asset-backed securities. Recent market events caused credit spreads for asset-backed and other fixed income securities to widen dramatically and contributed to substantial declines in their value. There can be no assurance these conditions will not continue or that they will not deteriorate further.
• Leveraging Risk — The use of reverse repurchase agreements and other derivatives may cause the Fund's portfolio to be leveraged. Because the Fund and some underlying funds are not limited in the extent to which they may use derivatives or in the absolute face value of their derivative positions, the Fund may be leveraged in relation to its assets. Leverage increases the Fund's portfolio losses and reduces opportunities for gain when interest rates or currency rates are changing.
Other principal risks of an investment in the Fund include Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of the Fund's or an underlying fund's investments denominated in foreign currencies, or that the U.S. dollar will decline in value relative to the foreign currency being hedged by the Fund or an underlying fund), Credit and Counterparty Risk (risk of default of an issuer of a portfolio security or derivatives counterparty of the Fund or of an underlying fund or a borrower of the Fund's or an underlying fund's securities), Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real estate industry may cause the value of the underlying fund's investments to fluctuate more than if it invested in securities of companies in a broader range of industries), Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investment by the Fund or an underlying fund in companies with smaller market capitalizations), and Short Sales Risk (risk that the Fund's loss on a short sale of securities that the Fund does not own is unlimited), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that
21
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). The Fund and some of the underlying funds are non-diversified investment companies under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund or an underlying fund may affect the Fund's or the underlying fund's performance more than if the Fund or the underlying fund were diversified. Certain of the above referenced risks are more pronounced for the Fund as a result of its investment in ECDF.
Among other trading agreements, the Fund is party to International Swaps and Derivatives Association, Inc. Master Agreements ("ISDA Agreements") with select counterparties that generally govern over-the-counter derivative transactions entered into by the Fund. The ISDA Master Agreements typically include standard representations and warranties as well as contractual terms related to collateral, events of default, termination events, and other standard provisions. Termination events include the decline in the net assets of the Fund below a certain level over a specified period of time and entitles a counterparty to elect to terminate early with respect to some or all the transactions under the ISDA Agreement with that counterparty. Such an election by one or more of the counterparties could have a material impact on the Fund's operations. Due to declines in the net assets of the Fund during the period ended August 31, 2009, one o r more counterparties are entitled to terminate early but none has taken such action.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund uses derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Manager seeks to hedge some or all of the broad market exposure of the underlying GMO Trust Funds and other assets in which the Fund invests by using futures, swap contracts, and currency forwards and by making short sales of securities (e.g., shares of an exchange-traded fund).
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms
22
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
(e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictability of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
23
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options, rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | 3,926,391 | — | 3,926,391 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 1,640,396 | — | — | — | 1,640,396 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | 1,640,396 | $ | — | $ | 3,926,391 | $ | — | $ | 5,566,787 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | (32,663,199 | ) | — | (32,663,199 | ) | |||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | (3,830,432 | ) | — | — | — | (3,830,432 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | (97,244,760 | ) | — | (97,244,760 | ) | |||||||||||||||||||
Total | $ | — | $ | (3,830,432 | ) | $ | — | $ | (129,907,959 | ) | $ | — | $ | (133,738,391 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
24
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options, rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | 33,089,321 | — | 33,089,321 | |||||||||||||||||||||
Swap contracts | — | — | — | 8,233,163 | — | 8,233,163 | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 1,266,694 | — | — | — | 1,266,694 | |||||||||||||||||||||
Total | $ | — | $ | 1,266,694 | $ | — | $ | 41,322,484 | $ | — | $ | 42,589,178 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options, rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | (110,187,522 | ) | — | (110,187,522 | ) | |||||||||||||||||||
Swap contracts | — | — | — | (204,277,005 | ) | — | (204,277,005 | ) | |||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | (10,913,897 | ) | — | — | — | (10,913,897 | ) | |||||||||||||||||||
Total | $ | — | $ | (10,913,897 | ) | $ | — | $ | (314,464,527 | ) | $ | — | $ | (325,378,424 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Forwards | Futures | Swaps | |||||||||||||
Average notional amount outstanding | $ | 418,837,539 | $ | 458,039,281 | $ | 420,598,751 | |||||||||
Highest notional amount outstanding | 959,183,224 | 714,255,026 | 715,669,901 | ||||||||||||
Lowest notional amount outstanding | 186,621,680 | 329,424,622 | 357,084,488 |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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
25
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 0.10% 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 expenses incurred by the Fund through at least June 30, 2010 to the extent that the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.50% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fun d) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes) (collectively, "Excluded Fund Fees and Expenses"). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 direct or indirect investment in underlying funds (excluding these Funds' Excluded Fund Fees and Expenses) exceeds 0.50% of the Fund's average daily 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 funds. For the period ended August 31, 2009, 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 | |||||||||
0.345 | % | 0.060 | % | 0.405 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $11,175 and $6,900, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
26
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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, 2009 aggregated $468,532,633 and $946,567,540, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 75.62% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. Two of the shareholders are other funds of the Trust.
As of August 31, 2009, 1.47% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 97.18% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 7,479,119 | $ | 38,649,530 | 10,891,534 | $ | 107,005,790 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 962,240 | 5,306,700 | 10,963,624 | 75,954,352 | |||||||||||||||
Shares repurchased | (10,145,613 | ) | (54,511,611 | ) | (16,617,931 | ) | (175,376,185 | ) | |||||||||||
Purchase premiums | — | — | — | 65,115 | |||||||||||||||
Redemption fees | — | — | — | 8,072 | |||||||||||||||
Net increase (decrease) | (1,704,254 | ) | $ | (10,555,381 | ) | 5,237,227 | $ | 7,657,144 |
27
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 80,772,075 | $ | 407,916,245 | 81,138,618 | $ | 775,605,728 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 15,779,561 | 87,315,114 | 192,685,490 | 1,315,596,109 | |||||||||||||||
Shares repurchased | (189,007,069 | ) | (1,046,541,383 | ) | (182,907,526 | ) | (1,818,454,819 | ) | |||||||||||
Purchase premiums | — | — | — | 404,109 | |||||||||||||||
Redemption fees | — | — | — | 43,468 | |||||||||||||||
Net increase (decrease) | (92,455,433 | ) | $ | (551,310,024 | ) | 90,916,582 | $ | 273,194,595 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 IV | $ | 368,331,113 | $ | 76,404,449 | $ | 216,483,770 | $ | 5,544,449 | $ | — | $ | 272,174,076 | |||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 354,875,492 | 80,088,564 | 227,633,770 | 2,888,564 | — | 271,976,138 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | — | 16,729,839 | 4,600,000 | 62,299 | — | 13,727,571 | |||||||||||||||||||||
GMO Quality Fund, Class VI | 467,659,107 | 125,369,517 | 276,250,000 | 2,969,517 | — | 358,493,048 | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | 255,428,005 | 59,911,054 | 146,600,000 | 1,636,053 | — | 197,433,573 | |||||||||||||||||||||
GMO U.S. Treasury Fund | — | 110,029,210 | 75,000,000 | 29,211 | — | 35,017,216 | |||||||||||||||||||||
Totals | $ | 1,446,293,717 | $ | 468,532,633 | $ | 946,567,540 | $ | 13,130,093 | $ | — | $ | 1,148,821,622 |
28
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
29
GMO Alpha Only Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees observed that the usefulness of the comparative data provided by the third-party data services was limited because the peer groups they used for the Fund included funds with investment programs that were substantially different from that of the Fund. As a result , the Trustees gave more weight to the Fund's performance relative to its benchmark than to the peer group data. 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.
30
GMO Alpha Only Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement — (Continued)
August 31, 2009 (Unaudited)
The Trustees also gave substantial consideration to the fees payable under the Fund's investment management agreement. The Trustees considered information prepared by third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trust ees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for advisory fees, shareholder fees and most other expenses of the underlying funds 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
31
GMO Alpha Only Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement — (Continued)
August 31, 2009 (Unaudited)
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
32
GMO Alpha Only Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.66 | % | $ | 1,000.00 | $ | 909.70 | $ | 3.18 | |||||||||||
2) Hypothetical | 0.66 | % | $ | 1,000.00 | $ | 1,021.88 | $ | 3.36 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.61 | % | $ | 1,000.00 | $ | 909.80 | $ | 2.94 | |||||||||||
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, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
33
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 92.4 | % | |||||
Short-Term Investments | 7.0 | ||||||
Options Purchased | 2.5 | ||||||
Swaps | 0.8 | ||||||
Loan Participations | 0.2 | ||||||
Loan Assignments | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures | (0.3 | ) | |||||
Written Options | (0.8 | ) | |||||
Reverse Repurchase Agreements | (2.8 | ) | |||||
Other | 0.9 | ||||||
100.0 | % | ||||||
Country / Region Summary** | % of Investments | ||||||
United States | 99.7 | % | |||||
United Kingdom | 5.5 | ||||||
Euro Region*** | 4.6 | ||||||
Emerging**** | 4.6 | ||||||
Australia | 1.8 | ||||||
Canada | 1.5 | ||||||
Sweden | 0.5 | ||||||
Japan | (18.2 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative contracts. Duration is based on the Manager's models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and negative) are factored into the duration-adjusted exposure using the reference security and applying the same methodology to that security.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
**** The "Emerging" exposure is associated with investments in the GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Uruguay, Turkey, and Indonesia. Additional information about the fund's emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
1
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) / Shares | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 16.1% | |||||||||||||||
U.S. Government — 16.1% | |||||||||||||||
7,605,080 | U.S. Treasury Inflation Indexed Note, 2.00%, due 01/15/16 (a) | 7,740,542 | |||||||||||||
5,021,750 | U.S. Treasury Inflation Indexed Bond, 2.13%, due 01/15/19 (a) | 5,173,969 | |||||||||||||
11,439,700 | U.S. Treasury Inflation Indexed Bond, 2.38%, due 01/15/25 (a) | 11,689,943 | |||||||||||||
10,864,400 | U.S. Treasury Inflation Indexed Bond, 2.00%, due 01/15/26 (a) | 10,555,438 | |||||||||||||
10,807,650 | U.S. Treasury Inflation Indexed Bond, 1.75%, due 01/15/28 (a) | 10,067,996 | |||||||||||||
4,332,933 | U.S. Treasury Inflation Indexed Bond, 3.63%, due 04/15/28 (a) (b) | 5,214,416 | |||||||||||||
13,116,900 | U.S. Treasury Inflation Indexed Bond, 3.88%, due 04/15/29 (a) (b) | 16,424,825 | |||||||||||||
Total U.S. Government | 66,867,129 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $67,086,401) | 66,867,129 | ||||||||||||||
MUTUAL FUNDS — 80.7% | |||||||||||||||
Affiliated Issuers — 80.7% | |||||||||||||||
2,065,631 | GMO Emerging Country Debt Fund, Class III | 15,905,358 | |||||||||||||
13,970,321 | GMO Short-Duration Collateral Fund | 224,223,657 | |||||||||||||
28,918 | GMO Special Purpose Holding Fund (c) | 18,219 | |||||||||||||
510,981 | GMO U.S. Treasury Fund | 12,779,629 | |||||||||||||
4,225,208 | GMO World Opportunity Overlay Fund | 81,800,023 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $368,365,172) | 334,726,886 | ||||||||||||||
SHORT-TERM INVESTMENTS — 1.7% | |||||||||||||||
Money Market Funds — 1.6% | |||||||||||||||
6,815,234 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 6,815,234 | |||||||||||||
Other Short-Term Investments — 0.1% | |||||||||||||||
300,000 | U.S. Treasury Bill, 0.28%, due 05/06/10 (b) (d) | 299,440 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $7,114,186) | 7,114,674 | ||||||||||||||
TOTAL INVESTMENTS — 98.5% (Cost $442,565,759) | 408,708,689 | ||||||||||||||
Other Assets and Liabilities (net) — 1.5% | 6,238,835 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 414,947,524 |
See accompanying notes to the financial statements.
2
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
23 | Australian Government Bond 10 Yr. | September 2009 | $ | 2,029,534 | $ | 13,012 | |||||||||||||
39 | Australian Government Bond 3 Yr. | September 2009 | 3,375,685 | (29,729 | ) | ||||||||||||||
33 | Canadian Government Bond 10 Yr. | December 2009 | 3,620,760 | 14,010 | |||||||||||||||
2 | Euro BOBL | September 2009 | 333,764 | 1,085 | |||||||||||||||
4 | Euro Bund | September 2009 | 703,921 | 7,049 | |||||||||||||||
4 | U.S. Treasury Note 2 Yr. (CBT) | December 2009 | 865,375 | 1,928 | |||||||||||||||
6 | U.S. Treasury Note 5 Yr. (CBT) | December 2009 | 691,500 | 2,988 | |||||||||||||||
48 | UK Gilt Long Bond | December 2009 | 9,268,738 | 26,366 | |||||||||||||||
$ | 20,889,277 | $ | 36,709 | ||||||||||||||||
Sales | |||||||||||||||||||
4 | U.S. Treasury Bond (CBT) | December 2009 | $ | 479,000 | $ | (2,621 | ) | ||||||||||||
104 | U.S. Treasury Note 10 Yr. (CBT) | December 2009 | 12,190,750 | (70,187 | ) | ||||||||||||||
48 | Japanese Government Bond 10 Yr. (TSE) | September 2009 | 71,990,882 | (1,342,453 | ) | ||||||||||||||
$ | 84,660,632 | $ | (1,415,261 | ) |
Swap Agreements
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
25,000,000 | USD | 4/15/2010 | Barclays Bank PLC | (0.60 | %) | CPURNSA Index (a) | $ | 417,610 | |||||||||||||||||||
285,000,000 | USD | 10/14/2009 | Barclays Bank PLC | 0.50 | % | Barclays TIPS Index Total Return (a) | 5,720,334 | ||||||||||||||||||||
$ | 6,137,944 | ||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
As of August 31, 2009, for the futures and/or swap contracts held, 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.
3
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Notes to Schedule of Investments:
CPURNSA - Consumer Price All Urban Non-Seasonally Adjusted
TIPS - Treasury Inflation Protected Securities
(a) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic.
(b) All or a portion of this security has been pledged to cover margin requirements on open financial futures contracts (Note 2).
(c) Underlying investment represents interests in defaulted securities.
(d) Rate shown represents yield-to-maturity.
Currency Abbreviations:
USD - United States Dollar
See accompanying notes to the financial statements.
4
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $74,200,587) (Note 2) | $ | 73,981,803 | |||||
Investments in affiliated issuers, at value (cost $368,365,172) (Notes 2 and 8) | 334,726,886 | ||||||
Interest receivable | 374,902 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 74,158 | ||||||
Receivable for open swap contracts (Note 2) | 6,137,944 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 26,515 | ||||||
Total assets | 415,322,208 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 86,820 | ||||||
Shareholder service fee | 28,894 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 805 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 173,630 | ||||||
Accrued expenses | 84,535 | ||||||
Total liabilities | 374,684 | ||||||
Net assets | $ | 414,947,524 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 526,883,521 | |||||
Distributions in excess of net investment income | (26,894,218 | ) | |||||
Accumulated net realized loss | (55,952,869 | ) | |||||
Net unrealized depreciation | (29,088,910 | ) | |||||
$ | 414,947,524 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 119,448,665 | |||||
Class VI shares | $ | 295,498,859 | |||||
Shares outstanding: | |||||||
Class III | 7,088,809 | ||||||
Class VI | 17,546,828 | ||||||
Net asset value per share: | |||||||
Class III | $ | 16.85 | |||||
Class VI | $ | 16.84 |
See accompanying notes to the financial statements.
5
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 2,083,822 | |||||
Interest | 2,013,512 | ||||||
Dividends | 939 | ||||||
Total investment income | 4,098,273 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 495,544 | ||||||
Shareholder service fee – Class III (Note 3) | 91,849 | ||||||
Shareholder service fee – Class VI (Note 3) | 75,342 | ||||||
Custodian, fund accounting agent and transfer agent fees | 83,168 | ||||||
Audit and tax fees | 34,316 | ||||||
Legal fees | 9,108 | ||||||
Trustees fees and related expenses (Note 3) | 4,027 | ||||||
Registration fees | 2,944 | ||||||
Miscellaneous | 3,680 | ||||||
Total expenses | 799,978 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (128,984 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (28,212 | ) | |||||
Shareholder service fee waived (Note 3) | (10,415 | ) | |||||
Net expenses | 632,367 | ||||||
Net investment income (loss) | 3,465,906 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 12,006 | ||||||
Closed futures contracts | (21,570 | ) | |||||
Closed swap contracts | 4,804,900 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (2,805 | ) | |||||
Net realized gain (loss) | 4,792,531 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 2,499,941 | ||||||
Investments in affiliated issuers | 47,251,682 | ||||||
Open futures contracts | (1,378,552 | ) | |||||
Open swap contracts | 14,648,136 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 8,768 | ||||||
Net unrealized gain (loss) | 63,029,975 | ||||||
Net realized and unrealized gain (loss) | 67,822,506 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 71,288,412 |
See accompanying notes to the financial statements.
6
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 3,465,906 | $ | 16,042,051 | |||||||
Net realized gain (loss) | 4,792,531 | (22,061,546 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 63,029,975 | (94,300,285 | ) | ||||||||
Net increase (decrease) in net assets from operations | 71,288,412 | (100,319,780 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (4,651,370 | ) | (11,449,888 | ) | |||||||
Class VI | (10,387,052 | ) | (37,250,183 | ) | |||||||
Total distributions from net investment income | (15,038,422 | ) | (48,700,071 | ) | |||||||
Return of capital | |||||||||||
Class III | (2,365,409 | ) | — | ||||||||
Class VI | (5,296,172 | ) | — | ||||||||
Total distributions from return of capital | (7,661,581 | ) | — | ||||||||
(22,700,003 | ) | — | |||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (10,342,887 | ) | 9,787,174 | ||||||||
Class VI | 8,901,408 | 279,038,782 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | (1,441,479 | ) | 288,825,956 | ||||||||
Redemption fees (Notes 2 and 7): | |||||||||||
Class III | 31,215 | 20,582 | |||||||||
Class VI | — | 90,895 | |||||||||
Increase in net assets resulting from redemption fees | 31,215 | 111,477 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (1,410,264 | ) | 288,937,433 | ||||||||
Total increase (decrease) in net assets | 47,178,145 | 139,917,582 | |||||||||
Net assets: | |||||||||||
Beginning of period | 367,769,379 | 227,851,797 | |||||||||
End of period (including distributions in excess of net investment income of $26,894,218 and $15,321,702, respectively) | $ | 414,947,524 | $ | 367,769,379 |
See accompanying notes to the financial statements.
7
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 14.88 | $ | 23.52 | $ | 25.47 | $ | 24.96 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)(b)† | 0.14 | 0.82 | 1.13 | 0.75 | |||||||||||||||
Net realized and unrealized gain (loss) | 2.75 | (6.90 | ) | (0.21 | ) | 0.68 | |||||||||||||
Total from investment operations | 2.89 | (6.08 | ) | 0.92 | 1.43 | ||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.61 | ) | (2.56 | ) | (2.81 | ) | (0.87 | ) | |||||||||||
From net realized gains | — | — | (0.06 | ) | (0.05 | ) | |||||||||||||
Return of capital | (0.31 | ) | — | — | — | ||||||||||||||
Total distributions | (0.92 | ) | (2.56 | ) | (2.87 | ) | (0.92 | ) | |||||||||||
Net asset value, end of period | $ | 16.85 | $ | 14.88 | $ | 23.52 | $ | 25.47 | |||||||||||
Total Return(c) | 19.85 | %** | (26.89 | )% | 3.95 | % | 5.79 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 119,449 | $ | 114,859 | $ | 137,492 | $ | 260,205 | |||||||||||
Net operating expenses to average daily net assets(e) | 0.38 | %* | 0.39 | %(d) | 0.37 | %(d) | 0.39 | %* | |||||||||||
Interest expense to average daily net assets | — | — | 0.07 | % | — | ||||||||||||||
Total net expenses to average daily net assets | 0.38 | %* | 0.39 | %(d) | 0.44 | %(d) | 0.39 | %* | |||||||||||
Net investment income to average daily net assets(b) | 1.74 | %* | 4.17 | % | 4.51 | % | 4.37 | %* | |||||||||||
Portfolio turnover rate | 7 | %** | 56 | % | 131 | % | 37 | %†† | |||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.08 | %* | 0.11 | % | 0.06 | % | 0.06 | %* | |||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.01 | — | — |
(a) Period from June 29, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds 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 and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) The net expense ratio does not include the effect of expense reductions.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(f) 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 period from May 31, 2006 (commencement of operations) through February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
8
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 14.87 | $ | 23.51 | $ | 25.48 | $ | 25.00 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)(b)† | 0.14 | 1.37 | 1.38 | 0.83 | |||||||||||||||
Net realized and unrealized gain (loss) | 2.75 | (7.43 | ) | (0.45 | ) | 0.60 | |||||||||||||
Total from investment operations | 2.89 | (6.06 | ) | 0.93 | 1.43 | ||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.61 | ) | (2.58 | ) | (2.84 | ) | (0.90 | ) | |||||||||||
From net realized gains | — | — | (0.06 | ) | (0.05 | ) | |||||||||||||
Return of capital | (0.31 | ) | — | — | — | ||||||||||||||
Total distributions | (0.92 | ) | (2.58 | ) | (2.90 | ) | (0.95 | ) | |||||||||||
Net asset value, end of period | $ | 16.84 | $ | 14.87 | $ | 23.51 | $ | 25.48 | |||||||||||
Total Return(c) | 19.90 | %** | (26.82 | )% | 4.00 | % | 5.75 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 295,499 | $ | 252,911 | $ | 90,360 | $ | 1,874,841 | |||||||||||
Net operating expenses to average daily net assets(d) | 0.29 | %* | 0.30 | %(e) | 0.29 | %(e) | 0.29 | %* | |||||||||||
Interest expense to average daily net assets | — | — | 0.07 | % | — | ||||||||||||||
Total net expenses to average daily net assets | 0.29 | %* | 0.30 | %(e) | 0.36 | %(e) | 0.29 | %* | |||||||||||
Net investment income to average daily net assets(b) | 1.75 | %* | 7.73 | % | 5.48 | % | 4.33 | %* | |||||||||||
Portfolio turnover rate | 7 | %** | 56 | % | 131 | % | 37 | %** | |||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.08 | %* | 0.09 | % | 0.06 | % | 0.06 | %* | |||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.01 | — | — |
(a) Period from May 31, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds 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 and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 3).
(e) The net expense ratio does not include the effect of expense reductions.
(f) There were no redemption fees during the period.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
9
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Inflation Indexed Plus Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the Barclays Capital 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 seeking to exploit differences in global interest rates, sectors, and credit, currency, and emerging country debt markets. The Fund may implement its strategies: (i) synthetically by using exchange-traded and over-the-counter ("OTC") derivatives and investing in other series of the Trust and/or (ii) directly by purchasing inflation-indexed bonds. The Fund has historically gained its investment exposure primarily through the use of derivatives and investments in other series of the Trust. As a result, the Fund has substantial holdings of GMO Short-Duration Collateral Fund ("SDCF") (a Fund that invests primarily in asset-backed securities) and GMO World Opportunity Overlay Fund ("Overlay Fund") (a Fund that invests in asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Under normal circumstances, the Fund invests (including through investment in other series of the Trust) at least 80% of its assets in inflation indexed bonds (which include instruments that are "linked" to general measures of inflation because their principal and/or interest components change with general movements of inflation in the country of issue). For these purposes, the term "bonds" includes (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by using a futures contract, swap contract, currency forward or option. To implement its investment strategies, the Fund may invest in or hold: inflation indexed bonds issued by the U.S. and foreign governments and their agencies or instrumentalities (inc luding securities neither guaranteed nor insured by the U.S. government), including Inflation-Protected Securities issued by the U.S. Treasury (TIPS), and inflation indexed bonds issued by corporations; non-inflation indexed (or nominal) fixed income securities issued by the U.S. and foreign governments and their agencies or instrumentalities (including securities neither guaranteed nor insured by the U.S. government) and by corporations (to gain direct exposure to such securities and/or for use as part of a synthetic position); derivatives, including without limitation, futures contracts, currency options, currency forwards, credit default swaps and other swap contracts (to gain exposure to inflation indexed bonds and/or the global interest rate, credit, and currency markets); shares of SDCF (to gain exposure to asset-backed securities); shares of Overlay Fund (to attempt to exploit misvaluations in world interest rates, currencies, and credit markets); shares of GMO Emerging Country Debt Fund ("ECDF") (to gain exposure to sovereign debt of
10
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
emerging countries); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). Because of the deterioration in credit markets that became acute in 2008, the Fund through its investment in SDCF and Overlay Fund currently holds and may continue to hold material positions of below investment grade securities. This is in addition to the Fund's emerging country debt investments. The Fund also may invest in unaffiliated money market funds.
Throughout the year ended August 31, 2009, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
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). As of August 31, 2009, shares of SDCF, GMO Special Purpose Holding Fund and Overlay Fund were not publicly available.
From prior to March 1, 2009 through July 12, 2009 the Fund had a policy to effect redemptions of its shares in-kind above de minimis levels. The Fund established de minimis amounts below which redemptions would be honored for cash. Beginning July 13, 2009, the Fund had a policy to pay redemption requests with cash (less a redemption fee).
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
As of August 31, 2009, a significant portion of the Fund's dividends received from other GMO funds is expected to be a return of capital for U.S. federal income tax purposes. Accordingly, "dividends from affiliated issuers" reported in the Statement of Operations has been reduced by the portion estimated to be a return of capital as of August 31, 2009. The estimated return of capital is $46,792,582. In addition, all applicable related income disclosures throughout this Semiannual Report have been adjusted by the estimated return of capital. Furthermore, the "distributions to shareholders from return of capital" disclosed in the Statement of Changes in Net Assets and Financial Highlights are also estimates as of August 31, 2009. Both the dividends from affiliated issuers and distributions to shareholders from return of capital are subject to change and will not be finalized until February 28, 2010, the Fund's upcoming fiscal year - -end. Finally, in early 2010, applicable shareholders will receive Form 1099-DIV that will indicate the appropriate tax character of all distributions paid by the Fund in 2009.
11
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by the Fund, those alternative sources would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fu nd. As of August 31, 2009, the total value of securities held directly and indirectly that were fair valued or for which no alternative pricing source was available represented 15.88% of the net assets of the Fund.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
12
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
U.S. Government | $ | — | $ | 66,867,129 | $ | — | $ | 66,867,129 | |||||||||||
TOTAL DEBT OBLIGATIONS | — | 66,867,129 | — | 66,867,129 | |||||||||||||||
Mutual Funds | 28,684,987 | 306,041,899 | — | 334,726,886 | |||||||||||||||
Short-Term Investments | 299,440 | 6,815,234 | — | 7,114,674 | |||||||||||||||
Total Investments | 28,984,427 | 379,724,262 | — | 408,708,689 | |||||||||||||||
Derivatives | |||||||||||||||||||
Futures Contracts | 66,438 | — | — | 66,438 | |||||||||||||||
Swap Agreements | — | 6,137,944 | — | 6,137,944 | |||||||||||||||
Total | $ | 29,050,865 | $ | 385,862,206 | $ | — | $ | 414,913,071 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Futures Contracts | $ | (1,444,990 | ) | $ | — | $ | — | $ | (1,444,990 | ) | |||||||||
Total | $ | (1,444,990 | ) | $ | — | $ | — | $ | (1,444,990 | ) |
13
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 59.53% and (0.14)% of total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Mutual Funds | $ | 21,110 | $ | — | $ | — | $ | — | $ | (2,891 | ) | $ | (18,219 | ) | $ | — | |||||||||||||||
Total | $ | 21,110 | $ | — | $ | — | $ | — | $ | (2,891 | ) | $ | (18,219 | ) | $ | — |
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of
14
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying
15
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the-counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts outstanding during the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations.
16
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exposure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent
17
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
market disruptions. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at a later date at a fixed price. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which can cause the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no repurchase agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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. Unless otherwise indicated, all applicable tax disclosures reflect tax adjusted balances as of December 31, 2008. The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, if any, at least annually. The Fund is permitted to, and will from time to time, declare and pay distributions from net investment income, if any, more frequently (e.g. monthly). All distributions are paid in shares of the Fund, at net asset value, unless
18
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of December 31, 2008, the Fund elected to defer to January 1, 2009 post-October capital losses of $1,829,159.
As of December 31, 2008, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Such losses expire as follows:
12/31/2015 | $ | (33,561,953 | ) | ||||
12/31/2016 | (23,863,587 | ) | |||||
Total | $ | (57,425,540 | ) |
Utilization of the capital loss carryforwards, post-October capital losses and futures losses, if any, realized subsequent to January 1, 2009, could be subject to limitations imposed by the Code related to share ownership activity.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 469,468,317 | $ | 843,201 | $ | (61,602,829 | ) | $ | (60,759,628 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement
19
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 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 incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
From prior to March 1, 2009 through August 2, 2009, the fee on cash redemptions was 2.00% of the amount redeemed. From August 3, 2009 through August 31, 2009, the fee on cash redemptions was 1.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired
20
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
(e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are g enerally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. Many of these risks are more pronounced as a result of current global economic conditions that began to unfold in 2008.This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of non-inflation indexed (nominal) fixed income securities will decline during periods of rising nominal interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further. Typically, the value of inflation indexed fixed income securities will decline during periods of rising real interest rates. In addition, increases in real interest rates need not be accompanied by increases in nominal interest rates. In such instances, the value of inflation indexed fixed income securities may experience greater declines than nominal fixed income securities with similar maturities. There can be no assurance that the value of the Fund's inflation indexed bond investments will be directly correlated to changes in nominal interest rates, and short-term increases in inflation may lead to a decline in their value.
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to an OTC derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security, will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses OTC derivatives, including swap contracts with longer-term
21
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments where financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent the Fund from selling securities or closing derivative positions at desirable prices. The Fund may be required to sell certain less liquid securities at distressed prices or meet redemption requests in-kind. Recent changes in credit markets have reduced the liquidity of all types of fixed income securities, including in particular the asset-backed securities held by the Fund through SDCF and Overlay Fund.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected.
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Leveraging Risk (increased risks from use of reverse repurchase agreeme nts and other derivatives and securities lending), Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies), Focused Investment Risk (increased risk from the Fund's to focus on investments in countries, regions, or sectors with high positive correlations to one another), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. For more information about reverse repurchase agreement and other derivatives, please refer to the descriptions of financial instruments (e.g. reverse repurchase agreements, swaps, futures, and other types of derivative contracts) in Note 2 above as well as the discussion of the Fund's use of derivatives below. Certain of the above referenced risks will be more pronounced for the Fund as a result of its investment in ECDF.
The Fund invests (including through investment in underlying funds) in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt
22
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of underlying assets or other support available to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities generally. These events reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not continue or that they will not deteriorate further. Also, government actions and proposals affecting the terms of underl ying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
The Fund uses its cash balance to meet its collateral obligations and for other purposes. There is no assurance that the Fund's cash balance will be sufficient to meet those obligations. If it is not, the Fund would be required to liquidate portfolio positions. To manage the Fund's cash collateral needs, the Manager reserves the right to reduce or eliminate the Fund's derivative exposures. A reduction in those exposures may cause
23
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the performance of the Fund to track its benchmark less closely and make the Fund's performance more dependent on the performance of the asset-backed securities it holds directly or indirectly.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund uses derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund uses derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps (including credit default swaps) or other derivatives on an index, a single security or a basket of securities to gain investment exposures. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. For example, the Fund may use credit default swaps to take an active short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may attempt to alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed vs. variable and shorter duration vs. longer duration. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives
24
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictability of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
25
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
26
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | 66,438 | — | — | — | — | 66,438 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | 5,720,334 | — | — | — | 417,610 | 6,137,944 | |||||||||||||||||||||
Total | $ | 5,786,772 | $ | — | $ | — | $ | — | $ | 417,610 | $ | 6,204,382 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | (1,444,990 | ) | — | — | — | — | (1,444,990 | ) | |||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | (1,444,990 | ) | $ | — | $ | — | $ | — | $ | — | $ | (1,444,990 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
27
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | (21,570 | ) | — | — | — | — | (21,570 | ) | |||||||||||||||||||
Swap contracts | 4,804,900 | — | — | — | — | 4,804,900 | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | 4,783,330 | $ | — | $ | — | $ | — | $ | — | $ | 4,783,330 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | (1,378,552 | ) | — | — | — | — | (1,378,552 | ) | |||||||||||||||||||
Swap contracts | 14,230,526 | — | — | — | 417,610 | 14,648,136 | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | 12,851,974 | $ | — | $ | — | $ | — | $ | 417,610 | $ | 13,269,584 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Futures | Swaps | ||||||||||
Average notional amount outstanding | $ | 63,225,126 | $ | 300,000,000 | |||||||
Highest notional amount outstanding | 110,975,301 | 310,000,000 | |||||||||
Lowest notional amount outstanding | — | 275,000,000 |
Other matters
GMO Special Purpose Holding Fund ("SPHF"), an investment of the Fund, has litigation pending against various entities related to the 2002 default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in
28
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the net asset value of SPHF. For the period ended August 31, 2009, the Fund received no distributions through SPHF in connection with settlement agreements related to that litigation.
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 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 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 0.055% for Class VI shares; provided, however, that the amount of this waiver will not exceed the respective Class's shareholder service fee.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.25% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 to the extent that the sum of (a) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses); (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in ECDF (excluding ECDF's Excluded Fund Fees and Expenses); and (c) the amount of fees and expenses incurred indirectly (through investment in other underlying funds) by the Fund through its (direct or indirect) investment in GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.25% of the Fund's average daily net assets, subject to a maximum total reimbursement to such Fund equ al to 0.25% of the Fund's average daily net assets.
29
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder in underlying funds. For the period ended August 31, 2009, 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 | ||||||||||||
0.021 | % | 0.005 | % | 0.011 | % | 0.037 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 ended was $3,200 and $1,840, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
4. Purchases and sales of securities
For the period ended August 31, 2009, cost of purchases and proceeds from sales of investments, other than short-term obligations and class exchanges, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 23,239,037 | $ | — | |||||||
Investments (non-U.S. Government securities) | 40,390,785 | 27,375,000 |
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 78.37% of the outstanding shares of the Fund were held by four shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
30
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of August 31, 2009, 0.05% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 73.96% of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 748 | $ | 11,715 | 4,861,784 | $ | 80,097,939 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 6,705 | 107,550 | 628,052 | 11,067,193 | |||||||||||||||
Shares repurchased | (636,924 | ) | (10,462,152 | ) | (3,617,561 | ) | (81,377,958 | ) | |||||||||||
Redemption fees | — | 31,215 | — | 20,582 | |||||||||||||||
Net increase (decrease) | (629,471 | ) | $ | (10,311,672 | ) | 1,872,275 | $ | 9,807,756 | |||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 540,983 | $ | 8,901,408 | 20,092,219 | $ | 400,069,195 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 1,168,087 | 18,646,359 | |||||||||||||||
Shares repurchased | — | — | (8,097,642 | ) | (139,676,772 | ) | |||||||||||||
Redemption fees | — | — | — | 90,895 | |||||||||||||||
Net increase (decrease) | 540,983 | $ | 8,901,408 | 13,162,664 | $ | 279,129,677 |
31
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 | $ | 11,878,915 | $ | 244,279 | $ | — | $ | 244,279 | $ | — | $ | 15,905,358 | |||||||||||||||
GMO Short-Duration Collateral Fund | 238,892,494 | — | — | 1,818,037 | — | 224,223,657 | |||||||||||||||||||||
GMO Special Purpose Holding Fund | 21,110 | — | — | — | — | 18,219 | |||||||||||||||||||||
GMO U.S. Treasury Fund | — | 40,146,506 | 27,375,000 | 21,506 | — | 12,779,629 | |||||||||||||||||||||
GMO World Opportunity Overlay Fund | 77,532,563 | — | — | — | — | 81,800,023 | o | ||||||||||||||||||||
Totals | $ | 328,325,082 | $ | 40,390,785 | $ | 27,375,000 | $ | 2,083,822 | $ | — | $ | 334,726,886 |
o The Fund received return of capital distributions in the amount of $7,085,088.
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. On September 14, 2009, the Fund's redemption fee was eliminated.
32
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including a one-year period and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. 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 overa ll 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The
33
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement — (Continued)
August 31, 2009 (Unaudited)
Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, the Trustees also took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for advisory fees, shareholder fees and most other expenses of the underlying funds 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management
34
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement — (Continued)
August 31, 2009 (Unaudited)
agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
35
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including redemption fees; (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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.42 | % | $ | 1,000.00 | $ | 1,198.50 | $ | 2.33 | |||||||||||
2) Hypothetical | 0.42 | % | $ | 1,000.00 | $ | 1,023.09 | $ | 2.14 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.33 | % | $ | 1,000.00 | $ | 1,199.00 | $ | 1.83 | |||||||||||
2) Hypothetical | 0.33 | % | $ | 1,000.00 | $ | 1,023.54 | $ | 1.68 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
36
GMO International Core Equity Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO International Core Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.0 | % | |||||
Short-Term Investments | 3.1 | ||||||
Futures Contracts | 0.2 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | 0.6 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
Japan | 27.1 | % | |||||
United Kingdom | 22.6 | ||||||
France | 10.4 | ||||||
Switzerland | 7.4 | ||||||
Germany | 5.3 | ||||||
Italy | 4.5 | ||||||
Australia | 3.8 | ||||||
Spain | 3.2 | ||||||
Sweden | 3.1 | ||||||
Netherlands | 3.0 | ||||||
Canada | 2.1 | ||||||
Belgium | 1.7 | ||||||
Singapore | 1.5 | ||||||
Hong Kong | 1.4 | ||||||
Finland | 1.2 | ||||||
Greece | 0.4 | ||||||
Ireland | 0.4 | ||||||
Norway | 0.3 | ||||||
Denmark | 0.3 | ||||||
New Zealand | 0.2 | ||||||
Austria | 0.1 | ||||||
Malta | 0.0 | ||||||
100.0 | % |
1
GMO International Core Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Industry Group Summary | % of Equity Investments | ||||||
Banks | 14.1 | % | |||||
Pharmaceuticals, Biotechnology & Life Sciences | 13.5 | ||||||
Energy | 8.8 | ||||||
Materials | 7.1 | ||||||
Telecommunication Services | 6.4 | ||||||
Food, Beverage & Tobacco | 6.1 | ||||||
Diversified Financials | 5.1 | ||||||
Capital Goods | 5.0 | ||||||
Automobiles & Components | 4.7 | ||||||
Utilities | 4.6 | ||||||
Retailing | 4.5 | ||||||
Consumer Durables & Apparel | 3.1 | ||||||
Food & Staples Retailing | 3.1 | ||||||
Technology Hardware & Equipment | 2.6 | ||||||
Software & Services | 2.0 | ||||||
Real Estate | 1.9 | ||||||
Insurance | 1.8 | ||||||
Household & Personal Products | 1.4 | ||||||
Transportation | 1.3 | ||||||
Semiconductors & Semiconductor Equipment | 0.9 | ||||||
Consumer Services | 0.7 | ||||||
Health Care Equipment & Services | 0.6 | ||||||
Media | 0.4 | ||||||
Commercial & Professional Services | 0.3 | ||||||
100.0 | % |
2
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 96.0% | |||||||||||||||
Australia — 3.6% | |||||||||||||||
1,010,488 | Australia and New Zealand Banking Group Ltd | 18,153,229 | |||||||||||||
353,013 | BHP Billiton Ltd | 10,979,890 | |||||||||||||
4,041,384 | BlueScope Steel Ltd | 9,777,527 | |||||||||||||
2,643,992 | Foster's Group Ltd | 12,230,537 | |||||||||||||
17,398,783 | GPT Group (REIT) | 9,062,293 | |||||||||||||
2,048,208 | Lihir Gold Ltd * | 4,739,865 | |||||||||||||
2,767,511 | Mirvac Group | 3,443,466 | |||||||||||||
550,118 | National Australia Bank Ltd | 13,236,534 | |||||||||||||
229,639 | Newcrest Mining Ltd | 5,850,745 | |||||||||||||
372,429 | Origin Energy Ltd | 4,817,180 | |||||||||||||
4,301,804 | Stockland (REIT) | 13,689,825 | |||||||||||||
662,354 | TABCORP Holdings Ltd | 3,751,952 | |||||||||||||
3,122,777 | Telstra Corp Ltd | 8,597,519 | |||||||||||||
603,376 | Woodside Petroleum Ltd | 25,036,084 | |||||||||||||
459,708 | Woolworths Ltd | 10,868,530 | |||||||||||||
Total Australia | 154,235,176 | ||||||||||||||
Austria — 0.1% | |||||||||||||||
66,647 | OMV AG | 2,631,345 | |||||||||||||
Belgium — 1.6% | |||||||||||||||
636,553 | Anheuser-Busch InBev NV | 27,522,384 | |||||||||||||
121,412 | Belgacom SA | 4,560,610 | |||||||||||||
44,463 | Colruyt SA | 10,208,796 | |||||||||||||
139,573 | Delhaize Group | 9,360,001 | |||||||||||||
1,042,253 | Dexia SA * | 8,939,336 | |||||||||||||
1,931,606 | Fortis * | 8,240,163 | |||||||||||||
Total Belgium | 68,831,290 | ||||||||||||||
Canada — 2.0% | |||||||||||||||
393,400 | Bank of Montreal | 19,045,627 | |||||||||||||
146,800 | Barrick Gold Corp | 5,066,092 |
See accompanying notes to the financial statements.
3
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Canada — continued | |||||||||||||||
171,000 | Magna International Inc Class A | 7,747,522 | |||||||||||||
100,400 | Metro Inc Class A | 3,387,783 | |||||||||||||
430,600 | National Bank of Canada | 24,170,240 | |||||||||||||
102,600 | Royal Bank of Canada | 5,290,496 | |||||||||||||
255,300 | Sun Life Financial Inc | 7,555,807 | |||||||||||||
398,080 | Suncor Energy Inc | 12,177,848 | |||||||||||||
Total Canada | 84,441,415 | ||||||||||||||
Denmark — 0.3% | |||||||||||||||
190,308 | Novo-Nordisk A/S Class B | 11,610,522 | |||||||||||||
Finland — 1.2% | |||||||||||||||
322,652 | Neste Oil Oyj | 5,368,406 | |||||||||||||
1,161,217 | Nokia Oyj | 16,300,963 | |||||||||||||
420,372 | Outokumpu Oyj | 8,909,255 | |||||||||||||
198,044 | Rautaruukki Oyj | 4,636,737 | |||||||||||||
358,843 | Sampo Oyj Class A | 8,601,339 | |||||||||||||
352,031 | Tieto Oyj | 6,443,777 | |||||||||||||
Total Finland | 50,260,477 | ||||||||||||||
France — 10.0% | |||||||||||||||
123,768 | Air Liquide SA | 13,239,241 | |||||||||||||
291,876 | ArcelorMittal | 10,438,716 | |||||||||||||
789,208 | BNP Paribas | 63,635,272 | |||||||||||||
69,732 | Casino Guichard-Perrachon SA | 5,291,323 | |||||||||||||
133,919 | Compagnie de Saint-Gobain | 6,050,383 | |||||||||||||
164,389 | Essilor International SA | 8,893,845 | |||||||||||||
1,038,509 | France Telecom SA | 26,411,427 | |||||||||||||
184,958 | GDF Suez | 7,817,857 | |||||||||||||
241,083 | Gemalto NV * | 10,048,233 | |||||||||||||
94,951 | Hermes International | 14,076,955 | |||||||||||||
98,045 | L'Oreal SA | 9,678,746 | |||||||||||||
124,699 | Nexans SA | 9,135,686 | |||||||||||||
241,788 | Peugeot SA * | 7,017,985 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
France — continued | |||||||||||||||
316,752 | Renault SA * | 14,292,375 | |||||||||||||
1,559,915 | Sanofi-Aventis | 106,211,062 | |||||||||||||
409,133 | Societe Generale | 33,070,066 | |||||||||||||
588,030 | STMicroelectronics NV | 5,110,387 | |||||||||||||
217,392 | Technip SA | 13,481,182 | |||||||||||||
727,881 | Total SA | 41,765,610 | |||||||||||||
58,983 | Unibail-Rodamco SE (REIT) | 11,691,834 | |||||||||||||
93,424 | Vinci SA | 5,028,543 | |||||||||||||
133,932 | Wendel | 6,330,329 | |||||||||||||
Total France | 428,717,057 | ||||||||||||||
Germany — 5.1% | |||||||||||||||
88,477 | Adidas AG | 4,172,904 | |||||||||||||
160,219 | Aurubis AG | 6,109,472 | |||||||||||||
222,832 | BASF AG | 11,645,431 | |||||||||||||
219,957 | Bayerische Motoren Werke AG | 10,039,253 | |||||||||||||
65,346 | Demag Cranes AG | 1,973,415 | |||||||||||||
394,184 | Deutsche Bank AG (Registered) | 26,771,852 | |||||||||||||
60,800 | Deutsche Boerse AG | 4,650,278 | |||||||||||||
1,871,238 | Deutsche Telekom AG (Registered) | 24,915,392 | |||||||||||||
246,994 | E.ON AG | 10,465,567 | |||||||||||||
392,731 | Hannover Rueckversicherung AG (Registered) * | 17,301,929 | |||||||||||||
974,587 | Infineon Technologies AG * | 5,134,209 | |||||||||||||
248,028 | Kloeckner & Co AG * | 6,631,292 | |||||||||||||
194,395 | MTU Aero Engines Holding AG | 8,219,669 | |||||||||||||
31,482 | Muenchener Rueckversicherungs-Gesellschaft AG (Registered) | 4,704,183 | |||||||||||||
78,464 | RWE AG | 7,275,690 | |||||||||||||
102,662 | Salzgitter AG | 9,798,478 | |||||||||||||
681,039 | SAP AG | 33,253,542 | |||||||||||||
152,374 | SGL Carbon SE * | 5,641,232 | |||||||||||||
87,813 | Software AG | 6,739,595 | |||||||||||||
311,218 | Suedzucker AG | 6,055,627 | |||||||||||||
172,365 | ThyssenKrupp AG | 5,878,460 | |||||||||||||
Total Germany | 217,377,470 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Greece — 0.4% | |||||||||||||||
545,669 | National Bank of Greece SA * | 17,139,067 | |||||||||||||
Hong Kong — 1.4% | |||||||||||||||
3,258,221 | CLP Holdings Ltd | 21,800,815 | |||||||||||||
2,897,000 | Hong Kong Electric Holdings Ltd | 16,194,658 | |||||||||||||
558,300 | Hong Kong Exchanges and Clearing Ltd | 9,712,743 | |||||||||||||
520,000 | Sun Hung Kai Properties Ltd | 7,016,168 | |||||||||||||
1,748,000 | Yue Yuen Industrial Holdings | 4,561,345 | |||||||||||||
Total Hong Kong | 59,285,729 | ||||||||||||||
Ireland — 0.3% | |||||||||||||||
405,219 | CRH Plc | 10,367,889 | |||||||||||||
189,865 | DCC Plc | 4,604,931 | |||||||||||||
Total Ireland | 14,972,820 | ||||||||||||||
Italy — 4.3% | |||||||||||||||
294,318 | Ansaldo STS SPA | 5,951,059 | |||||||||||||
231,071 | Atlantia SPA | 5,157,852 | |||||||||||||
1,399,959 | Bulgari SPA | 10,168,152 | |||||||||||||
3,539,314 | Enel SPA | 20,916,727 | |||||||||||||
2,298,130 | ENI SPA | 54,604,860 | |||||||||||||
612,015 | Fiat SPA * | 7,271,289 | |||||||||||||
3,728,343 | Parmalat SPA | 9,587,134 | |||||||||||||
271,078 | Saipem SPA | 7,286,943 | |||||||||||||
1,581,229 | Snam Rete Gas SPA | 7,354,701 | |||||||||||||
6,306,580 | Telecom Italia SPA | 10,220,400 | |||||||||||||
5,923,712 | Telecom Italia SPA-Di RISP | 6,729,883 | |||||||||||||
11,326,877 | UniCredit SPA * | 41,145,628 | |||||||||||||
Total Italy | 186,394,628 | ||||||||||||||
Japan — 26.0% | |||||||||||||||
1,290,200 | Aiful Corp | 3,851,704 | |||||||||||||
988,700 | Alps Electric Co Ltd | 5,949,608 | |||||||||||||
414,800 | Astellas Pharma Inc | 16,579,484 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
282,500 | Bridgestone Corp | 5,155,482 | |||||||||||||
220,000 | Canon Inc | 8,409,867 | |||||||||||||
395,700 | Chubu Electric Power Co Inc | 9,200,189 | |||||||||||||
260,500 | Chugai Pharmaceutical Co Ltd | 5,305,728 | |||||||||||||
1,558,600 | Chuo Mitsui Trust Holdings Inc | 6,554,418 | |||||||||||||
533,700 | Culture Convenience Club Co Ltd | 3,943,172 | |||||||||||||
483,600 | Daiei Inc * | 2,145,104 | |||||||||||||
1,055,000 | Daiichi Chuo Kisen Kaisha | 2,896,618 | |||||||||||||
294,948 | Daiichi Sankyo Co Ltd | 6,277,352 | |||||||||||||
2,333,000 | Daikyo Inc * | 6,064,194 | |||||||||||||
135,000 | Daito Trust Construction Co Ltd | 6,433,509 | |||||||||||||
746,000 | Daiwabo Co Ltd | 3,419,104 | |||||||||||||
1,206 | DeNa Co Ltd | 3,814,092 | |||||||||||||
252,800 | Don Quijote Co Ltd | 6,051,502 | |||||||||||||
1,572,000 | Dowa Holdings Co Ltd | 8,849,893 | |||||||||||||
182,700 | Eisai Co Ltd | 6,676,744 | |||||||||||||
694,600 | Elpida Memory Inc * | 10,830,535 | |||||||||||||
246,500 | FamilyMart Co Ltd | 7,627,048 | |||||||||||||
280,900 | Fast Retailing Co Ltd | 33,632,468 | |||||||||||||
3,076,000 | Fuji Heavy Industries Ltd | 13,291,905 | |||||||||||||
244,400 | Fuji Oil Co Ltd | 3,429,393 | |||||||||||||
1,433,000 | GS Yuasa Corp | 12,479,164 | |||||||||||||
153,100 | Hikari Tsushin Inc | 3,306,127 | |||||||||||||
2,307,000 | Hitachi Ltd | 8,115,392 | |||||||||||||
1,724,800 | Honda Motor Co Ltd | 54,082,058 | |||||||||||||
249,700 | Ibiden Co Ltd | 8,865,504 | |||||||||||||
991 | INPEX Corp | 8,069,580 | |||||||||||||
1,379,000 | Iseki & Co Ltd * | 6,274,470 | |||||||||||||
276,900 | JFE Holdings Inc | 9,663,627 | |||||||||||||
2,762,000 | Kajima Corp | 7,743,814 | |||||||||||||
1,450 | Kakaku.com Inc | 5,418,967 | |||||||||||||
734,000 | Kao Corp | 18,590,264 | |||||||||||||
2,476,000 | Kawasaki Kisen Kaisha Ltd | 10,854,398 | |||||||||||||
3,625 | Kenedix Inc * | 1,748,964 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
12,931 | KK daVinci Holdings * | 1,981,373 | |||||||||||||
305,400 | Konami Corp | 6,006,469 | |||||||||||||
343,200 | Kyushu Electric Power Co Inc | 7,578,652 | |||||||||||||
278,700 | Lawson Inc | 12,067,504 | |||||||||||||
2,477,000 | Marubeni Corp | 12,301,038 | |||||||||||||
769,600 | Matsui Securities Co Ltd | 7,125,861 | |||||||||||||
4,460,000 | Mazda Motor Corp | 12,378,356 | |||||||||||||
120,604 | Meiji Holdings Co Ltd * | 4,929,323 | |||||||||||||
900,200 | Mitsubishi Corp | 18,197,451 | |||||||||||||
4,067,600 | Mitsubishi UFJ Financial Group Inc | 25,858,819 | |||||||||||||
213,450 | Mitsubishi UFJ Lease & Finance Co Ltd | 6,764,365 | |||||||||||||
1,252,000 | Mitsui OSK Lines Ltd | 7,984,474 | |||||||||||||
8,703,600 | Mizuho Financial Group Inc | 21,175,037 | |||||||||||||
1,912 | Net One Systems Co Ltd | 3,144,245 | |||||||||||||
30,600 | Nintendo Co Ltd | 8,293,309 | |||||||||||||
554,000 | Nippon Denko Co Ltd | 4,243,244 | |||||||||||||
274,000 | Nippon Electric Glass Co Ltd | 2,842,464 | |||||||||||||
2,359,000 | Nippon Light Metal * | 2,713,926 | |||||||||||||
344,000 | Nippon Meat Packers Inc | 4,152,537 | |||||||||||||
3,592,500 | Nippon Mining Holdings Inc | 17,867,070 | |||||||||||||
2,749,000 | Nippon Oil Corp | 15,695,812 | |||||||||||||
337,600 | Nippon Paper Group Inc | 9,922,080 | |||||||||||||
1,446,000 | Nippon Sheet Glass | 5,053,978 | |||||||||||||
483,200 | Nippon Telegraph & Telephone Corp | 21,511,084 | |||||||||||||
923,500 | Nippon Yakin Koguo Co Ltd | 5,391,180 | |||||||||||||
2,100,000 | Nippon Yusen KK | 9,084,252 | |||||||||||||
6,090,000 | Nissan Motor Co Ltd | 42,492,053 | |||||||||||||
105,300 | Nitori Co Ltd | 8,134,568 | |||||||||||||
177,400 | Nitto Denko Corp | 5,379,855 | |||||||||||||
808,200 | Nomura Holdings Inc | 7,161,669 | |||||||||||||
19,066 | NTT Docomo Inc | 29,354,330 | |||||||||||||
1,741,000 | Obayashi Corp | 7,834,370 | |||||||||||||
2,301,000 | OJI Paper Co Ltd | 10,841,728 | |||||||||||||
116,100 | Ono Pharmaceutical Co Ltd | 5,707,204 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
80,100 | Oriental Land Co Ltd | 5,415,305 | |||||||||||||
446,690 | ORIX Corp | 34,227,763 | |||||||||||||
4,878,000 | Osaka Gas Co Ltd | 16,858,450 | |||||||||||||
1,119,000 | Pacific Metals Co Ltd | 9,371,231 | |||||||||||||
103,180 | Point Inc | 6,307,356 | |||||||||||||
1,181,900 | Resona Holdings Inc | 16,099,161 | |||||||||||||
478,000 | Ricoh Company Ltd | 6,876,640 | |||||||||||||
110,900 | Ryohin Keikaku Co Ltd | 5,061,052 | |||||||||||||
203,400 | Sankyo Co Ltd | 12,793,934 | |||||||||||||
5,270,000 | Sanyo Electric Co Ltd * | 14,205,548 | |||||||||||||
1,509,400 | Seven & I Holdings Co Ltd | 36,428,860 | |||||||||||||
765 | Seven Bank Ltd | 1,941,136 | |||||||||||||
745,000 | Sharp Corp | 8,599,747 | |||||||||||||
340,900 | Shin-Etsu Chemical Co Ltd | 20,130,493 | |||||||||||||
451,200 | SoftBank Corp | 10,103,243 | |||||||||||||
6,813,400 | Sojitz Corp | 14,558,879 | |||||||||||||
708,000 | SUMCO Corp | 14,437,940 | |||||||||||||
720,200 | Sumitomo Corp | 7,368,343 | |||||||||||||
681,100 | Sumitomo Electric Industries Ltd | 8,787,630 | |||||||||||||
525,000 | Sumitomo Metal Mining Co Ltd | 8,077,709 | |||||||||||||
1,446,000 | Sumitomo Osaka Cement Co Ltd | 3,072,991 | |||||||||||||
2,176,068 | Sumitomo Trust & Banking Co Ltd | 13,274,082 | |||||||||||||
3,319,000 | Taisei Corp | 7,275,759 | |||||||||||||
289,000 | Taisho Pharmaceutical Co Ltd | 5,666,708 | |||||||||||||
158,000 | Taiyo Yuden Co Ltd | 1,881,774 | |||||||||||||
300,400 | Takeda Pharmaceutical Co Ltd | 12,084,243 | |||||||||||||
743,740 | Takefuji Corp | 3,799,753 | |||||||||||||
963,200 | Tokyo Electric Power Co Inc (The) | 25,090,167 | |||||||||||||
3,148,000 | Tokyo Gas Co Ltd | 12,606,274 | |||||||||||||
709,000 | Tokyo Steel Manufacturing Co | 9,334,128 | |||||||||||||
1,531,000 | Tokyo Tatemono Co Ltd | 9,043,732 | |||||||||||||
332,000 | TonenGeneral Sekiyu KK | 3,174,081 | |||||||||||||
309,000 | Toyo Suisan Kaisha Ltd | 7,864,044 | |||||||||||||
422,200 | Toyota Motor Corp | 18,000,182 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
718,100 | UNY Co Ltd | 6,068,782 | |||||||||||||
68,980 | USS Co Ltd | 4,343,242 | |||||||||||||
Total Japan | 1,113,001,484 | ||||||||||||||
Malta — 0.0% | |||||||||||||||
15,998,662 | BGP Holding Plc * | — | |||||||||||||
Netherlands — 2.9% | |||||||||||||||
1,980,491 | Aegon NV * | 14,930,805 | |||||||||||||
423,401 | Heineken NV | 17,910,047 | |||||||||||||
2,094,846 | ING Groep NV * | 31,586,000 | |||||||||||||
1,171,071 | Koninklijke Ahold NV | 13,752,683 | |||||||||||||
380,068 | Koninklijke DSM NV | 13,873,360 | |||||||||||||
191,498 | OCE NV | 1,125,362 | |||||||||||||
357,875 | Reed Elsevier NV | 3,802,345 | |||||||||||||
551,144 | TomTom NV * | 8,141,569 | |||||||||||||
416,707 | Unilever NV | 11,675,200 | |||||||||||||
77,569 | Wereldhave NV | 7,618,098 | |||||||||||||
Total Netherlands | 124,415,469 | ||||||||||||||
New Zealand — 0.2% | |||||||||||||||
4,439,069 | Telecom Corp of New Zealand | 8,336,479 | |||||||||||||
Norway — 0.3% | |||||||||||||||
324,400 | DnB NOR ASA * | 3,330,533 | |||||||||||||
527,100 | Tandberg ASA | 10,960,660 | |||||||||||||
Total Norway | 14,291,193 | ||||||||||||||
Singapore — 1.5% | |||||||||||||||
388,200 | MobileOne Ltd | 460,876 | |||||||||||||
2,752,000 | Oversea-Chinese Banking Corp Ltd | 14,783,980 | |||||||||||||
2,568,000 | Singapore Exchange Ltd | 14,903,250 | |||||||||||||
9,263,000 | Singapore Telecommunications | 20,190,981 | |||||||||||||
1,063,000 | United Overseas Bank Ltd | 12,329,491 | |||||||||||||
Total Singapore | 62,668,578 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Spain — 3.1% | |||||||||||||||
640,508 | Banco Bilbao Vizcaya Argentaria SA | 11,387,789 | |||||||||||||
916,678 | Banco Popular Espanol SA | 9,880,323 | |||||||||||||
2,535,190 | Banco Santander SA | 39,029,621 | |||||||||||||
969,187 | Iberdrola SA | 8,998,754 | |||||||||||||
155,283 | Inditex SA | 8,468,621 | |||||||||||||
582,881 | Repsol YPF SA | 14,487,917 | |||||||||||||
1,595,325 | Telefonica SA | 40,337,770 | |||||||||||||
Total Spain | 132,590,795 | ||||||||||||||
Sweden — 2.9% | |||||||||||||||
1,664,400 | Boliden AB | 17,143,674 | |||||||||||||
699,573 | Electrolux AB Series B * | 14,542,223 | |||||||||||||
2,507,590 | Ericsson LM B Shares | 24,061,998 | |||||||||||||
604,314 | Hennes & Mauritz AB Class B | 33,554,198 | |||||||||||||
154,389 | Investor AB Class B | 2,878,957 | |||||||||||||
819,630 | Nordea Bank AB | 8,597,008 | |||||||||||||
373,078 | SKF AB Class B | 5,716,320 | |||||||||||||
612,489 | Svenska Handelsbanken AB Class A | 16,096,621 | |||||||||||||
328,455 | Swedbank AB Class A * | 3,448,684 | |||||||||||||
Total Sweden | 126,039,683 | ||||||||||||||
Switzerland — 7.1% | |||||||||||||||
142,066 | Actelion Ltd (Registered) * | 8,208,599 | |||||||||||||
94,482 | Baloise Holding Ltd | 8,575,945 | |||||||||||||
254,271 | Compagnie Financiere Richemont SA Class A | 6,940,990 | |||||||||||||
554,329 | Credit Suisse Group AG (Registered) | 28,281,303 | |||||||||||||
1,619,066 | Nestle SA (Registered) | 67,406,701 | |||||||||||||
2,338,699 | Novartis AG (Registered) | 108,639,853 | |||||||||||||
214,146 | Roche Holding AG (Non Voting) | 34,108,259 | |||||||||||||
55,686 | Swatch Group AG | 12,037,557 | |||||||||||||
52,041 | Syngenta AG (Registered) | 12,231,964 | |||||||||||||
109,136 | Synthes Inc | 12,786,538 | |||||||||||||
348,297 | UBS AG (Registered) * | 6,411,948 | |||||||||||||
Total Switzerland | 305,629,657 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — 21.7% | |||||||||||||||
2,045,178 | 3i Group Plc | 10,007,480 | |||||||||||||
254,509 | AMEC Plc | 3,106,411 | |||||||||||||
1,938,785 | AstraZeneca Plc | 89,968,728 | |||||||||||||
594,945 | Autonomy Corp Plc * | 12,547,712 | |||||||||||||
11,328,481 | Barclays Plc * | 69,344,277 | |||||||||||||
1,021,392 | BBA Aviation Plc | 2,549,289 | |||||||||||||
112,548 | Berkeley Group Holdings Plc (Unit Shares) * | 1,726,585 | |||||||||||||
2,443,614 | BG Group Plc | 40,092,691 | |||||||||||||
1,725,546 | BP Plc | 14,788,961 | |||||||||||||
1,112,330 | British American Tobacco Plc | 33,798,470 | |||||||||||||
1,383,033 | Burberry Group Plc | 10,832,093 | |||||||||||||
938,552 | Cadbury Plc | 8,812,637 | |||||||||||||
930,482 | Capita Group Plc | 10,282,579 | |||||||||||||
941,791 | Centrica Plc | 3,848,955 | |||||||||||||
1,662,839 | Compass Group Plc | 8,782,538 | |||||||||||||
1,101,145 | Diageo Plc | 17,040,329 | |||||||||||||
1,152,230 | Drax Group Plc | 8,953,960 | |||||||||||||
14,225,331 | DSG International Plc | 6,401,115 | |||||||||||||
838,679 | FirstGroup Plc | 5,151,344 | |||||||||||||
1,333,974 | Game Group Plc | 3,546,540 | |||||||||||||
7,111,401 | GlaxoSmithKline Plc | 138,869,949 | |||||||||||||
1,823,642 | Home Retail Group Plc | 9,193,423 | |||||||||||||
1,466,028 | HSBC Holdings Plc | 15,845,590 | |||||||||||||
252,517 | Imperial Tobacco Group Plc | 7,082,673 | |||||||||||||
355,083 | Kazakhmys Plc | 5,635,215 | |||||||||||||
2,252,506 | Kesa Electricals Plc | 5,125,639 | |||||||||||||
2,779,914 | Kingfisher Plc | 9,524,115 | |||||||||||||
1,596,439 | Ladbrokes Plc | 5,037,001 | |||||||||||||
530,802 | Lancashire Holdings Ltd | 3,998,417 | |||||||||||||
16,352,021 | Lloyds Banking Group Plc | 29,280,169 | |||||||||||||
528,965 | London Stock Exchange | 6,897,597 | |||||||||||||
1,067,197 | Marks & Spencer Group Plc | 5,870,570 | |||||||||||||
297,035 | Michael Page International Plc | 1,639,391 | |||||||||||||
546,340 | Next Plc | 14,491,877 | |||||||||||||
1,742,971 | Northern Foods Plc | 1,809,534 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
785,508 | Pearson Plc | 9,555,180 | |||||||||||||
220,843 | Provident Financial Plc | 3,165,289 | |||||||||||||
634,872 | Reckitt Benckiser Group Plc | 29,354,882 | |||||||||||||
567,226 | Royal Dutch Shell Group Class A (Amsterdam) | 15,732,406 | |||||||||||||
1,256,063 | Royal Dutch Shell Plc A Shares (London) | 34,740,680 | |||||||||||||
1,025,532 | Royal Dutch Shell Plc B Shares (London) | 27,669,399 | |||||||||||||
269,545 | Scottish & Southern Energy Plc | 4,892,936 | |||||||||||||
263,394 | Signet Jewelers Ltd | 6,230,489 | |||||||||||||
589,724 | Smith & Nephew Plc | 4,993,065 | |||||||||||||
240,143 | Spectris Plc | 2,729,367 | |||||||||||||
1,117,893 | Stagecoach Group Plc | 2,441,397 | |||||||||||||
773,690 | Standard Chartered Plc | 17,463,362 | |||||||||||||
1,802,295 | Tesco Plc | 10,970,994 | |||||||||||||
1,671,407 | Tomkins Plc | 4,820,002 | |||||||||||||
962,818 | Travis Perkins Plc | 12,562,308 | |||||||||||||
1,525,424 | Trinity Mirror Plc | 3,401,184 | |||||||||||||
373,755 | Unilever Plc | 10,213,207 | |||||||||||||
240,560 | Vedanta Resources Plc | 6,948,098 | |||||||||||||
24,041,221 | Vodafone Group Plc | 52,020,968 | |||||||||||||
601,663 | WH Smith Plc | 4,301,075 | |||||||||||||
1,784,158 | William Hill Plc | 5,351,691 | |||||||||||||
946,764 | Wolseley Plc * | 22,155,171 | |||||||||||||
3,190,902 | Wolseley Plc (Deferred) | — | |||||||||||||
1,050,580 | Xstrata Plc | 13,938,424 | |||||||||||||
Total United Kingdom | 927,535,428 | ||||||||||||||
TOTAL COMMON STOCKS (COST $4,440,663,865) | 4,110,405,762 |
See accompanying notes to the financial statements.
13
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 3.1% | |||||||||||
CAD | 349,635 | Bank of America Time Deposit, 0.04%, due 09/01/09 | 319,374 | ||||||||
EUR | 179,331 | Bank of Ireland Time Deposit, 0.06%, due 09/01/09 | 257,090 | ||||||||
USD | 54,156 | Bank of Ireland Time Deposit, 0.03%, due 09/01/09 | 54,156 | ||||||||
USD | 25,800,000 | BNP Paribas Time Deposit, 0.18%, due 09/01/09 | 25,800,000 | ||||||||
CHF | 17,872 | Brown Brothers Harriman Time Deposit, 0.02%, due 09/01/09 | 16,878 | ||||||||
HKD | 77,505 | Brown Brothers Harriman Time Deposit, 0.01%, due 09/01/09 | 10,000 | ||||||||
NOK | 64,322 | Brown Brothers Harriman Time Deposit, 0.35%, due 09/01/09 | 10,689 | ||||||||
NZD | 14,876 | Brown Brothers Harriman Time Deposit, 1.50%, due 09/01/09 | 10,209 | ||||||||
SEK | 72,234 | Brown Brothers Harriman Time Deposit, 0.01%, due 09/01/09 | 10,147 | ||||||||
DKK | 213,907 | Citibank Time Deposit, 0.30%, due 09/01/09 | 41,199 | ||||||||
USD | 25,800,000 | Commerzbank Time Deposit, 0.15%, due 09/01/09 | 25,800,000 | ||||||||
AUD | 588,795 | Deutsche Bank Time Deposit, 2.17%, due 09/01/09 | 497,649 | ||||||||
JPY | 35,207,480 | HSBC Bank (Hong Kong) Time Deposit, 0.01%, due 09/01/09 | 378,372 | ||||||||
USD | 25,800,000 | HSBC Bank (USA) Time Deposit, 0.13%, due 09/01/09 | 25,800,000 | ||||||||
SGD | 677,636 | JPMorgan Chase Time Deposit, 0.01%, due 09/01/09 | 470,270 | ||||||||
USD | 25,700,000 | Royal Bank of Canada Time Deposit, 0.15%, due 09/01/09 | 25,700,000 | ||||||||
USD | 25,800,000 | Societe Generale Time Deposit, 0.13%, due 09/01/09 | 25,800,000 | ||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $130,976,033) | 130,976,033 | ||||||||||
TOTAL INVESTMENTS — 99.1% (Cost $4,571,639,898) | 4,241,381,795 | ||||||||||
Other Assets and Liabilities (net) — 0.9% | 40,364,240 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 4,281,746,035 |
See accompanying notes to the financial statements.
14
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys † | |||||||||||||||||||
10/23/09 | CHF | 42,003,191 | $ | 39,685,404 | $ | 692,468 | |||||||||||||
10/23/09 | CHF | 42,003,191 | 39,685,405 | 591,467 | |||||||||||||||
10/23/09 | EUR | 14,395,064 | 20,637,227 | 368,400 | |||||||||||||||
10/23/09 | HKD | 92,032,935 | 11,879,379 | (590 | ) | ||||||||||||||
10/23/09 | SEK | 161,793,547 | 22,733,641 | 484,956 | |||||||||||||||
10/23/09 | SEK | 161,793,547 | 22,733,641 | 405,895 | |||||||||||||||
10/23/09 | SEK | 161,793,547 | 22,733,641 | 350,603 | |||||||||||||||
10/23/09 | SEK | 161,793,547 | 22,733,641 | 406,372 | |||||||||||||||
10/23/09 | SEK | 161,793,547 | 22,733,641 | 469,679 | |||||||||||||||
10/23/09 | SEK | 161,793,547 | 22,733,641 | 477,485 | |||||||||||||||
10/23/09 | SEK | 161,793,547 | 22,733,641 | 462,446 | |||||||||||||||
$ | 271,022,902 | $ | 4,709,181 | �� | |||||||||||||||
Sales # | |||||||||||||||||||
10/23/09 | CAD | 24,322,175 | $ | 22,219,032 | $ | (288,987 | ) | ||||||||||||
10/23/09 | CAD | 25,059,210 | 22,892,336 | (262,383 | ) | ||||||||||||||
10/23/09 | CAD | 24,322,175 | 22,219,032 | (246,193 | ) | ||||||||||||||
10/23/09 | EUR | 13,447,345 | 19,278,546 | 116,156 | |||||||||||||||
10/23/09 | GBP | 17,020,486 | 27,706,267 | 476,254 | |||||||||||||||
10/23/09 | GBP | 17,020,486 | 27,706,267 | 275,072 | |||||||||||||||
10/23/09 | SEK | 95,393,508 | 13,403,759 | (71,706 | ) | ||||||||||||||
10/23/09 | SGD | 27,689,752 | 19,206,960 | (121,109 | ) | ||||||||||||||
10/23/09 | SGD | 27,689,752 | 19,206,960 | (133,336 | ) | ||||||||||||||
$ | 193,839,159 | $ | (256,232 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
15
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
507 | CAC40 | September 2009 | $ | 26,631,848 | $ | 1,803,934 | |||||||||||||
167 | DAX | September 2009 | 32,785,509 | 3,376,836 | |||||||||||||||
75 | FTSE 100 | September 2009 | 5,962,114 | 666,979 | |||||||||||||||
407 | FTSE/MIB | September 2009 | 65,688,467 | 7,551,773 | |||||||||||||||
286 | MSCI Singapore | September 2009 | 12,433,601 | (142,103 | ) | ||||||||||||||
197 | TOPIX | September 2009 | 20,329,343 | 910,499 | |||||||||||||||
$ | 163,830,882 | $ | 14,167,918 | ||||||||||||||||
Sales | |||||||||||||||||||
574 | S&P Toronto 60 | September 2009 | $ | 68,350,436 | $ | (3,301,614 | ) |
As of August 31, 2009, for the futures contracts held, 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.
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 USD - United States Dollar | ||||||
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, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $4,571,639,898) (Note 2) | $ | 4,241,381,795 | |||||
Foreign currency, at value (cost $153,891) (Note 2) | 152,675 | ||||||
Dividends and interest receivable | 10,757,987 | ||||||
Foreign taxes receivable | 3,185,287 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 5,577,253 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 25,918,710 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 140,647 | ||||||
Total assets | 4,287,114,354 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 858,433 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 1,349,934 | ||||||
Shareholder service fee | 327,806 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 7,993 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 582,203 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 1,124,304 | ||||||
Miscellaneous payable | 417,299 | ||||||
Accrued expenses | 700,347 | ||||||
Total liabilities | 5,368,319 | ||||||
Net assets | $ | 4,281,746,035 |
See accompanying notes to the financial statements.
17
GMO International Core Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 5,786,104,002 | |||||
Accumulated undistributed net investment income | 74,101,194 | ||||||
Accumulated net realized loss | (1,263,735,693 | ) | |||||
Net unrealized depreciation | (314,723,468 | ) | |||||
$ | 4,281,746,035 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 1,239,683,821 | |||||
Class IV shares | $ | 1,005,179,331 | |||||
Class VI shares | $ | 2,036,882,883 | |||||
Shares outstanding: | |||||||
Class III | 46,507,289 | ||||||
Class IV | 37,728,978 | ||||||
Class VI | 76,472,929 | ||||||
Net asset value per share: | |||||||
Class III | $ | 26.66 | |||||
Class IV | $ | 26.64 | |||||
Class VI | $ | 26.64 |
See accompanying notes to the financial statements.
18
GMO International Core Equity Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $7,502,538) | $ | 76,459,913 | |||||
Interest | 106,520 | ||||||
Total investment income | 76,566,433 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 7,359,480 | ||||||
Shareholder service fee – Class III (Note 3) | 814,133 | ||||||
Shareholder service fee – Class IV (Note 3) | 618,995 | ||||||
Shareholder service fee – Class VI (Note 3) | 388,398 | ||||||
Custodian and fund accounting agent fees | 765,624 | ||||||
Legal fees | 73,784 | ||||||
Audit and tax fees | 41,124 | ||||||
Trustees fees and related expenses (Note 3) | 38,143 | ||||||
Transfer agent fees | 24,564 | ||||||
Registration fees | 13,524 | ||||||
Miscellaneous | 98,057 | ||||||
Total expenses | 10,235,826 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (946,956 | ) | |||||
Expense reductions (Note 2) | (1,989 | ) | |||||
Net expenses | 9,286,881 | ||||||
Net investment income (loss) | 67,279,552 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (738,538,250 | ) | |||||
Closed futures contracts | (9,272,229 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 9,712,913 | ||||||
Net realized gain (loss) | (738,097,566 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 2,106,987,052 | ||||||
Open futures contracts | 30,762,713 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 12,132,787 | ||||||
Net unrealized gain (loss) | 2,149,882,552 | ||||||
Net realized and unrealized gain (loss) | 1,411,784,986 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 1,479,064,538 |
See accompanying notes to the financial statements.
19
GMO International Core Equity Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 67,279,552 | $ | 144,264,443 | |||||||
Net realized gain (loss) | (738,097,566 | ) | (495,995,163 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 2,149,882,552 | (2,413,814,411 | ) | ||||||||
Net increase (decrease) in net assets from operations | 1,479,064,538 | (2,765,545,131 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (9,813,263 | ) | (33,600,867 | ) | |||||||
Class IV | (11,028,299 | ) | (33,761,743 | ) | |||||||
Class VI | (12,261,617 | ) | (125,844,027 | ) | |||||||
Total distributions from net investment income | (33,103,179 | ) | (193,206,637 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (7,902,343 | ) | ||||||||
Class IV | — | (7,358,071 | ) | ||||||||
Class VI | — | (28,358,623 | ) | ||||||||
Total distributions from net realized gains | — | (43,619,037 | ) | ||||||||
(33,103,179 | ) | (236,825,674 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (22,113,118 | ) | 495,120,468 | ||||||||
Class IV | (670,883,805 | ) | 741,372,190 | ||||||||
Class VI | 408,089,466 | (545,537,754 | ) | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (284,907,457 | ) | 690,954,904 | ||||||||
Total increase (decrease) in net assets | 1,161,053,902 | (2,311,415,901 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 3,120,692,133 | 5,432,108,034 | |||||||||
End of period (including accumulated undistributed net investment income of $74,101,194 and $39,924,821, respectively) | $ | 4,281,746,035 | $ | 3,120,692,133 |
See accompanying notes to the financial statements.
20
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 18.15 | $ | 37.25 | $ | 39.38 | $ | 35.23 | $ | 30.81 | $ | 26.75 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.38 | 0.92 | 1.01 | 0.86 | 0.72 | 0.55 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 8.34 | (18.54 | ) | (0.51 | ) | 6.06 | 4.79 | 4.54 | |||||||||||||||||||
Total from investment operations | 8.72 | (17.62 | ) | 0.50 | 6.92 | 5.51 | 5.09 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.21 | ) | (1.19 | ) | (0.68 | ) | (0.77 | ) | (0.16 | ) | (0.54 | ) | |||||||||||||||
From net realized gains | — | (0.29 | ) | (1.95 | ) | (2.00 | ) | (0.93 | ) | (0.49 | ) | �� | |||||||||||||||
Total distributions | (0.21 | ) | (1.48 | ) | (2.63 | ) | (2.77 | ) | (1.09 | ) | (1.03 | ) | |||||||||||||||
Net asset value, end of period | $ | 26.66 | $ | 18.15 | $ | 37.25 | $ | 39.38 | $ | 35.23 | $ | 30.81 | |||||||||||||||
Total Return(a) | 48.16 | %** | (48.61 | )% | 0.69 | % | 20.04 | % | 18.26 | % | 19.20 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,239,684 | $ | 855,690 | $ | 917,685 | $ | 877,816 | $ | 820,336 | $ | 321,463 | |||||||||||||||
Net expenses to average daily net assets | 0.53 | %(b)* | 0.53 | %(c) | 0.53 | %(c) | 0.53 | % | 0.54 | % | 0.55 | % | |||||||||||||||
Net investment income to average daily net assets | 3.34 | %* | 3.08 | % | 2.44 | % | 2.29 | % | 2.26 | % | 1.98 | % | |||||||||||||||
Portfolio turnover rate | 25 | %** | 41 | % | 43 | % | 47 | % | 43 | % | 45 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.10 | % | 0.14 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
* 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 IV share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 18.14 | $ | 37.23 | $ | 39.36 | $ | 35.21 | $ | 30.80 | $ | 26.75 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.40 | 0.94 | 1.04 | 0.85 | 0.65 | 0.56 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 8.31 | (18.53 | ) | (0.52 | ) | 6.09 | 4.87 | 4.54 | |||||||||||||||||||
Total from investment operations | 8.71 | (17.59 | ) | 0.52 | 6.94 | 5.52 | 5.10 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.21 | ) | (1.21 | ) | (0.70 | ) | (0.79 | ) | (0.18 | ) | (0.56 | ) | |||||||||||||||
From net realized gains | — | (0.29 | ) | (1.95 | ) | (2.00 | ) | (0.93 | ) | (0.49 | ) | ||||||||||||||||
Total distributions | (0.21 | ) | (1.50 | ) | (2.65 | ) | (2.79 | ) | (1.11 | ) | (1.05 | ) | |||||||||||||||
Net asset value, end of period | $ | 26.64 | $ | 18.14 | $ | 37.23 | $ | 39.36 | $ | 35.21 | $ | 30.80 | |||||||||||||||
Total Return(a) | 48.14 | %** | (48.56 | )% | 0.75 | % | 20.14 | % | 18.31 | % | 19.24 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,005,179 | $ | 1,166,165 | $ | 947,063 | $ | 711,712 | $ | 1,183,535 | $ | 255,580 | |||||||||||||||
Net expenses to average daily net assets | 0.47 | %(b)* | 0.47 | %(c) | 0.47 | %(c) | 0.47 | % | 0.48 | % | 0.49 | % | |||||||||||||||
Net investment income to average daily net assets | 3.57 | %* | 3.18 | % | 2.51 | % | 2.27 | % | 1.98 | % | 2.01 | % | |||||||||||||||
Portfolio turnover rate | 25 | %** | 41 | % | 43 | % | 47 | % | 43 | % | 45 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.11 | % | 0.14 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
22
GMO International Core Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2009 | Year Ended February 28, | ||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 18.13 | $ | 37.22 | $ | 39.35 | $ | 36.09 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.39 | 0.92 | 0.98 | 0.74 | |||||||||||||||
Net realized and unrealized gain (loss) | 8.32 | (18.50 | ) | (0.45 | ) | 5.33 | |||||||||||||
Total from investment operations | 8.71 | (17.58 | ) | 0.53 | 6.07 | ||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.20 | ) | (1.22 | ) | (0.71 | ) | (0.81 | ) | |||||||||||
From net realized gains | — | (0.29 | ) | (1.95 | ) | (2.00 | ) | ||||||||||||
Total distributions | (0.20 | ) | (1.51 | ) | (2.66 | ) | (2.81 | ) | |||||||||||
Net asset value, end of period | $ | 26.64 | $ | 18.13 | $ | 37.22 | $ | 39.35 | |||||||||||
Total Return(b) | 48.21 | %** | (48.56 | )% | 0.78 | % | 17.24 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 2,036,883 | $ | 1,098,838 | $ | 3,567,360 | $ | 1,377,829 | |||||||||||
Net expenses to average daily net assets | 0.44 | %(c)* | 0.44 | %(d) | 0.44 | %(d) | 0.44 | %* | |||||||||||
Net investment income to average daily net assets | 3.39 | %* | 3.07 | % | 2.36 | % | 2.11 | %* | |||||||||||
Portfolio turnover rate | 25 | %** | 41 | % | 43 | % | 47 | %†† | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.05 | % | 0.05 | % | 0.05 | %* |
(a) Period from March 28, 2006 (commencement of operations) through February 28, 2007.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions.
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
23
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO International Core Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 its benchmark, the MSCI EAFE Index (Europe, Australasia, and Far East). The Fund typically makes equity investments in companies tied economically to countries other than the U.S. Under normal circumstances, the Fund invests at least 80% of its assets in equity investments (which include common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depository receipts). The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the counter derivatives, including options, futures, an d swap contracts. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
Throughout the period ended August 31, 2009, the Fund had three classes of shares outstanding: Class III, Class IV and Class VI. Each class of shares bears a different shareholder service fee.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for
24
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 93.15% of the net assets of the Fund were valued using fair value prices based on models used by a third party vendor and are classified as using Level 2 inputs in the table below.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation or quoted prices for similar securities.
Level 3 – Valuations based on inputs that are unobservable and significant.
25
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | 10,979,890 | $ | 143,255,286 | $ | — | $ | 154,235,176 | |||||||||||
Austria | — | 2,631,345 | — | 2,631,345 | |||||||||||||||
Belgium | — | 68,831,290 | — | 68,831,290 | |||||||||||||||
Canada | 84,441,415 | — | — | 84,441,415 | |||||||||||||||
Denmark | — | 11,610,522 | — | 11,610,522 | |||||||||||||||
Finland | — | 50,260,477 | — | 50,260,477 | |||||||||||||||
France | 26,411,427 | 402,305,630 | — | 428,717,057 | |||||||||||||||
Germany | — | 217,377,470 | — | 217,377,470 | |||||||||||||||
Greece | — | 17,139,067 | — | 17,139,067 | |||||||||||||||
Hong Kong | — | 59,285,729 | — | 59,285,729 | |||||||||||||||
Ireland | — | 14,972,820 | — | 14,972,820 | |||||||||||||||
Italy | — | 186,394,628 | — | 186,394,628 | |||||||||||||||
Japan | — | 1,113,001,484 | — | 1,113,001,484 | |||||||||||||||
Malta | — | 0 | * | — | 0 | ||||||||||||||
Netherlands | — | 124,415,469 | — | 124,415,469 | |||||||||||||||
New Zealand | — | 8,336,479 | — | 8,336,479 | |||||||||||||||
Norway | — | 14,291,193 | — | 14,291,193 | |||||||||||||||
Singapore | — | 62,668,578 | — | 62,668,578 | |||||||||||||||
Spain | — | 132,590,795 | — | 132,590,795 | |||||||||||||||
Sweden | — | 126,039,683 | — | 126,039,683 | |||||||||||||||
Switzerland | — | 305,629,657 | — | 305,629,657 | |||||||||||||||
United Kingdom | — | 927,535,428 | — | 927,535,428 | |||||||||||||||
TOTAL COMMON STOCKS | 121,832,732 | 3,988,573,030 | — | 4,110,405,762 | |||||||||||||||
Short-Term Investments | 130,976,033 | — | — | 130,976,033 | |||||||||||||||
Total Investments | 252,808,765 | 3,988,573,030 | — | 4,241,381,795 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | — | 5,577,253 | — | 5,577,253 | |||||||||||||||
Futures Contracts | — | 14,310,021 | — | 14,310,021 | |||||||||||||||
Total | $ | 252,808,765 | $ | 4,008,460,304 | $ | — | $ | 4,261,269,069 |
* Represents the interest in securities that have no value at August 31, 2009.
26
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | $ | — | $ | (1,124,304 | ) | $ | — | $ | (1,124,304 | ) | |||||||||
Futures Contracts | (3,301,614 | ) | (142,103 | ) | — | (3,443,717 | ) | ||||||||||||
Total | $ | (3,301,614 | ) | $ | (1,266,407 | ) | $ | — | $ | (4,568,021 | ) |
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
27
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because many foreign exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign futures on those exchanges do not reflect events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor based on that vendor's proprietary models. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying
28
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations.
29
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exposure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. The Fund had no swap agreements outstanding at the end of the period.
30
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. Rights and warrants 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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
31
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $283,595,779.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (215,235,940 | ) | ||||
Total | $ | (215,235,940 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 4,634,585,541 | $ | 274,003,951 | $ | (667,207,697 | ) | $ | (393,203,746 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
For the period ended August 31, 2009, the Fund had net realized losses attributed to redemption in-kind transactions of $111,462,201.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon
32
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 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.
Brown Brothers Harriman & Co. ("BBH") serves as custodian and fund accounting agent of the Fund. State Street Bank and Trust Company ("State Street") serves as transfer agent of the Fund. BBH and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
33
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund's securities may not increase to what the Manager believes to be their fundamental value or that the Manager may have overestimated their fundamental value), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Credit and Counterparty Risk (risk of default of a derivatives counterparty or borrower of the Fund's securities), Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected).
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a
34
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC
35
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in cases where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | 14,310,021 | — | 14,310,021 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 5,577,253 | — | — | — | 5,577,253 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | 5,577,253 | $ | — | $ | 14,310,021 | $ | — | $ | 19,887,274 |
36
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | (3,443,717 | ) | — | (3,443,717 | ) | |||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | (1,124,304 | ) | — | — | — | (1,124,304 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | (1,124,304 | ) | $ | — | $ | (3,443,717 | ) | $ | — | $ | (4,568,021 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (20,856,533 | ) | $ | — | $ | (20,856,533 | ) | |||||||||||||
Futures contracts | — | — | — | (9,272,229 | ) | — | (9,272,229 | ) | |||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 8,310,578 | — | — | — | 8,310,578 | |||||||||||||||||||||
Total | $ | — | $ | 8,310,578 | $ | — | $ | (30,128,762 | ) | $ | — | $ | (21,818,184 | ) |
37
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | 439,699 | $ | — | $ | 439,699 | |||||||||||||||
Futures contracts | — | — | — | 30,762,713 | — | 30,762,713 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 11,956,040 | — | — | — | 11,956,040 | |||||||||||||||||||||
Total | $ | — | $ | 11,956,040 | $ | — | $ | 30,762,713 | $ | — | $ | 42,718,753 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Forwards | Futures | Rights/Warrants | |||||||||||||
Average notional amount outstanding | $ | 677,441,702 | $ | 209,630,178 | $ | 1,799,638 | |||||||||
Highest notional amount outstanding | 811,628,536 | 242,885,823 | 10,347,247 | ||||||||||||
Lowest notional amount outstanding | 464,862,061 | 152,532,761 | — |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.38% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief
38
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasu ry Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.38% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 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 period ended August 31, 2009 was $30,323 and $17,664, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $988,417,777 and $926,599,570, respectively. Proceeds from sales of securities for in-kind transactions for the period ended August 31, 2009 were $285,886,439.
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 24.33% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, less than 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 43.92% of the Fund's shares were held by accounts for which the Manager had investment discretion.
39
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 3,597,023 | $ | 73,825,193 | 24,667,921 | $ | 554,316,558 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 339,642 | 8,035,924 | 1,343,947 | 36,964,534 | |||||||||||||||
Shares repurchased | (4,574,076 | ) | (103,974,235 | ) | (3,502,126 | ) | (96,160,624 | ) | |||||||||||
Net increase (decrease) | (637,411 | ) | $ | (22,113,118 | ) | 22,509,742 | $ | 495,120,468 | |||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 3,816,004 | $ | 78,316,047 | 56,498,768 | $ | 1,087,585,834 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 466,313 | 11,028,299 | 1,320,611 | 35,699,368 | |||||||||||||||
Shares repurchased | (30,850,336 | ) | (760,228,151 | ) | (18,958,207 | ) | (381,913,012 | ) | |||||||||||
Net increase (decrease) | (26,568,019 | ) | $ | (670,883,805 | ) | 38,861,172 | $ | 741,372,190 | |||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 22,000,913 | $ | 525,862,468 | 22,188,760 | $ | 566,965,336 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 518,329 | 12,253,293 | 5,699,175 | 154,153,325 | |||||||||||||||
Shares repurchased | (6,662,424 | ) | (130,026,295 | ) | (63,112,155 | ) | (1,266,656,415 | ) | |||||||||||
Net increase (decrease) | 15,856,818 | $ | 408,089,466 | (35,224,220 | ) | $ | (545,537,754 | ) |
40
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
41
GMO International Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one- and five-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In
42
GMO International Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, 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 to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to separate account clients and the impact on the Manager of, and expenses and risks associated with, the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and chan ges in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 facto rs, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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
43
GMO International Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
44
GMO International Core Equity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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.
45
GMO International Core Equity Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 2009 (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 | $ | 1,481.60 | $ | 3.32 | |||||||||||
2) Hypothetical | 0.53 | % | $ | 1,000.00 | $ | 1,022.53 | $ | 2.70 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.47 | % | $ | 1,000.00 | $ | 1,481.40 | $ | 2.94 | |||||||||||
2) Hypothetical | 0.47 | % | $ | 1,000.00 | $ | 1,022.84 | $ | 2.40 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.44 | % | $ | 1,000.00 | $ | 1,482.10 | $ | 2.75 | |||||||||||
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, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
46
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 65.9 | % | |||||
Debt Obligations | 26.8 | ||||||
Cash and Cash Equivalents | 13.4 | ||||||
Short-Term Investments | 6.1 | ||||||
Options Purchased | 0.6 | ||||||
Preferred Stocks | 0.5 | ||||||
Loan Participations | 0.1 | ||||||
Loan Assignments | 0.0 | ||||||
Private Equity Securities | 0.0 | ||||||
Investment Funds | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Convertible Securities | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Forward Currency Contracts | (0.0 | ) | |||||
Written Options | (0.2 | ) | |||||
Reverse Repurchase Agreements | (1.9 | ) | |||||
Swaps | (5.4 | ) | |||||
Futures | (9.8 | ) | |||||
Other | 3.9 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Country / Region Summary** | % of Investments | ||||||
United States | 80.2 | % | |||||
Japan | 4.7 | ||||||
Euro Region*** | 3.5 | ||||||
United Kingdom | 2.4 | ||||||
Switzerland | 1.5 | ||||||
South Korea | 1.2 | ||||||
Russia | 1.1 | ||||||
Brazil | 0.9 | ||||||
Sweden | 0.8 | ||||||
China | 0.7 | ||||||
Taiwan | 0.7 | ||||||
Turkey | 0.7 | ||||||
India | 0.4 | ||||||
Indonesia | 0.3 | ||||||
Thailand | 0.3 | ||||||
Argentina | 0.1 | ||||||
Canada | 0.1 | ||||||
Colombia | 0.1 | ||||||
Egypt | 0.1 | ||||||
Malaysia | 0.1 | ||||||
Mexico | 0.1 | ||||||
Norway | 0.1 | ||||||
Philippines | 0.1 | ||||||
Poland | 0.1 | ||||||
South Africa | 0.1 | ||||||
Uruguay | 0.1 | ||||||
Venezuela | 0.1 | ||||||
Hong Kong | (0.1 | ) | |||||
Australia | (0.5 | ) | |||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds except for GMO Alpha Only Fund. The table excludes short-term investments. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
2
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 3.5% | |||||||||||||||
Asset-Backed Securities — 3.5% | |||||||||||||||
Auto Financing — 0.5% | |||||||||||||||
312,101 | BMW Vehicle Lease Trust, Series 07-1, Class A3B, 1 mo. LIBOR + .24%, 0.51%, due 08/15/13 | 311,926 | |||||||||||||
100,000 | Capital Auto Receivable Asset Trust, Series 07-SN1, Class A4, 1 mo. LIBOR + .10%, 0.37%, due 02/15/11 | 97,750 | |||||||||||||
700,000 | Capital Auto Receivable Asset Trust, Series 08-1, Class A4B, 1 mo. LIBOR + 1.35%, 1.62%, due 07/15/14 | 668,066 | |||||||||||||
300,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4A, 5.32%, due 11/10/14 | 315,799 | |||||||||||||
500,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 1.85%, 2.13%, due 11/10/14 | 481,250 | |||||||||||||
67,068 | Daimler Chrysler Master Owner Trust, Series 06-A, Class A, 1 mo. LIBOR + .03%, 0.30%, due 11/15/11 | 66,754 | |||||||||||||
1,400,000 | Ford Credit Auto Owner Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 2.00%, 2.27%, due 03/15/13 | 1,424,374 | |||||||||||||
1,300,000 | Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.52%, due 06/15/13 | 1,209,000 | |||||||||||||
600,000 | Nissan Auto Lease Trust, Series 08-A, Class A3B, 1 mo. LIBOR + 2.20%, 2.47%, due 07/15/11 | 596,640 | |||||||||||||
600,000 | Nissan Auto Receivables Owner Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.27%, due 06/17/13 | 596,819 | |||||||||||||
600,000 | Nissan Master Owner Trust Receivables, Series 07-A, Class A, 1 mo. LIBOR, 0.27%, due 05/15/12 | 573,000 | |||||||||||||
1,100,000 | Swift Master Auto Receivables Trust, Series 07-1, Class A, 1 mo. LIBOR + .10%, 0.37%, due 06/15/12 | 1,023,000 | |||||||||||||
1,200,000 | Truck Retail Installment Paper Corp., Series 05-1A, Class A, 144A, 1 mo. LIBOR + .27%, 0.54%, due 12/15/16 | 1,035,121 | |||||||||||||
Total Auto Financing | 8,399,499 | ||||||||||||||
Bank Loan Collateralized Debt Obligations — 0.1% | |||||||||||||||
1,840,000 | Omega Capital Europe Plc, Series GLOB-5A, Class A1, 144A, 3 mo. LIBOR + .25%, 0.83%, due 07/05/11 | 1,637,600 | |||||||||||||
Business Loans — 0.3% | |||||||||||||||
524,217 | Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, 1 mo. LIBOR + .37%, 0.64%, due 01/25/35 | 366,952 |
See accompanying notes to the financial statements.
3
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Business Loans — continued | |||||||||||||||
484,908 | GE Business Loan Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .29%, 0.56%, due 05/15/32 | 334,587 | |||||||||||||
1,600,000 | GE Dealer Floorplan Master Trust, Series 07-2, Class A, 1 mo. LIBOR + .01%, 0.28%, due 07/20/12 | 1,575,360 | |||||||||||||
1,320,671 | Lehman Brothers Small Balance Commercial, Series 05-2A, Class 1A, 144A, 1 mo. LIBOR + .25%, 0.52%, due 09/25/30 | 792,402 | |||||||||||||
700,000 | Navistar Financial Dealer Note Master Trust, Series 05-1, Class A, 1 mo. LIBOR + .11%, 0.39%, due 02/25/13 | 679,000 | |||||||||||||
600,000 | Textron Financial Floorplan Master Note, Series 07-AA, Class A, 144A, 1 mo. LIBOR + .06%, 0.33%, due 03/13/12 | 390,000 | |||||||||||||
Total Business Loans | 4,138,301 | ||||||||||||||
CMBS — 0.3% | |||||||||||||||
700,000 | Commercial Mortgage Pass-Through Certificates, Series 06-FL12, Class AJ, 144A, 1 mo. LIBOR + .13%, 0.40%, due 12/15/20 | 385,000 | |||||||||||||
800,000 | GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45 | 802,720 | |||||||||||||
177,739 | Greenwich Capital Commercial Funding Corp., Series 06-FL4A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.37%, due 11/05/21 | 152,855 | |||||||||||||
822,268 | GS Mortgage Securities Corp., Series 07-EOP, Class A1, 144A, 1 mo. LIBOR + .09%, 0.37%, due 03/06/20 | 715,373 | |||||||||||||
1,100,000 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-LDP7, Class A2, 6.05%, due 04/15/45 | 1,108,914 | |||||||||||||
500,000 | Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, 5.79%, due 05/12/39 | 503,150 | |||||||||||||
127,379 | Morgan Stanley Dean Witter Capital I, Series 03-TOP9, Class A1, 3.98%, due 11/13/36 | 127,762 | |||||||||||||
531,246 | Wachovia Bank Commercial Mortgage Trust, Series 06-WL7A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.36%, due 09/15/21 | 382,497 | |||||||||||||
Total CMBS | 4,178,271 | ||||||||||||||
CMBS Collateralized Debt Obligations — 0.1% | |||||||||||||||
1,600,000 | American Capital Strategies Ltd. Commercial Real Estate CDO Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .80%, 1.21%, due 11/23/52 | 112,000 | |||||||||||||
1,635,713 | Crest Exeter Street Solar, Series 04-1A, Class A1, 144A, 3 mo. LIBOR + .35%, 0.95%, due 06/28/19 | 981,428 | |||||||||||||
Total CMBS Collateralized Debt Obligations | 1,093,428 |
See accompanying notes to the financial statements.
4
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Credit Cards — 0.6% | |||||||||||||||
1,400,000 | American Express Credit Account Master Trust, Series 05-5, Class A, 1 mo. LIBOR + .04%, 0.31%, due 02/15/13 | 1,393,168 | |||||||||||||
1,900,000 | Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, 3 mo. LIBOR + .15%, 0.59%, due 06/16/14 | 1,862,589 | |||||||||||||
700,000 | Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.52%, due 09/15/17 | 646,723 | |||||||||||||
800,000 | Citibank OMNI Master Trust, Series 07-A9A, Class A9, 144A, 1 mo. LIBOR + 1.10%, 1.37%, due 12/23/13 | 796,800 | |||||||||||||
1,600,000 | Discover Card Master Trust I, Series 96-4, Class A, 1 mo. LIBOR + .38%, 0.65%, due 10/16/13 | 1,572,960 | |||||||||||||
1,200,000 | GE Capital Credit Card Master Note Trust, Series 05-1, Class A, 1 mo. LIBOR + .04%, 0.31%, due 03/15/13 | 1,194,372 | |||||||||||||
1,100,000 | Household Credit Card Master Note Trust I, Series 07-1, Class A, 1 mo. LIBOR + .05%, 0.32%, due 04/15/13 | 1,082,812 | |||||||||||||
200,000 | MBNA Credit Card Master Note Trust, Series 04-A8, Class A8, 1 mo. LIBOR + .15%, 0.42%, due 01/15/14 | 196,300 | |||||||||||||
800,000 | National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.07%, due 05/15/13 | 776,000 | |||||||||||||
1,300,000 | World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, 1 mo. LIBOR + .13%, 0.40%, due 02/15/17 | 1,171,222 | |||||||||||||
Total Credit Cards | 10,692,946 | ||||||||||||||
Equipment Leases — 0.1% | |||||||||||||||
800,000 | CNH Equipment Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.95%, 2.23%, due 08/15/14 | 810,480 | |||||||||||||
821,270 | GE Equipment Midticket LLC, Series 07-1, Class A3B, 1 mo. LIBOR + .25%, 0.52%, due 06/14/11 | 818,190 | |||||||||||||
Total Equipment Leases | 1,628,670 | ||||||||||||||
Insurance Premiums — 0.1% | |||||||||||||||
800,000 | AICCO Premium Finance Master Trust, Series 07-AA, Class A, 144A, 1 mo. LIBOR + .05%, 0.32%, due 12/15/11 | 768,480 | |||||||||||||
Insured Auto Financing — 0.3% | |||||||||||||||
92,390 | AmeriCredit Automobile Receivables Trust, Series 05-BM, Class A4, MBIA, 1 mo. LIBOR + .08%, 0.36%, due 05/06/12 | 91,295 |
See accompanying notes to the financial statements.
5
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Auto Financing — continued | |||||||||||||||
1,400,000 | AmeriCredit Automobile Receivables Trust, Series 07-AX, Class A4, XL, 1 mo. LIBOR + .04%, 0.32%, due 10/06/13 | 1,344,420 | |||||||||||||
800,000 | AmeriCredit Prime Automobile Receivable Trust, Series 07-2M, Class A4B, MBIA, 1 mo. LIBOR + .50%, 0.78%, due 03/08/16 | 725,110 | |||||||||||||
741,466 | Capital One Auto Finance Trust, Series 06-B, Class A4, MBIA, 1 mo. LIBOR + .02%, 0.29%, due 07/15/13 | 720,898 | |||||||||||||
662,616 | Capital One Auto Finance Trust, Series 07-C, Class A3B, FGIC, 1 mo. LIBOR + .51%, 0.78%, due 04/16/12 | 655,221 | |||||||||||||
1,100,000 | Santander Drive Auto Receivables Trust, Series 07-3, Class A4B, FGIC, 1 mo. LIBOR + .65%, 0.92%, due 10/15/14 | 1,023,770 | |||||||||||||
1,100,000 | Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.48%, due 07/14/14 | 1,001,000 | |||||||||||||
Total Insured Auto Financing | 5,561,714 | ||||||||||||||
Insured Other — 0.1% | |||||||||||||||
1,000,000 | Dominos Pizza Master Issuer LLC, Series 07-1, Class A2, 144A, MBIA, 5.26%, due 04/25/37 | 802,835 | |||||||||||||
813,498 | Henderson Receivables LLC, Series 06-4A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.47%, due 12/15/41 | 619,332 | |||||||||||||
2,500,000 | Toll Road Investment Part II, Series C, 144A, MBIA, Zero Coupon, due 02/15/37 | 236,225 | |||||||||||||
Total Insured Other | 1,658,392 | ||||||||||||||
Insured Residential Asset-Backed Securities (United States) — 0.0% | |||||||||||||||
435,278 | Residential Asset Mortgage Products, Inc., Series 05-RS9, Class AI3, FGIC, 1 mo. LIBOR + .22%, 0.49%, due 11/25/35 | 195,875 | |||||||||||||
Insured Residential Mortgage-Backed Securities (United States) — 0.0% | |||||||||||||||
218,146 | Chevy Chase Mortgage Funding Corp., Series 04-1A, Class A2, 144A, AMBAC, 1 mo. LIBOR + .33%, 0.60%, due 01/25/35 | 104,710 | |||||||||||||
102,772 | GreenPoint Home Equity Loan Trust, Series 04-4, Class A, AMBAC, 1 mo. LIBOR + .28%, 0.83%, due 08/15/30 | 57,561 | |||||||||||||
338,495 | Wachovia Asset Securitization, Inc., Series 04-HE1, Class A, MBIA, 1 mo. LIBOR + .22%, 0.49%, due 06/25/34 | 162,968 | |||||||||||||
Total Insured Residential Mortgage-Backed Securities (United States) | 325,239 |
See accompanying notes to the financial statements.
6
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Time Share — 0.0% | |||||||||||||||
26,861 | Cendant Timeshare Receivables Funding LLC, Series 04-1A, Class A2, 144A, MBIA, 1 mo. LIBOR + .18%, 0.45%, due 05/20/16 | 21,896 | |||||||||||||
164,126 | Cendant Timeshare Receivables Funding LLC, Series 05-1A, Class A2, 144A, FGIC, 1 mo. LIBOR + .18%, 0.45%, due 05/20/17 | 149,355 | |||||||||||||
Total Insured Time Share | 171,251 | ||||||||||||||
Investment Grade Corporate Collateralized Debt Obligations — 0.2% | |||||||||||||||
1,600,000 | Morgan Stanley ACES SPC, Series 04-15, Class II, 144A, 3 mo. LIBOR + .65%, 1.26%, due 12/20/09 | 1,490,400 | |||||||||||||
1,000,000 | Morgan Stanley ACES SPC, Series 05-10, Class A1, 144A, 3 mo. LIBOR + .52%, 1.13%, due 03/20/10 | 876,500 | |||||||||||||
1,400,000 | Salisbury International Investments Ltd., 3 mo. LIBOR + .42%, 1.03%, due 06/22/10 | 1,005,200 | |||||||||||||
Total Investment Grade Corporate Collateralized Debt Obligations | 3,372,100 | ||||||||||||||
Residential Asset-Backed Securities (United States) — 0.5% | |||||||||||||||
27,166 | ACE Securities Corp., Series 06-ASL1, Class A, 1 mo. LIBOR + .14%, 0.41%, due 02/25/36 | 4,333 | |||||||||||||
891,716 | ACE Securities Corp., Series 07-WM1, Class A2A, 1 mo. LIBOR + .07%, 0.34%, due 11/25/36 | 423,565 | |||||||||||||
600,000 | Argent Securities, Inc., Series 06-M1, Class A2C, 1 mo. LIBOR + .15%, 0.42%, due 07/25/36 | 141,750 | |||||||||||||
1,200,000 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3C, 1 mo. LIBOR + .15%, 0.42%, due 10/25/36 | 476,760 | |||||||||||||
56,726 | Asset Backed Funding Certificates, Series 06-OPT3, Class A3A, 1 mo. LIBOR + .06%, 0.33%, due 11/25/36 | 55,024 | |||||||||||||
894,738 | Bayview Financial Acquisition Trust, Series 04-B, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 05/28/39 | 629,895 | |||||||||||||
569,379 | Bayview Financial Acquisition Trust, Series 04-B, Class A2, 144A, 1 mo. LIBOR + .65%, 1.56%, due 05/28/39 | 341,627 | |||||||||||||
456,009 | Carrington Mortgage Loan Trust, Series 07-FRE1, Class A1, 1 mo. LIBOR + .12%, 0.39%, due 02/25/37 | 417,361 | |||||||||||||
1,200,000 | Centex Home Equity, Series 06-A, Class AV3, 1 mo. LIBOR + .16%, 0.43%, due 06/25/36 | 840,000 | |||||||||||||
595,312 | Countrywide Asset-Backed Certificates, Series 06-BC5, Class 2A1, 1 mo. LIBOR + .08%, 0.35%, due 03/25/37 | 555,962 |
See accompanying notes to the financial statements.
7
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
117,977 | Equity One ABS, Inc., Series 04-1, Class AV2, 1 mo. LIBOR + .30%, 0.57%, due 04/25/34 | 49,440 | |||||||||||||
800,000 | First Franklin Mortgage Loan Asset Backed Certificates, Series 06-FF5, Class 2A3, 1 mo. LIBOR + .16%, 0.43%, due 04/25/36 | 324,000 | |||||||||||||
342,964 | Fremont Home Loan Trust, Series 06-B, Class 2A2, 1 mo. LIBOR + .10%, 0.37%, due 08/25/36 | 222,820 | |||||||||||||
847,014 | Household Home Equity Loan Trust, Series 05-3, Class A2, 1 mo. LIBOR + .29%, 0.56%, due 01/20/35 | 644,789 | |||||||||||||
600,000 | Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.42%, due 03/25/36 | 212,526 | |||||||||||||
2,400,000 | Master Asset-Backed Securities Trust, Series 06-HE3, Class A3, 1 mo. LIBOR + .15%, 0.42%, due 08/25/36 | 728,232 | |||||||||||||
816,844 | Master Second Lien Trust, Series 06-1, Class A, 1 mo. LIBOR + .16%, 0.43%, due 03/25/36 | 26,547 | |||||||||||||
305,806 | Merrill Lynch Mortgage Investors, Series 07-HE2, Class A2A, 1 mo. LIBOR + .12%, 0.39%, due 02/25/37 | 158,652 | |||||||||||||
951,706 | Morgan Stanley Home Equity Loans, Series 07-2, Class A1, 1 mo. LIBOR + .10%, 0.37%, due 04/25/37 | 743,283 | |||||||||||||
940,498 | Residential Asset Securities Corp., Series 05-KS12, Class A2, 1 mo. LIBOR + .25%, 0.52%, due 01/25/36 | 799,423 | |||||||||||||
Total Residential Asset-Backed Securities (United States) | 7,795,989 | ||||||||||||||
Residential Mortgage-Backed Securities (Australian) — 0.1% | |||||||||||||||
554,754 | Interstar Millennium Trust, Series 03-3G, Class A2, 3 mo. LIBOR + .25%, 1.10%, due 09/27/35 | 440,486 | |||||||||||||
282,101 | Interstar Millennium Trust, Series 05-1G, Class A, 3 mo. LIBOR + .12%, 0.75%, due 12/08/36 | 231,788 | |||||||||||||
727,761 | Medallion Trust, Series 06-1G, Class A1, 3 mo. LIBOR + .05%, 0.68%, due 06/14/37 | 673,185 | |||||||||||||
336,867 | Superannuation Members Home Loans Global Fund, Series 8, Class A1, 3 mo. LIBOR + .07%, 0.58%, due 01/12/37 | 290,343 | |||||||||||||
Total Residential Mortgage-Backed Securities (Australian) | 1,635,802 | ||||||||||||||
Residential Mortgage-Backed Securities (European) — 0.1% | |||||||||||||||
602,778 | Aire Valley Mortgages, Series 06-1A, Class 1A, 144A, 3 mo. LIBOR + .11%, 0.72%, due 09/20/66 | 301,389 |
See accompanying notes to the financial statements.
8
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Mortgage-Backed Securities (European) — continued | |||||||||||||||
700,000 | Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.61%, due 01/13/39 | 614,469 | |||||||||||||
250,623 | Granite Master Issuer Plc, Series 06-2, Class A4, 1 mo. LIBOR + .04%, 0.31%, due 12/20/54 | 195,486 | |||||||||||||
41,413 | Paragon Mortgages Plc, Series 7A, Class A1A, 144A, 3 mo. LIBOR + .21%, 0.65%, due 05/15/34 | 27,234 | |||||||||||||
540,538 | Paragon Mortgages Plc, Series 14A, Class A2C, 144A, 3 mo. LIBOR + .10%, 0.73%, due 09/15/39 | 279,847 | |||||||||||||
800,000 | Pendeford Master Issuer Plc, Series 07-1A, Class 3A, 144A, 3 mo. LIBOR + .10%, 0.56%, due 02/12/16 | 752,000 | |||||||||||||
Total Residential Mortgage-Backed Securities (European) | 2,170,425 | ||||||||||||||
Residential Mortgage-Backed Securities (United States) — 0.0% | |||||||||||||||
120,169 | Chevy Chase Mortgage Funding Corp., Series 04-3A, Class A2, 144A, 1 mo. LIBOR + .30%, 0.57%, due 08/25/35 | 57,681 | |||||||||||||
Student Loans — 0.1% | |||||||||||||||
1,500,000 | College Loan Corp. Trust, Series 06-1, Class A2, 3 mo. LIBOR + .02%, 0.52%, due 04/25/22 | 1,494,375 | |||||||||||||
Time Share — 0.0% | |||||||||||||||
232,854 | Sierra Receivables Funding Co., Series 08-1A, Class A2, 144A, 1 mo. LIBOR + 4.00%, 4.27%, due 02/20/20 | 227,615 | |||||||||||||
Total Asset-Backed Securities | 57,203,653 | ||||||||||||||
U.S. Government Agency — 0.0% | |||||||||||||||
58,525 | Agency for International Development Floater (Support of C.A.B.E.I), 6 mo. U.S. Treasury Bill + .40%, 0.66%, due 10/01/12 (a) | 56,953 | |||||||||||||
168,317 | Agency for International Development Floater (Support of Honduras), 3 mo. U.S. Treasury Bill x 117%, 0.26%, due 10/01/11 (a) | 164,286 | |||||||||||||
166,667 | Agency for International Development Floater (Support of Zimbabwe), 3 mo. U.S. Treasury Bill x 115%, 0.20%, due 01/01/12 (a) | 161,819 | |||||||||||||
Total U.S. Government Agency | 383,058 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $55,473,708) | 57,586,711 |
See accompanying notes to the financial statements.
9
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 96.5% | |||||||||||||||
Affiliated Issuers — 96.5% | |||||||||||||||
63,027,757 | GMO Alpha Only Fund, Class IV | 313,878,230 | |||||||||||||
743,346 | GMO Alternative Asset Opportunity Fund | 19,081,689 | |||||||||||||
2,018,900 | GMO Asset Allocation Bond Fund, Class VI | 51,825,166 | |||||||||||||
3,665,708 | GMO Emerging Country Debt Fund, Class IV | 28,225,952 | |||||||||||||
8,343,169 | GMO Emerging Markets Fund, Class VI | 88,854,750 | |||||||||||||
2,830,870 | GMO Flexible Equities Fund, Class VI | 57,834,678 | |||||||||||||
16,978,233 | GMO International Small Companies Fund, Class III | 116,810,244 | |||||||||||||
34,447,106 | GMO Quality Fund, Class VI | 605,924,588 | |||||||||||||
1,781,790 | GMO Special Situations Fund, Class VI | 48,072,689 | |||||||||||||
15,836,267 | GMO Strategic Fixed Income Fund, Class VI | 254,488,805 | |||||||||||||
932,004 | GMO World Opportunity Overlay Fund | 18,043,600 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $1,718,664,341) | 1,603,040,391 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||||||
Money Market Funds — 0.0% | |||||||||||||||
31,948 | State Street Institutional U.S. Government Money Market Fund-Institutional Class | 31,948 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $31,948) | 31,948 | ||||||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $1,774,169,997) | 1,660,659,050 | ||||||||||||||
Other Assets and Liabilities (net) — 0.00% | 5,670 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,660,664,720 |
See accompanying notes to the financial statements.
10
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (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.
C.A.B.E.I. - Central American Bank for Economic Integration
CDO - Collateralized Debt Obligation
CMBS - Commercial Mortgage Backed Security
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
LIBOR - London Interbank Offered Rate
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at August 31, 2009, which are subject to change based on the terms of the security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust.
See accompanying notes to the financial statements.
11
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $55,505,656) (Note 2) | $ | 57,618,659 | |||||
Investments in affiliated issuers, at value (cost $1,718,664,341) (Notes 2 and 8) | 1,603,040,391 | ||||||
Receivable for investments sold | 14,625,828 | ||||||
Receivable for Fund shares sold | 10,250,000 | ||||||
Interest receivable | 53,276 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 12,710 | ||||||
Miscellaneous receivable | 44,857 | ||||||
Total assets | 1,685,645,721 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 28 | ||||||
Payable for Fund shares repurchased | 24,920,686 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 3,225 | ||||||
Accrued expenses | 57,062 | �� | |||||
Total liabilities | 24,981,001 | ||||||
Net assets | $ | 1,660,664,720 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 1,891,359,896 | |||||
Accumulated undistributed net investment income | 6,932,264 | ||||||
Accumulated net realized loss | (124,116,493 | ) | |||||
Net unrealized depreciation | (113,510,947 | ) | |||||
$ | 1,660,664,720 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 1,660,664,720 | |||||
Shares outstanding: | |||||||
Class III | 79,280,967 | ||||||
Net asset value per share: | |||||||
Class III | $ | 20.95 |
See accompanying notes to the financial statements.
12
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 30,539,872 | |||||
Interest | 1,978,342 | ||||||
Dividends | 2,950 | ||||||
Total investment income | 32,521,164 | ||||||
Expenses: | |||||||
Legal fees | 30,360 | ||||||
Custodian, fund accounting agent and transfer agent fees | 24,472 | ||||||
Trustees fees and related expenses (Note 3) | 15,873 | ||||||
Audit and tax fees | 15,640 | ||||||
Chief Compliance Officer (Note 3) | 7,360 | ||||||
Registration fees | 2,760 | ||||||
Miscellaneous | 3,588 | ||||||
Total expenses | 100,053 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (76,820 | ) | |||||
Expense reductions (Note 2) | (416 | ) | |||||
Net expenses | 22,817 | ||||||
Net investment income (loss) | 32,498,347 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 90,638 | ||||||
Investments in affiliated issuers | (131,725,287 | ) | |||||
Net realized gain (loss) | (131,634,649 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 6,685,474 | ||||||
Investments in affiliated issuers | 383,697,983 | ||||||
Net unrealized gain (loss) | 390,383,457 | ||||||
Net realized and unrealized gain (loss) | 258,748,808 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 291,247,155 |
See accompanying notes to the financial statements.
13
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 32,498,347 | $ | 217,782,345 | |||||||
Net realized gain (loss) | (131,634,649 | ) | 33,168,350 | ||||||||
Change in net unrealized appreciation (depreciation) | 390,383,457 | (499,180,237 | ) | ||||||||
Net increase (decrease) in net assets from operations | 291,247,155 | (248,229,542 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (11,618,316 | ) | (249,189,711 | ) | |||||||
Net realized gains | |||||||||||
Class III | (1,400,564 | ) | (37,083,602 | ) | |||||||
(13,018,880 | ) | (286,273,313 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (55,063,268 | ) | 361,232,562 | ||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 548,963 | 154,811 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | (54,514,305 | ) | 361,387,373 | ||||||||
Total increase (decrease) in net assets | 223,713,970 | (173,115,482 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 1,436,950,750 | 1,610,066,232 | |||||||||
End of period (including accumulated undistributed net investment income of $6,932,264 and distributions in excess of net investment income of $13,947,767, respectively) | $ | 1,660,664,720 | $ | 1,436,950,750 |
See accompanying notes to the financial statements.
14
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 17.51 | $ | 25.30 | $ | 26.92 | $ | 27.76 | $ | 26.50 | $ | 24.28 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.40 | 3.21 | 1.19 | 0.80 | 1.26 | 0.98 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 3.21 | (6.72 | ) | 1.18 | 1.63 | 2.93 | 3.00 | ||||||||||||||||||||
Total from investment operations | 3.61 | (3.51 | ) | 2.37 | 2.43 | 4.19 | 3.98 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.15 | ) | (3.71 | ) | (1.12 | ) | (1.16 | ) | (1.51 | ) | (0.99 | ) | |||||||||||||||
From net realized gains | (0.02 | ) | (0.57 | ) | (2.87 | ) | (2.11 | ) | (1.42 | ) | (0.77 | ) | |||||||||||||||
Total distributions | (0.17 | ) | (4.28 | ) | (3.99 | ) | (3.27 | ) | (2.93 | ) | (1.76 | ) | |||||||||||||||
Net asset value, end of period | $ | 20.95 | $ | 17.51 | $ | 25.30 | $ | 26.92 | $ | 27.76 | $ | 26.50 | |||||||||||||||
Total Return(b) | 20.64 | %** | (15.11 | )% | 8.60 | % | 9.31 | % | 16.50 | % | 16.74 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,660,665 | $ | 1,436,951 | $ | 1,610,066 | $ | 1,296,396 | $ | 1,207,625 | $ | 1,068,099 | |||||||||||||||
Net expenses to average daily net assets(c)(d) | 0.00 | %(e)* | 0.00 | %(e) | 0.00 | %(e) | 0.00 | % | 0.00 | % | 0.00 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 4.12 | %* | 14.05 | % | 4.30 | % | 2.94 | % | 4.64 | % | 3.92 | % | |||||||||||||||
Portfolio turnover rate | 17 | %** | 40 | % | 57 | % | 45 | % | 47 | % | 50 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.01 | % | 0.01 | % | 0.01 | % | 0.02 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.00 | (f) | $ | 0.00 | (f) | $ | 0.00 | (f) | $ | 0.00 | (f) | $ | 0.07 |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds 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 and assumes the effect of reinvested distributions. 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 funds (See Note 3).
(d) Net expenses to average daily net assets were less than 0.01%.
(e) The net expense ratio does not include the effect of expense reductions.
(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.
15
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Benchmark-Free Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 a positive total return. The Fund is a fund of funds and invests primarily in shares or holds assets of other series of the Trust, which may include the GMO International Equity Funds, the GMO U.S. Equity Funds, the GMO Fixed Income Funds, GMO Alpha Only Fund, GMO Alternative Asset Opportunity Fund, GMO Flexible Equities Fund, GMO Short-Duration Collateral Fund, GMO Special Situations Fund, and GMO World Opportunity Overlay Fund (the GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). In addition, the Fund may hold securities (particularly asset-backed securities) directly or through one or more subsidiaries or other entities. The Fund implements its strategy by allocating its assets among asset classes represented by the underlying funds (e.g., foreign equity, U.S. equity, emerging country equity, emerging country debt, foreign fixed income, U.S. fixed income, and commodities) . The Fund is not restricted in its exposure to any particular asset class, and at times may be substantially invested in underlying funds that primarily invest in a single asset class (e.g., Fixed Income Funds). In addition, the Fund is not restricted in its exposure to any particular market. Although the Fund generally will have exposure to both emerging countries and developed countries, including the U.S., at times, it also may have substantial exposure to a particular country or type of country (e.g., emerging countries). The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
The financial statements of the 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). As of August 31, 2009, shares of GMO Alternative Asset Opportunity Fund, GMO Flexible Equities Fund, GMO Short-Duration Collateral Fund, GMO Special Situations Fund, and GMO World Opportunity Overlay Fund were 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 followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in
16
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
As of August 31, 2009, a portion of the Fund's return of capital received from certain other GMO funds is expected to be classified as dividend income for U.S. federal income tax purposes. Accordingly, "dividends from affiliated issuers" as reported in the Statement of Operations has been increased by the portion estimated to be dividend income as of August 31, 2009. The estimated increase in dividend income is $1,033,603. In addition, all applicable related income disclosures throughout this Semiannual Report have been adjusted by the additional income. The dividends from affiliated issuers are subject to change and will not be finalized until February 28, 2010, the Fund's fiscal year-end. Finally, in early 2010, applicable shareholders will receive Form 1099-DIV that will indicate the appropriate tax character of all distributions paid by the Fund in 2009.
Portfolio valuation
Shares of the underlying funds and other mutual funds are generally valued at their net asset value.
Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 26.09% of the net assets of the Fund, through investments in the underlying funds,
17
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
were valued using fair value prices based on models used by that third party vendor. Those underlying funds classify such securities under SFAS 157 (as defined below) as level 2.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by the Fund, those alternative sources would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fu nd. As of August 31, 2009, the total value of securities held directly and indirectly that were fair valued or for which no alternative pricing source was available represented 4.66% of the net assets of the Fund.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund valued certain debt securities using a specified spread above the LIBOR Rate.
18
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Asset-Backed Securities | $ | — | $ | 9,093,082 | $ | 48,110,571 | $ | 57,203,653 | |||||||||||
U.S. Government Agency | — | — | 383,058 | 383,058 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 9,093,082 | 48,493,629 | 57,586,711 | |||||||||||||||
Mutual Funds | 1,460,007,735 | 143,032,656 | — | 1,603,040,391 | |||||||||||||||
Short-Term Investments | — | 31,948 | — | 31,948 | |||||||||||||||
Total Investments | 1,460,007,735 | 152,157,686 | 48,493,629 | 1,660,659,050 | |||||||||||||||
Total | $ | 1,460,007,735 | $ | 152,157,686 | $ | 48,493,629 | $ | 1,660,659,050 |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 16.99% and (0.05%) of total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||
Asset-Backed Securities | $ | 55,256,761 | $ | (6,354,800 | ) | $ | 807,261 | $ | 810,245 | $ | 6,684,186 | $ | (9,093,082 | ) | $ | 48,110,571 | |||||||||||||||
U.S. Government Agency | 451,344 | (74,926 | ) | 2,746 | 2,606 | 1,288 | — | 383,058 | |||||||||||||||||||||||
Total | $ | 55,708,105 | $ | (6,429,726 | ) | $ | 810,007 | $ | 812,851 | $ | 6,685,474 | $ | (9,093,082 | ) | $ | 48,493,629 |
19
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,811,244,121 | $ | 194,314,681 | $ | (344,899,752 | ) | $ | (150,585,071 | ) |
For the period ended August 31, 2009, the Fund had net realized losses attributed to redemption in-kind transactions of $489,814.
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or
20
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Income dividends and capital gain distributions from the underlying funds 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 asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
From prior to March 1, 2009 through June 29, 2009, the premium on cash purchases was 0.10% of the amount invested and the fee on cash redemptions was 2.00% of the amount redeemed. From June 30, 2009 through August 31, 2009, the purchase premium remained at 0.10% of the amount invested and the redemption fee was changed to 1.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premi um or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospective or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other
21
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and/or redemption fees may be waived at the Manager's discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premium and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premium and/or redemption fee imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transactio n costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of a Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund, including those risks to which the Fund is exposed as a result of its investments in underlying funds. This summary is not intended to include every potential risk of investing in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time. In addition, while each GMO Fund is exposed to some level of management risk, this risk may be particularly pronounced for this Fund because it does not seek to control risk relative to, or to outperform, a particular securities market index or benchmark.
• Market Risk — Equity Securities — From time to time, the Fund may allocate part or all of its assets to equity investments (including investments in emerging country equities). Equity securities held by underlying funds may decline in value due to factors affecting issuing companies, their industries, or the economy and equity markets generally. Declines in stock market prices generally are likely to result in declines in the value of the underlying funds' investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. An underlying
22
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Market Risk — Fixed Income Securities — From time to time, the Fund may allocate part or all of its assets to fixed income securities, which may include emerging country debt (including below investment grade securities (also known as "junk bonds")). Typically, the value of an underlying fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Smaller Company Risk — From time to time, the Fund may allocate part or all of its assets to investments in companies with smaller market capitalizations. The securities of companies with smaller market capitalizations typically are less widely held, trade less frequently and in lesser quantities, and have market prices that may fluctuate more than those of securities of larger capitalization companies.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent an underlying fund from selling securities or closing derivative positions at desirable prices.
• Derivatives Risk — The use of derivatives by underlying funds involves risks different from, and potentially greater than, risks associated with direct investments in securities and other assets. Derivatives may increase other Fund risks, including market risk, liquidity risk, and credit and counterparty risk, and their value may or may not correlate with the value of the relevant underlying asset.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of an underlying fund's foreign currency holdings and investments denominated in foreign currencies.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests will not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, investments in underlying funds with higher fees or expenses than the underlying funds in which the Fund is invested will increase the Fund's total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may potentially be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
Other principal risks of an investment in the Fund include Credit and Counterparty Risk (risk of default of an issuer of a portfolio security or a derivatives counterparty of an underlying fund or a borrower of an underlying fund's securities), Commodities Risk (value of an underlying fund's shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a
23
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
broader range of investments), Leveraging Risk (increased risk from use of reverse repurchase agreements and other derivatives and securities lending by an underlying fund), Short Sales Risk (risk that an underlying fund's loss on the short sale of securities that it does not own is unlimited), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market D isruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). Some of the underlying funds are non-diversified investment companies under the 1940 Act, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified.
The Fund invests (including through investment in underlying funds) in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of u nderlying assets or other support available to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities generally. These events reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not continue or that they will not deteriorate further. Also, government actions and proposals affecting the terms of underl ying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may
24
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund adopted SFAS 161 on March 1, 2009. As of August 31, 2009, the Fund held no derivative contracts for the purposes of SFAS 161.
3. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.00% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment co mpany under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, nonrecurring and certain other unusual expenses (including taxes).
25
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 | % | 0.068 | % | 0.004 | % | 0.478 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $12,653 and $7,360, respectively. The compensation and expenses of the CCO are included in the Statement of Operations. The Fund paid no remuneration 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 and class exchanges, for the period ended August 31, 2009 aggregated $306,318,320 and $264,790,856, respectively. Securities disposed of through in-kind transactions for the period ended August 31, 2009 was $1,250,655.
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 22.64% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 1.15% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 97.09% of the Fund's shares were held by accounts for which the Manager had investment discretion.
26
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,639,827 | $ | 32,613,161 | 5,802,830 | $ | 125,161,583 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 564,011 | 11,054,634 | 14,154,108 | 273,113,176 | |||||||||||||||
Shares repurchased | (4,970,920 | ) | (98,731,063 | ) | (1,546,197 | ) | (37,042,197 | ) | |||||||||||
Purchase premiums | — | 10,556 | — | 97,972 | |||||||||||||||
Redemption fees | — | 538,407 | — | 56,839 | |||||||||||||||
Net increase (decrease) | (2,767,082 | ) | $ | (54,514,305 | ) | 18,410,741 | $ | 361,387,373 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 IV | $ | 434,803,314 | $ | 79,751,236 | $ | 152,754,320 | $ | 21,277,263 | $ | — | $ | 313,878,230 | |||||||||||||||
GMO Alternative Asset Opportunity Fund | 16,373,298 | — | 65,257 | — | — | 19,081,689 | |||||||||||||||||||||
GMO Asset Allocation Bond Fund, Class VI | — | 64,352,371 | 14,027,205 | — | — | 51,825,166 | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | 21,081,143 | 432,794 | — | 432,794 | — | 28,225,952 | |||||||||||||||||||||
GMO Emerging Markets Fund, Class VI | 64,789,027 | 23,215,474 | 59,521,700 | 328,308 | — | 88,854,750 | |||||||||||||||||||||
GMO Flexible Equities Fund, Class VI | 46,651,926 | 83,441 | 4,013,395 | — | — | 57,834,678 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | 42,720,670 | 36,339,390 | 7,021,750 | 976,013 | — | 116,810,244 |
27
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Quality Fund, Class VI | $ | 401,725,164 | $ | 93,225,560 | $ | 12,422,732 | $ | 6,491,891 | $ | — | $ | 605,924,588 | |||||||||||||||
GMO Special Situations Fund, Class VI | 45,145,613 | 8,918,025 | 8,600,000 | — | — | 48,072,689 | |||||||||||||||||||||
GMO Strategic Fixed Income Fund, Class VI | 275,849,692 | — | 1,117,492 | 1,033,603 | — | 254,488,805 | t | ||||||||||||||||||||
GMO World Opportunity Overlay Fund | 17,169,667 | — | 67,906 | — | — | 18,043,600 | o | ||||||||||||||||||||
Totals | $ | 1,366,309,514 | $ | 306,318,291 | $ | 259,611,757 | $ | 30,539,872 | $ | — | $ | 1,603,040,391 |
t The Fund received return of capital distributions in the amount of $60,385,511. Please note that in early 2010, Form 1099-DIV is anticipated to be sent to applicable shareholders that will state the actual tax characterization of all distributions paid in 2009.
o The Fund received return of capital distributions in the amount of $1,562,842.
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. Effective September 14, 2009, the premium on cash purchases was 0.09% of the amount invested and the fee on cash redemptions was 0.12% of the amount redeemed.
28
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 considered that the Fund seeks a positive total return and does not seek to outperform a particular securities market index or blend of market indices. The Trustees also considered the Fund's investment performance as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one- and five-year periods and for the life of the Fund, and information prepared by the third-party data services, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees observed that the usefulness of the comparative data provided by the third-party data services was limited because the peer groups they used for the Fund included funds with investment programs that were substantially different from that of the Fund. The Trustees also considered the qualifications and experi ence 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 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
29
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
advisory fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 and the Trust as a whole (including the effect of recent market events and changes in assets under management and revenues on such profitability); information prepared by third-party data services concerning fees paid to managers of funds deemed by those services 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 with similar objectives.
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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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
30
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
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.
Following their review, on June 15, 2009, 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, 2009.
31
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.48 | % | $ | 1,000.00 | $ | 1,206.40 | $ | 2.67 | |||||||||||
2) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.79 | $ | 2.45 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, 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 Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 68.9 | % | |||||
Debt Obligations | 24.7 | ||||||
Cash and Cash Equivalents | 6.8 | ||||||
Short-Term Investments | 5.5 | ||||||
Preferred Stocks | 0.6 | ||||||
Options Purchased | 0.3 | ||||||
Loan Participations | 0.0 | ||||||
Private Equity Securities | 0.0 | ||||||
Investment Funds | 0.0 | ||||||
Loan Assignments | 0.0 | ||||||
Convertible Securities | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Written Options | (0.1 | ) | |||||
Reverse Repurchase Agreements | (1.8 | ) | |||||
Swaps | (2.6 | ) | |||||
Futures | (5.0 | ) | |||||
Other | 2.7 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Country / Region Summary** | % of Investments | ||||||
United States | 62.1 | % | |||||
Euro Region*** | 8.3 | ||||||
Japan | 8.2 | ||||||
United Kingdom | 6.5 | ||||||
Switzerland | 3.1 | ||||||
South Korea | 1.6 | ||||||
Sweden | 1.2 | ||||||
Russia | 1.1 | ||||||
Brazil | 1.0 | ||||||
China | 0.9 | ||||||
Taiwan | 0.9 | ||||||
Turkey | 0.9 | ||||||
Australia | 0.6 | ||||||
India | 0.5 | ||||||
Thailand | 0.5 | ||||||
Canada | 0.4 | ||||||
Emerging | 0.4 | ||||||
Singapore | 0.4 | ||||||
Hong Kong | 0.2 | ||||||
Indonesia | 0.2 | ||||||
Poland | 0.2 | ||||||
Denmark | 0.1 | ||||||
Egypt | 0.1 | ||||||
Israel | 0.1 | ||||||
Malaysia | 0.1 | ||||||
Mexico | 0.1 | ||||||
Norway | 0.1 | ||||||
Philippines | 0.1 | ||||||
South Africa | 0.1 | ||||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds except for GMO Alpha Only Fund. The table excludes short-term investments. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia 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, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 3.3% | |||||||||||||||
Asset-Backed Securities — 3.2% | |||||||||||||||
ABS Collateralized Debt Obligations — 0.0% | |||||||||||||||
500,000 | Paragon CDO Ltd., Series 04-1A, Class A, 144A, 3 mo. LIBOR + .65%, 1.16%, due 10/20/44 | 15,000 | |||||||||||||
Airlines — 0.0% | |||||||||||||||
600,000 | Aircraft Finance Trust, Series 99-1A, Class A1, 144A, 1 mo. LIBOR + .48%, 0.75%, due 05/15/24 | 174,000 | |||||||||||||
Auto Financing — 0.5% | |||||||||||||||
624,202 | BMW Vehicle Lease Trust, Series 07-1, Class A3B, 1 mo. LIBOR + .24%, 0.51%, due 08/15/13 | 623,852 | |||||||||||||
900,000 | Capital Auto Receivable Asset Trust, Series 07-2, Class A4B, 1 mo. LIBOR + .40%, 0.67%, due 02/18/14 | 893,700 | |||||||||||||
400,000 | Capital Auto Receivable Asset Trust, Series 07-SN1, Class A4, 1 mo. LIBOR + .10%, 0.37%, due 02/15/11 | 391,000 | |||||||||||||
200,000 | Capital Auto Receivable Asset Trust, Series 08-1, Class A4B, 1 mo. LIBOR + 1.35%, 1.62%, due 07/15/14 | 190,876 | |||||||||||||
800,000 | Carmax Auto Owner Trust, Series 08-2, Class A4B, 1 mo. LIBOR + 1.65%, 1.92%, due 08/15/13 | 806,352 | |||||||||||||
700,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4A, 5.32%, due 11/10/14 | 736,865 | |||||||||||||
600,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 1.85%, 2.13%, due 11/10/14 | 577,500 | |||||||||||||
120,723 | Daimler Chrysler Master Owner Trust, Series 06-A, Class A, 1 mo. LIBOR + .03%, 0.30%, due 11/15/11 | 120,156 | |||||||||||||
800,000 | Ford Credit Auto Owner Trust, Series 06-C, Class A4B, 1 mo. LIBOR + .04%, 0.31%, due 02/15/12 | 794,664 | |||||||||||||
500,000 | Ford Credit Auto Owner Trust, Series 07-B, Class A4B, 1 mo. LIBOR + .38%, 0.65%, due 07/15/12 | 493,750 | |||||||||||||
1,100,000 | Ford Credit Auto Owner Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 2.00%, 2.27%, due 03/15/13 | 1,119,151 | |||||||||||||
2,200,000 | Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.52%, due 06/15/13 | 2,046,000 | |||||||||||||
300,000 | Franklin Auto Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.95%, 2.22%, due 05/20/16 | 303,750 |
See accompanying notes to the financial statements.
3
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Auto Financing — continued | |||||||||||||||
1,000,000 | Nissan Auto Lease Trust, Series 08-A, Class A3B, 1 mo. LIBOR + 2.20%, 2.47%, due 07/15/11 | 994,400 | |||||||||||||
1,000,000 | Nissan Auto Receivables Owner Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.27%, due 06/17/13 | 994,698 | |||||||||||||
1,000,000 | Nissan Master Owner Trust Receivables, Series 07-A, Class A, 1 mo. LIBOR, 0.27%, due 05/15/12 | 955,000 | |||||||||||||
1,100,000 | Swift Master Auto Receivables Trust, Series 07-1, Class A, 1 mo. LIBOR + .10%, 0.37%, due 06/15/12 | 1,023,000 | |||||||||||||
500,000 | Swift Master Auto Receivables Trust, Series 07-2, Class A, 1 mo. LIBOR + .65%, 0.92%, due 10/15/12 | 456,280 | |||||||||||||
1,100,000 | Truck Retail Installment Paper Corp., Series 05-1A, Class A, 144A, 1 mo. LIBOR + .27%, 0.54%, due 12/15/16 | 948,861 | |||||||||||||
400,000 | Wachovia Auto Owner Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.15%, 1.42%, due 03/20/14 | 399,484 | |||||||||||||
600,000 | World Omni Auto Receivables Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.27%, due 11/15/12 | 590,988 | |||||||||||||
Total Auto Financing | 15,460,327 | ||||||||||||||
Bank Loan Collateralized Debt Obligations — 0.0% | |||||||||||||||
415,908 | Arran Corp. Loans No. 1 B.V., Series 06-1A, Class A3, 144A, 3 mo. LIBOR + .17%, 0.78%, due 06/20/25 | 387,184 | |||||||||||||
880,000 | Omega Capital Europe Plc, Series GLOB-5A, Class A1, 144A, 3 mo. LIBOR + .25%, 0.83%, due 07/05/11 | 783,200 | |||||||||||||
Total Bank Loan Collateralized Debt Obligations | 1,170,384 | ||||||||||||||
Business Loans — 0.2% | |||||||||||||||
626,415 | ACAS Business Loan Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .14%, 0.58%, due 08/16/19 | 488,604 | |||||||||||||
104,985 | Bayview Commercial Asset Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .36%, 0.63%, due 04/25/34 | 78,738 | |||||||||||||
69,896 | Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, 1 mo. LIBOR + .37%, 0.64%, due 01/25/35 | 48,927 | |||||||||||||
356,156 | Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, 1 mo. LIBOR + .39%, 0.66%, due 01/25/36 | 231,501 | |||||||||||||
295,240 | Bayview Commercial Asset Trust, Series 07-3, Class A1, 144A, 1 mo. LIBOR + .24%, 0.51%, due 07/25/37 | 177,144 |
See accompanying notes to the financial statements.
4
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Business Loans — continued | |||||||||||||||
1,000,000 | Bayview Commercial Asset Trust, Series 07-6A, Class A2, 144A, 1 mo. LIBOR + 1.30%, 1.57%, due 12/25/37 | 645,000 | |||||||||||||
91,395 | Capitalsource Commercial Loan Trust, Series 06-1A, Class A1, 144A, 1 mo. LIBOR + .12%, 0.39%, due 08/22/16 | 74,944 | |||||||||||||
236,988 | Capitalsource Commercial Loan Trust, Series 07-1A, Class A, 144A, 1 mo. LIBOR + .13%, 0.40%, due 03/20/17 | 194,330 | |||||||||||||
96,982 | GE Business Loan Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .29%, 0.56%, due 05/15/32 | 66,917 | |||||||||||||
141,301 | GE Business Loan Trust, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .24%, 0.51%, due 11/15/33 | 87,607 | |||||||||||||
900,000 | GE Dealer Floorplan Master Trust, Series 06-4, Class A, 1 mo. LIBOR + .01%, 0.28%, due 10/20/11 | 897,372 | |||||||||||||
1,400,000 | GE Dealer Floorplan Master Trust, Series 07-2, Class A, 1 mo. LIBOR + .01%, 0.28%, due 07/20/12 | 1,378,440 | |||||||||||||
268,108 | Lehman Brothers Small Balance Commercial, Series 05-1A, Class A, 144A, 1 mo. LIBOR + .25%, 0.52%, due 02/25/30 | 166,227 | |||||||||||||
227,702 | Lehman Brothers Small Balance Commercial, Series 05-2A, Class 1A, 144A, 1 mo. LIBOR + .25%, 0.52%, due 09/25/30 | 136,621 | |||||||||||||
100,215 | Lehman Brothers Small Balance Commercial, Series 07-3A, Class 1A1, 144A, 1 mo. LIBOR + .65%, 0.92%, due 10/25/37 | 87,187 | |||||||||||||
800,000 | Lehman Brothers Small Balance Commercial, Series 07-3A, Class 1A2, 144A, 1 mo. LIBOR + .85%, 1.12%, due 10/25/37 | 504,000 | |||||||||||||
800,000 | Navistar Financial Dealer Note Master Trust, Series 05-1, Class A, 1 mo. LIBOR + .11%, 0.39%, due 02/25/13 | 776,000 | |||||||||||||
700,000 | Textron Financial Floorplan Master Note, Series 07-AA, Class A, 144A, 1 mo. LIBOR + .06%, 0.33%, due 03/13/12 | 455,000 | |||||||||||||
9,796 | The Money Store Business Loan Backed Trust, Series 99-1, Class AN, 1 mo. LIBOR + .50%, 0.77%, due 09/15/17 | 8,327 | |||||||||||||
Total Business Loans | 6,502,886 | ||||||||||||||
CMBS — 0.3% | |||||||||||||||
700,000 | Citigroup/Deutsche Bank Commercial Mortgage, Series 05-CD1, Class A2FL, 1 mo. LIBOR + .12%, 0.39%, due 07/15/44 | 490,000 | |||||||||||||
1,100,000 | Commercial Mortgage Pass-Through Certificates, Series 06-FL12, Class AJ, 144A, 1 mo. LIBOR + .13%, 0.40%, due 12/15/20 | 605,000 | |||||||||||||
900,000 | GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45 | 903,060 |
See accompanying notes to the financial statements.
5
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
CMBS — continued | |||||||||||||||
500,000 | GE Capital Commercial Mortgage Corp., Series 06-C1, Class A2, 5.51%, due 03/10/44 | 502,250 | |||||||||||||
124,417 | Greenwich Capital Commercial Funding Corp., Series 06-FL4A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.37%, due 11/05/21 | 106,999 | |||||||||||||
900,000 | GS Mortgage Securities Corp., Series 06-GG6, Class A2, 5.51%, due 04/10/38 | 897,469 | |||||||||||||
213,181 | GS Mortgage Securities Corp., Series 07-EOP, Class A1, 144A, 1 mo. LIBOR + .09%, 0.37%, due 03/06/20 | 185,467 | |||||||||||||
300,000 | GS Mortgage Securities Corp., Series 07-EOP, Class A2, 144A, 1 mo. LIBOR + .13%, 0.41%, due 03/06/20 | 252,000 | |||||||||||||
290,951 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-FL1A, Class A1B, 144A, 1 mo. LIBOR + .12%, 0.39%, due 02/15/20 | 220,506 | |||||||||||||
1,400,000 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-LDP7, Class A2, 6.05%, due 04/15/45 | 1,411,346 | |||||||||||||
108,810 | Lehman Brothers Floating Rate Commercial, Series 06-LLFA, Class A1, 144A, 1 mo. LIBOR + .08%, 0.35%, due 09/15/21 | 93,033 | |||||||||||||
900,000 | Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, 5.79%, due 05/12/39 | 905,670 | |||||||||||||
300,000 | Morgan Stanley Capital I, Series 06-IQ11, Class A2, 5.69%, due 10/15/42 | 302,436 | |||||||||||||
400,000 | Morgan Stanley Capital I, Series 06-IQ11, Class A3, 5.91%, due 10/15/42 | 389,960 | |||||||||||||
127,379 | Morgan Stanley Dean Witter Capital I, Series 03-TOP9, Class A1, 3.98%, due 11/13/36 | 127,761 | |||||||||||||
863,275 | Wachovia Bank Commercial Mortgage Trust, Series 06-WL7A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.36%, due 09/15/21 | 621,558 | |||||||||||||
Total CMBS | 8,014,515 | ||||||||||||||
CMBS Collateralized Debt Obligations — 0.0% | |||||||||||||||
500,000 | American Capital Strategies Ltd. Commercial Real Estate CDO Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .80%, 1.21%, due 11/23/52 | 35,000 | |||||||||||||
423,554 | G-Force LLC, Series 05-RR2, Class A2, 144A, 5.16%, due 12/25/39 | 211,777 | |||||||||||||
540,711 | Guggenheim Structured Real Estate Funding, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .32%, 0.59%, due 08/26/30 | 189,249 | |||||||||||||
800,000 | Marathon Real Estate CDO, Series 06-1A, Class A1, 144A, 1 mo. LIBOR + .33%, 0.60%, due 05/25/46 | 416,000 | |||||||||||||
Total CMBS Collateralized Debt Obligations | 852,026 |
See accompanying notes to the financial statements.
6
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Collateralized Loan Obligations — 0.0% | |||||||||||||||
239,969 | Archimedes Funding IV (Cayman) Ltd., Series 4A, Class A1, 144A, 3 mo. LIBOR + .48%, 0.87%, due 02/25/13 | 215,972 | |||||||||||||
Credit Cards — 0.6% | |||||||||||||||
1,900,000 | American Express Credit Account Master Trust, Series 05-5, Class A, 1 mo. LIBOR + .04%, 0.31%, due 02/15/13 | 1,890,740 | |||||||||||||
700,000 | American Express Credit Account Master Trust, Series 06-1, Class A, 1 mo. LIBOR + .03%, 0.30%, due 12/15/13 | 687,969 | |||||||||||||
300,000 | American Express Issuance Trust, Series 07-1, Class A, 1 mo. LIBOR + .20%, 0.47%, due 09/15/11 | 298,650 | |||||||||||||
100,000 | Bank of America Credit Card Trust, Series 06-A12, Class A12, 1 mo. LIBOR + .02%, 0.29%, due 03/15/14 | 97,590 | |||||||||||||
1,100,000 | Cabela's Master Credit Card Trust, Series 08-4A, Class A2, 144A, 1 mo. LIBOR + 3.00%, 3.27%, due 09/15/14 | 1,128,941 | |||||||||||||
700,000 | Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, 3 mo. LIBOR + .15%, 0.59%, due 06/16/14 | 686,217 | |||||||||||||
800,000 | Capital One Multi-Asset Execution Trust, Series 06-A14, Class A, 1 mo. LIBOR + .01%, 0.28%, due 08/15/13 | 788,000 | |||||||||||||
200,000 | Capital One Multi-Asset Execution Trust, Series 07-A4, Class A4, 1 mo. LIBOR + .03%, 0.30%, due 03/16/15 | 191,000 | |||||||||||||
500,000 | Capital One Multi-Asset Execution Trust, Series 07-A6, Class A6, 1 mo. LIBOR + .07%, 0.34%, due 05/15/13 | 496,780 | |||||||||||||
600,000 | Capital One Multi-Asset Execution Trust, Series 08-A6, Class A6, 1 mo. LIBOR + 1.10%, 1.37%, due 03/17/14 | 595,500 | |||||||||||||
1,300,000 | Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.52%, due 09/15/17 | 1,201,057 | |||||||||||||
EUR | 1,100,000 | Citibank Credit Card Issuance Trust, Series 04-A2, Class A, 3 mo. EUR LIBOR + .10%, 0.95%, due 05/24/13 | 1,494,863 | ||||||||||||
1,300,000 | Citibank OMNI Master Trust, Series 07-A9A, Class A9, 144A, 1 mo. LIBOR + 1.10%, 1.37%, due 12/23/13 | 1,294,800 | |||||||||||||
400,000 | Discover Card Master Trust I, Series 05-4, Class A1, 1 mo. LIBOR + .06%, 0.33%, due 06/18/13 | 394,376 | |||||||||||||
500,000 | Discover Card Master Trust I, Series 05-4, Class A2, 1 mo. LIBOR + .09%, 0.36%, due 06/16/15 | 455,156 | |||||||||||||
1,900,000 | Discover Card Master Trust I, Series 06-2, Class A2, 1 mo. LIBOR + .03%, 0.30%, due 01/16/14 | 1,857,778 | |||||||||||||
100,000 | Discover Card Master Trust I, Series 07-1, Class A, 1 mo. LIBOR + .01%, 0.28%, due 08/15/12 | 99,562 |
See accompanying notes to the financial statements.
7
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Credit Cards — continued | |||||||||||||||
400,000 | Discover Card Master Trust I, Series 96-4, Class A, 1 mo. LIBOR + .38%, 0.65%, due 10/16/13 | 393,240 | |||||||||||||
700,000 | GE Capital Credit Card Master Note Trust, Series 05-1, Class A, 1 mo. LIBOR + .04%, 0.31%, due 03/15/13 | 696,717 | |||||||||||||
1,200,000 | GE Capital Credit Card Master Note Trust, Series 07-3, Class A1, 1 mo. LIBOR + .01%, 0.28%, due 06/15/13 | 1,185,600 | |||||||||||||
1,300,000 | Household Credit Card Master Note Trust I, Series 07-1, Class A, 1 mo. LIBOR + .05%, 0.32%, due 04/15/13 | 1,279,688 | |||||||||||||
600,000 | Household Credit Card Master Note Trust I, Series 07-2, Class A, 1 mo. LIBOR + .55%, 0.82%, due 07/15/13 | 588,000 | |||||||||||||
400,000 | MBNA Credit Card Master Note Trust, Series 04-A8, Class A8, 1 mo. LIBOR + .15%, 0.42%, due 01/15/14 | 392,600 | |||||||||||||
1,300,000 | National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.07%, due 05/15/13 | 1,261,000 | |||||||||||||
400,000 | World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, 1 mo. LIBOR + .13%, 0.40%, due 02/15/17 | 360,376 | |||||||||||||
Total Credit Cards | 19,816,200 | ||||||||||||||
Equipment Leases — 0.1% | |||||||||||||||
286,595 | CNH Equipment Trust, Series 07-B, Class A3B, 1 mo. LIBOR + .60%, 0.87%, due 10/17/11 | 286,698 | |||||||||||||
400,000 | CNH Equipment Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.95%, 2.23%, due 08/15/14 | 405,240 | |||||||||||||
903,397 | GE Equipment Midticket LLC, Series 07-1, Class A3B, 1 mo. LIBOR + .25%, 0.52%, due 06/14/11 | 900,010 | |||||||||||||
Total Equipment Leases | 1,591,948 | ||||||||||||||
Insurance Premiums — 0.0% | |||||||||||||||
1,000,000 | AICCO Premium Finance Master Trust, Series 07-AA, Class A, 144A, 1 mo. LIBOR + .05%, 0.32%, due 12/15/11 | 960,600 | |||||||||||||
Insured Auto Financing — 0.3% | |||||||||||||||
300,000 | Aesop Funding II LLC, Series 05-1A, Class A3, 144A, MBIA, 1 mo. LIBOR + .12%, 0.39%, due 04/20/11 | 293,808 | |||||||||||||
230,976 | AmeriCredit Automobile Receivables Trust, Series 05-BM, Class A4, MBIA, 1 mo. LIBOR + .08%, 0.36%, due 05/06/12 | 228,236 |
See accompanying notes to the financial statements.
8
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Auto Financing — continued | |||||||||||||||
800,000 | AmeriCredit Automobile Receivables Trust, Series 07-AX, Class A4, XL, 1 mo. LIBOR + .04%, 0.32%, due 10/06/13 | 768,240 | |||||||||||||
500,000 | AmeriCredit Automobile Receivables Trust, Series 07-BF, Class A4, FSA, 1 mo. LIBOR + .05%, 0.33%, due 12/06/13 | 454,300 | |||||||||||||
192,831 | AmeriCredit Automobile Receivables Trust, Series 07-CM, Class A3B, MBIA, 1 mo. LIBOR + .03%, 0.31%, due 05/07/12 | 188,195 | |||||||||||||
500,000 | AmeriCredit Automobile Receivables Trust, Series 07-DF, Class A4B, FSA, 1 mo. LIBOR + .80%, 1.08%, due 06/06/14 | 434,070 | |||||||||||||
800,000 | AmeriCredit Prime Automobile Receivable Trust, Series 07-2M, Class A4B, MBIA, 1 mo. LIBOR + .50%, 0.78%, due 03/08/16 | 725,111 | |||||||||||||
660,870 | Capital One Auto Finance Trust, Series 06-A, Class A4, AMBAC, 1 mo. LIBOR + .01%, 0.28%, due 12/15/12 | 637,145 | |||||||||||||
741,466 | Capital One Auto Finance Trust, Series 06-B, Class A4, MBIA, 1 mo. LIBOR + .02%, 0.29%, due 07/15/13 | 720,898 | |||||||||||||
200,000 | Capital One Auto Finance Trust, Series 07-A, Class A4, AMBAC, 1 mo. LIBOR + .02%, 0.29%, due 11/15/13 | 189,800 | |||||||||||||
596,354 | Capital One Auto Finance Trust, Series 07-C, Class A3B, FGIC, 1 mo. LIBOR + .51%, 0.78%, due 04/16/12 | 589,699 | |||||||||||||
100,000 | Hertz Vehicle Financing LLC, Series 05-2A, Class A3, 144A, AMBAC, 1 mo. LIBOR + .20%, 0.47%, due 02/25/11 | 98,697 | |||||||||||||
300,000 | Hertz Vehicle Financing LLC, Series 05-2A, Class A5, 144A, AMBAC, 1 mo. LIBOR + .25%, 0.52%, due 11/25/11 | 284,976 | |||||||||||||
1,021,445 | Santander Drive Auto Receivables Trust, Series 07-1, Class A4, FGIC, 1 mo. LIBOR + .05%, 0.32%, due 09/15/14 | 956,501 | |||||||||||||
800,000 | Santander Drive Auto Receivables Trust, Series 07-3, Class A4B, FGIC, 1 mo. LIBOR + .65%, 0.92%, due 10/15/14 | 744,560 | |||||||||||||
1,700,000 | Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.48%, due 07/14/14 | 1,547,000 | |||||||||||||
96,299 | UPFC Auto Receivables Trust, Series 06-B, Class A3, AMBAC, 5.01%, due 08/15/12 | 96,253 | |||||||||||||
Total Insured Auto Financing | 8,957,489 | ||||||||||||||
Insured Business Loans — 0.0% | |||||||||||||||
316,765 | CNL Commercial Mortgage Loan Trust, Series 03-2A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .44%, 0.71%, due 10/25/30 | 205,897 |
See accompanying notes to the financial statements.
9
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured High Yield Collateralized Debt Obligations — 0.0% | |||||||||||||||
442,873 | GSC Partners CDO Fund Ltd., Series 03-4A, Class A3, 144A, AMBAC, 3 mo. LIBOR + .46%, 0.97%, due 12/16/15 | 372,013 | |||||||||||||
128,575 | GSC Partners CDO Fund Ltd., Series 2A, Class A, 144A, FSA, 6 mo. LIBOR + .52%, 1.76%, due 05/22/13 | 96,431 | |||||||||||||
Total Insured High Yield Collateralized Debt Obligations | 468,444 | ||||||||||||||
Insured Other — 0.1% | |||||||||||||||
800,000 | DB Master Finance LLC, Series 06-1, Class A2, 144A, AMBAC, 5.78%, due 06/20/31 | 739,441 | |||||||||||||
1,500,000 | Dominos Pizza Master Issuer LLC, Series 07-1, Class A2, 144A, MBIA, 5.26%, due 04/25/37 | 1,204,252 | |||||||||||||
806,680 | Henderson Receivables LLC, Series 06-3A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.47%, due 09/15/41 | 609,794 | |||||||||||||
813,498 | Henderson Receivables LLC, Series 06-4A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.47%, due 12/15/41 | 619,332 | |||||||||||||
601,316 | TIB Card Receivables Fund, 144A, FGIC, 3 mo. LIBOR + .25%, 0.83%, due 01/05/14 | 541,184 | |||||||||||||
100,000 | Toll Road Investment Part II, Series B, 144A, MBIA, Zero Coupon, due 02/15/30 | 17,245 | |||||||||||||
900,000 | Toll Road Investment Part II, Series C, 144A, MBIA, Zero Coupon, due 02/15/37 | 85,041 | |||||||||||||
Total Insured Other | 3,816,289 | ||||||||||||||
Insured Residential Asset-Backed Securities (United States) — 0.0% | |||||||||||||||
98,258 | Ameriquest Mortgage Securities, Inc., Series 04-R6, Class A1, XL, 1 mo. LIBOR + .21%, 0.48%, due 07/25/34 | 43,234 | |||||||||||||
122,996 | Citigroup Mortgage Loan Trust, Inc., Series 03-HE3, Class A, AMBAC, 1 mo. LIBOR + .38%, 0.65%, due 12/25/33 | 67,648 | |||||||||||||
32,449 | Quest Trust, Series 04-X1, Class A, 144A, AMBAC, 1 mo. LIBOR + .33%, 0.60%, due 03/25/34 | 17,847 | |||||||||||||
808,374 | Residential Asset Mortgage Products, Inc., Series 05-RS9, Class AI3, FGIC, 1 mo. LIBOR + .22%, 0.49%, due 11/25/35 | 363,768 | |||||||||||||
Total Insured Residential Asset-Backed Securities (United States) | 492,497 |
See accompanying notes to the financial statements.
10
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Residential Mortgage-Backed Securities (United States) — 0.0% | |||||||||||||||
17,837 | Chevy Chase Mortgage Funding Corp., Series 03-4A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .34%, 0.61%, due 10/25/34 | 9,275 | |||||||||||||
41,271 | Chevy Chase Mortgage Funding Corp., Series 04-1A, Class A2, 144A, AMBAC, 1 mo. LIBOR + .33%, 0.60%, due 01/25/35 | 19,810 | |||||||||||||
462,770 | Countrywide Home Equity Loan Trust, Series 07-E, Class A, MBIA, 1 mo. LIBOR + .15%, 0.42%, due 06/15/37 | 92,276 | |||||||||||||
283,546 | GMAC Mortgage Corp. Loan Trust, Series 04-HE3, Class A3, FSA, 1 mo. LIBOR + .23%, 0.50%, due 10/25/34 | 130,545 | |||||||||||||
17,499 | GreenPoint Home Equity Loan Trust, Series 04-1, Class A, AMBAC, 1 mo. LIBOR + .23%, 0.73%, due 07/25/29 | 7,647 | |||||||||||||
22,023 | GreenPoint Home Equity Loan Trust, Series 04-4, Class A, AMBAC, 1 mo. LIBOR + .28%, 0.83%, due 08/15/30 | 12,335 | |||||||||||||
39,754 | Lehman ABS Corp., Series 04-2, Class A, AMBAC, 1 mo. LIBOR + .22%, 0.71%, due 06/25/34 | 13,119 | |||||||||||||
9,587 | Residential Funding Mortgage Securities II, Series 03-HS1, Class AII, FGIC, 1 mo. LIBOR + .29%, 0.56%, due 12/25/32 | 4,170 | |||||||||||||
193,679 | SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, 1 mo. LIBOR + .19%, 0.46%, due 11/25/35 | 92,686 | |||||||||||||
70,979 | Wachovia Asset Securitization, Inc., Series 02-HE1, Class A, AMBAC, 1 mo. LIBOR + .37%, 0.64%, due 09/27/32 | 36,334 | |||||||||||||
62,684 | Wachovia Asset Securitization, Inc., Series 04-HE1, Class A, MBIA, 1 mo. LIBOR + .22%, 0.49%, due 06/25/34 | 30,179 | |||||||||||||
Total Insured Residential Mortgage-Backed Securities (United States) | 448,376 | ||||||||||||||
Insured Time Share — 0.0% | |||||||||||||||
26,861 | Cendant Timeshare Receivables Funding LLC, Series 04-1A, Class A2, 144A, MBIA, 1 mo. LIBOR + .18%, 0.45%, due 05/20/16 | 21,896 | |||||||||||||
74,603 | Cendant Timeshare Receivables Funding LLC, Series 05-1A, Class A2, 144A, FGIC, 1 mo. LIBOR + .18%, 0.45%, due 05/20/17 | 67,888 | |||||||||||||
138,725 | Sierra Receivables Funding Co., Series 06-1A, Class A2, 144A, MBIA, 1 mo. LIBOR + .15%, 0.42%, due 05/20/18 | 113,787 | |||||||||||||
167,002 | Sierra Receivables Funding Co., Series 07-1A, Class A2, 144A, FGIC, 1 mo. LIBOR + .15%, 0.42%, due 03/20/19 | 145,292 | |||||||||||||
457,165 | Sierra Receivables Funding Co., Series 07-2A, Class A2, 144A, MBIA, 1 mo. LIBOR + 1.00%, 1.27%, due 09/20/19 | 283,543 | |||||||||||||
Total Insured Time Share | 632,406 |
See accompanying notes to the financial statements.
11
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Transportation — 0.0% | |||||||||||||||
186,667 | GE Seaco Finance SRL, Series 04-1A, Class A, 144A, AMBAC, 1 mo. LIBOR + .30%, 0.57%, due 04/17/19 | 143,733 | |||||||||||||
Investment Grade Corporate Collateralized Debt Obligations — 0.3% | |||||||||||||||
1,000,000 | Counts Trust, Series 04-2, 144A, 3 mo. LIBOR + .95%, 1.56%, due 09/20/09 | 1,002,030 | |||||||||||||
1,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class I, 144A, 3 mo. LIBOR + .45%, 1.06%, due 12/20/09 | 950,500 | |||||||||||||
1,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class II, 144A, 3 mo. LIBOR + .65%, 1.26%, due 12/20/09 | 931,500 | |||||||||||||
1,000,000 | Morgan Stanley ACES SPC, Series 05-10, Class A1, 144A, 3 mo. LIBOR + .52%, 1.13%, due 03/20/10 | 876,500 | |||||||||||||
1,000,000 | Morgan Stanley ACES SPC, Series 05-15, Class A, 144A, 3 mo. LIBOR + .40%, 1.01%, due 12/20/10 | 841,500 | |||||||||||||
1,000,000 | Morgan Stanley ACES SPC, Series 05-2A, Class A, 144A, 3 mo. LIBOR + .45%, 1.06%, due 03/20/10 | 909,000 | |||||||||||||
1,000,000 | Morgan Stanley ACES SPC, Series 06-13A, Class A, 144A, 3 mo. LIBOR + .29%, 0.90%, due 06/20/13 | 544,500 | |||||||||||||
1,000,000 | Prism Orso Trust, Series 04-MAPL, Class CERT, 144A, 3 mo. LIBOR + .70%, 1.41%, due 08/01/11 | 850,200 | |||||||||||||
1,000,000 | Salisbury International Investments Ltd., 3 mo. LIBOR + .42%, 1.03%, due 06/22/10 | 718,000 | |||||||||||||
Total Investment Grade Corporate Collateralized Debt Obligations | 7,623,730 | ||||||||||||||
Residential Asset-Backed Securities (United States) — 0.4% | |||||||||||||||
37,311 | Accredited Mortgage Loan Trust, Series 04-4, Class A1B, 1 mo. LIBOR + .39%, 0.66%, due 01/25/35 | 22,200 | |||||||||||||
51,539 | Accredited Mortgage Loan Trust, Series 07-1, Class A1, 1 mo. LIBOR + .05%, 0.32%, due 02/25/37 | 48,885 | |||||||||||||
63,082 | ACE Securities Corp., Series 05-ASP1, Class A2C, 1 mo. LIBOR + .27%, 0.54%, due 09/25/35 | 60,874 | |||||||||||||
108,662 | ACE Securities Corp., Series 06-ASL1, Class A, 1 mo. LIBOR + .14%, 0.41%, due 02/25/36 | 17,332 | |||||||||||||
228,290 | ACE Securities Corp., Series 06-ASP2, Class A2B, 1 mo. LIBOR + .14%, 0.41%, due 03/25/36 | 210,027 | |||||||||||||
300,000 | ACE Securities Corp., Series 06-ASP2, Class A2C, 1 mo. LIBOR + .18%, 0.45%, due 03/25/36 | 126,000 |
See accompanying notes to the financial statements.
12
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
286,549 | ACE Securities Corp., Series 06-ASP4, Class A2B, 1 mo. LIBOR + .10%, 0.37%, due 08/25/36 | 214,912 | |||||||||||||
700,000 | ACE Securities Corp., Series 06-ASP5, Class A2C, 1 mo. LIBOR + .18%, 0.45%, due 10/25/36 | 182,000 | |||||||||||||
683,003 | ACE Securities Corp., Series 06-CW1, Class A2B, 1 mo. LIBOR + .10%, 0.37%, due 07/25/36 | 512,252 | |||||||||||||
200,000 | ACE Securities Corp., Series 06-HE2, Class A2C, 1 mo. LIBOR + .16%, 0.43%, due 05/25/36 | 66,000 | |||||||||||||
252,851 | ACE Securities Corp., Series 06-HE3, Class A2B, 1 mo. LIBOR + .09%, 0.36%, due 06/25/36 | 189,639 | |||||||||||||
400,000 | ACE Securities Corp., Series 06-OP1, Class A2C, 1 mo. LIBOR + .15%, 0.42%, due 04/25/36 | 156,000 | |||||||||||||
141,220 | ACE Securities Corp., Series 06-SL1, Class A, 1 mo. LIBOR + .16%, 0.43%, due 09/25/35 | 17,476 | |||||||||||||
297,235 | ACE Securities Corp., Series 06-SL3, Class A1, 1 mo. LIBOR + .10%, 0.37%, due 06/25/36 | 9,660 | |||||||||||||
380,398 | ACE Securities Corp., Series 06-SL3, Class A2, 1 mo. LIBOR + .17%, 0.44%, due 06/25/36 | 6,657 | |||||||||||||
285,943 | ACE Securities Corp., Series 07-HE1, Class A2A, 1 mo. LIBOR + .09%, 0.36%, due 01/25/37 | 135,823 | |||||||||||||
254,776 | ACE Securities Corp., Series 07-WM1, Class A2A, 1 mo. LIBOR + .07%, 0.34%, due 11/25/36 | 121,019 | |||||||||||||
383,422 | Alliance Bancorp Trust, Series 07-S1, Class A1, 144A, 1 mo. LIBOR + .20%, 0.47%, due 05/25/37 | 46,394 | |||||||||||||
130,475 | Argent Securities, Inc., Series 04-W8, Class A5, 1 mo. LIBOR + .52%, 0.79%, due 05/25/34 | 97,653 | |||||||||||||
1,600,000 | Argent Securities, Inc., Series 06-M1, Class A2C, 1 mo. LIBOR + .15%, 0.42%, due 07/25/36 | 378,000 | |||||||||||||
385,474 | Argent Securities, Inc., Series 06-M2, Class A2B, 1 mo. LIBOR + .11%, 0.38%, due 09/25/36 | 231,284 | |||||||||||||
440,115 | Argent Securities, Inc., Series 06-W2, Class A2B, 1 mo. LIBOR + .19%, 0.46%, due 03/25/36 | 272,872 | |||||||||||||
300,000 | Argent Securities, Inc., Series 06-W5, Class A2C, 1 mo. LIBOR + .15%, 0.42%, due 06/25/36 | 99,609 | |||||||||||||
600,000 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3B, 1 mo. LIBOR + .11%, 0.38%, due 10/25/36 | 560,160 | |||||||||||||
300,000 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3C, 1 mo. LIBOR + .15%, 0.42%, due 10/25/36 | 119,190 |
See accompanying notes to the financial statements.
13
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
28,363 | Asset Backed Funding Certificates, Series 06-OPT3, Class A3A, 1 mo. LIBOR + .06%, 0.33%, due 11/25/36 | 27,512 | |||||||||||||
896,868 | Asset Backed Funding Certificates, Series 07-NC1, Class A1, 144A, 1 mo. LIBOR + .22%, 0.49%, due 05/25/37 | 644,041 | |||||||||||||
244,019 | Bayview Financial Acquisition Trust, Series 04-B, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 05/28/39 | 171,789 | |||||||||||||
244,019 | Bayview Financial Acquisition Trust, Series 04-B, Class A2, 144A, 1 mo. LIBOR + .65%, 1.56%, due 05/28/39 | 146,411 | |||||||||||||
359,431 | Bayview Financial Acquisition Trust, Series 05-A, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 02/28/40 | 174,468 | |||||||||||||
161,914 | Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A1, 1 mo. LIBOR + .11%, 0.38%, due 11/25/36 | 113,103 | |||||||||||||
300,000 | Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A2, 1 mo. LIBOR + .20%, 0.47%, due 11/25/36 | 59,727 | |||||||||||||
187,972 | Bear Stearns Mortgage Funding Trust, Series 07-SL2, Class 1A, 1 mo. LIBOR + .16%, 0.43%, due 02/25/37 | 17,178 | |||||||||||||
124,366 | Carrington Mortgage Loan Trust, Series 07-FRE1, Class A1, 1 mo. LIBOR + .12%, 0.39%, due 02/25/37 | 113,826 | |||||||||||||
1,300,000 | Carrington Mortgage Loan Trust, Series 07-FRE1, Class A2, 1 mo. LIBOR + .20%, 0.47%, due 02/25/37 | 796,658 | |||||||||||||
500,000 | Centex Home Equity, Series 06-A, Class AV3, 1 mo. LIBOR + .16%, 0.43%, due 06/25/36 | 350,000 | |||||||||||||
10,187 | Chase Funding Mortgage Loan Trust, Series 03-3, Class 2A2, 1 mo. LIBOR + .27%, 0.81%, due 04/25/33 | 6,232 | |||||||||||||
6,079 | Citigroup Mortgage Loan Trust, Inc., Series 04-OPT1, Class A1B, 1 mo. LIBOR + .41%, 0.68%, due 10/25/34 | 2,735 | |||||||||||||
400,000 | Citigroup Mortgage Loan Trust, Inc., Series 06-HE3, Class A2C, 1 mo. LIBOR + .16%, 0.43%, due 12/25/36 | 124,000 | |||||||||||||
1,000,000 | Countrywide Asset-Backed Certificates, Series 06-BC3, Class 2A2, 1 mo. LIBOR + .14%, 0.41%, due 02/25/37 | 546,100 | |||||||||||||
274,759 | Countrywide Asset-Backed Certificates, Series 06-BC5, Class 2A1, 1 mo. LIBOR + .08%, 0.35%, due 03/25/37 | 256,598 | |||||||||||||
113,925 | Credit-Based Asset Servicing & Securitization, Series 06-RP1, Class A1, 144A, 1 mo. LIBOR + .11%, 0.38%, due 04/25/36 | 105,060 | |||||||||||||
18,434 | Equity One ABS, Inc., Series 04-1, Class AV2, 1 mo. LIBOR + .30%, 0.57%, due 04/25/34 | 7,725 | |||||||||||||
500,000 | First Franklin Mortgage Loan Asset Backed Certificates, Series 06-FF5, Class 2A3, 1 mo. LIBOR + .16%, 0.43%, due 04/25/36 | 202,500 |
See accompanying notes to the financial statements.
14
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
69,418 | First Franklin Mortgage Loan Asset Backed Certificates, Series 06-FF18, Class A2A, 1 mo. LIBOR + .07%, 0.34%, due 12/25/37 | 67,791 | |||||||||||||
159,885 | Fremont Home Loan Trust, Series 06-A, Class 1A2, 1 mo. LIBOR + .20%, 0.46%, due 05/25/36 | 81,341 | |||||||||||||
128,612 | Fremont Home Loan Trust, Series 06-B, Class 2A2, 1 mo. LIBOR + .10%, 0.37%, due 08/25/36 | 83,557 | |||||||||||||
600,000 | Fremont Home Loan Trust, Series 06-B, Class 2A3, 1 mo. LIBOR + .16%, 0.43%, due 08/25/36 | 171,600 | |||||||||||||
149,442 | Household Home Equity Loan Trust, Series 05-2, Class A2, 1 mo. LIBOR + .31%, 0.58%, due 01/20/35 | 116,004 | |||||||||||||
135,522 | Household Home Equity Loan Trust, Series 05-3, Class A2, 1 mo. LIBOR + .29%, 0.56%, due 01/20/35 | 103,166 | |||||||||||||
422,835 | Household Home Equity Loan Trust, Series 06-1, Class A1, 1 mo. LIBOR + .16%, 0.43%, due 01/20/36 | 341,439 | |||||||||||||
1,000,000 | J.P. Morgan Mortgage Acquisition Corp., Series 06-WMC4, Class A3, 1 mo. LIBOR + .12%, 0.39%, due 12/25/36 | 286,484 | |||||||||||||
145,988 | Master Asset-Backed Securities Trust, Series 05-FRE1, Class A4, 1 mo. LIBOR + .25%, 0.52%, due 10/25/35 | 127,192 | |||||||||||||
233,576 | Master Asset-Backed Securities Trust, Series 06-AM3, Class A2, 1 mo. LIBOR + .13%, 0.40%, due 10/25/36 | 217,665 | |||||||||||||
700,000 | Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.42%, due 03/25/36 | 247,947 | |||||||||||||
400,000 | Master Asset-Backed Securities Trust, Series 06-HE2, Class A3, 1 mo. LIBOR + .15%, 0.42%, due 06/25/36 | 116,392 | |||||||||||||
800,000 | Master Asset-Backed Securities Trust, Series 06-HE3, Class A3, 1 mo. LIBOR + .15%, 0.42%, due 08/25/36 | 242,744 | |||||||||||||
500,000 | Master Asset-Backed Securities Trust, Series 06-NC3, Class A4, 1 mo. LIBOR + .16%, 0.43%, due 10/25/36 | 144,165 | |||||||||||||
91,343 | Master Asset-Backed Securities Trust, Series 06-WMC1, Class A2, 1 mo. LIBOR + .11%, 0.38%, due 02/25/36 | 90,715 | |||||||||||||
225,336 | Master Second Lien Trust, Series 06-1, Class A, 1 mo. LIBOR + .16%, 0.43%, due 03/25/36 | 7,323 | |||||||||||||
305,806 | Merrill Lynch Mortgage Investors, Series 07-HE2, Class A2A, 1 mo. LIBOR + .12%, 0.39%, due 02/25/37 | 158,652 | |||||||||||||
132,567 | Morgan Stanley Capital, Inc., Series 04-SD1, Class A, 1 mo. LIBOR + .40%, 0.67%, due 08/25/34 | 86,169 | |||||||||||||
1,000,000 | Morgan Stanley Capital, Inc., Series 07-HE4, Class A2C, 1 mo. LIBOR + .23%, 0.50%, due 02/25/37 | 300,000 |
See accompanying notes to the financial statements.
15
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
372,407 | Morgan Stanley Home Equity Loans, Series 07-2, Class A1, 1 mo. LIBOR + .10%, 0.37%, due 04/25/37 | 290,850 | |||||||||||||
300,000 | Morgan Stanley IXIS Real Estate Capital Trust, Series 06-2, Class A3, 1 mo. LIBOR + .15%, 0.42%, due 11/25/36 | 81,000 | |||||||||||||
273,824 | People's Choice Home Loan Securities Trust, Series 05-4, Class 1A2, 1 mo. LIBOR + .26%, 0.53%, due 12/25/35 | 178,921 | |||||||||||||
375,830 | RAAC Series Trust, Series 06-SP1, Class A2, 1 mo. LIBOR + .19%, 0.46%, due 09/25/45 | 287,322 | |||||||||||||
45,822 | Residential Asset Mortgage Products, Inc., Series 05-RS4, Class A3, 1 mo. LIBOR + .23%, 0.50%, due 04/25/35 | 43,531 | |||||||||||||
128,456 | Residential Asset Mortgage Products, Inc., Series 05-RS8, Class A2, 1 mo. LIBOR + .29%, 0.56%, due 10/25/33 | 110,140 | |||||||||||||
27,313 | Residential Asset Mortgage Products, Inc., Series 06-RZ4, Class A1, 1 mo. LIBOR + .09%, 0.36%, due 10/25/36 | 27,142 | |||||||||||||
324,310 | Residential Asset Securities Corp., Series 05-KS12, Class A2, 1 mo. LIBOR + .25%, 0.52%, due 01/25/36 | 275,663 | |||||||||||||
227,101 | Residential Asset Securities Corp., Series 07-KS3, Class AI1, 1 mo. LIBOR + .11%, 0.38%, due 04/25/37 | 207,920 | |||||||||||||
9,319 | Saxon Asset Securities Trust, Series 04-1, Class A, 1 mo. LIBOR + .27%, 0.81%, due 03/25/35 | 4,336 | |||||||||||||
135,921 | Securitized Asset Backed Receivables LLC, Series 06-NC1, Class A2, 1 mo. LIBOR + .16%, 0.43%, due 03/25/36 | 101,940 | |||||||||||||
113,307 | Security National Mortgage Loan Trust, Series 06-2A, Class A1, 144A, 1 mo. LIBOR + .29%, 0.56%, due 10/25/36 | 94,952 | |||||||||||||
71,475 | SG Mortgage Securities Trust, Series 05-OPT1, Class A2, 1 mo. LIBOR + .26%, 0.53%, due 10/25/35 | 64,743 | |||||||||||||
97,008 | Soundview Home Equity Loan Trust, Series 07-NS1, Class A1, 1 mo. LIBOR + .12%, 0.39%, due 01/25/37 | 79,576 | |||||||||||||
500,000 | Specialty Underwriting & Residential Finance, Series 06-BC3, Class A2C, 1 mo. LIBOR + .15%, 0.42%, due 06/25/37 | 142,800 | |||||||||||||
255,516 | Structured Asset Investment Loan Trust, Series 06-1, Class A3, 1 mo. LIBOR + .20%, 0.47%, due 01/25/36 | 148,199 | |||||||||||||
196,239 | Structured Asset Securities Corp., Series 05-S6, Class A2, 1 mo. LIBOR + .29%, 0.56%, due 11/25/35 | 41,210 | |||||||||||||
610,069 | Yale Mortgage Loan Trust, Series 07-1, Class A, 144A, 1 mo. LIBOR + .40%, 0.67%, due 06/25/37 | 156,788 | |||||||||||||
Total Residential Asset-Backed Securities (United States) | 13,094,960 |
See accompanying notes to the financial statements.
16
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Mortgage-Backed Securities (Australian) — 0.1% | |||||||||||||||
110,966 | Australian Mortgage Securities II, Series G3, Class A1A, 3 mo. LIBOR + .21%, 0.74%, due 01/10/35 | 97,095 | |||||||||||||
291,951 | Crusade Global Trust, Series 06-1, Class A1, 144A, 3 mo. LIBOR + .06%, 0.57%, due 07/20/38 | 272,315 | |||||||||||||
468,763 | Crusade Global Trust, Series 07-1, Class A1, 3 mo. LIBOR + .06%, 0.57%, due 04/19/38 | 425,702 | |||||||||||||
102,192 | Interstar Millennium Trust, Series 03-3G, Class A2, 3 mo. LIBOR + .25%, 1.10%, due 09/27/35 | 81,142 | |||||||||||||
816,840 | Interstar Millennium Trust, Series 04-2G, Class A, 3 mo. LIBOR + .20%, 1.03%, due 03/14/36 | 659,043 | |||||||||||||
70,525 | Interstar Millennium Trust, Series 05-1G, Class A, 3 mo. LIBOR + .12%, 0.75%, due 12/08/36 | 57,947 | |||||||||||||
92,148 | Interstar Millennium Trust, Series 06-2GA, Class A2, 144A, 3 mo. LIBOR + .08%, 0.46%, due 05/27/38 | 69,264 | |||||||||||||
52,483 | Medallion Trust, Series 05-1G, Class A1, 3 mo. LIBOR + .08%, 0.54%, due 05/10/36 | 49,344 | |||||||||||||
344,729 | Medallion Trust, Series 06-1G, Class A1, 3 mo. LIBOR + .05%, 0.68%, due 06/14/37 | 318,877 | |||||||||||||
425,188 | National RMBS Trust, Series 06-3, Class A1, 144A, 3 mo. LIBOR + .07%, 0.58%, due 10/20/37 | 369,458 | |||||||||||||
472,600 | Puma Finance Ltd., Series G5, Class A1, 144A, 3 mo. LIBOR + .07%, 0.49%, due 02/21/38 | 378,080 | |||||||||||||
570,083 | Superannuation Members Home Loans Global Fund, Series 07-1, Class A1, 3 mo. LIBOR + .06%, 0.70%, due 06/12/40 | 517,433 | |||||||||||||
26,214 | Superannuation Members Home Loans Global Fund, Series 6, Class A, 3 mo. LIBOR + .16%, 0.62%, due 11/09/35 | 23,099 | |||||||||||||
68,627 | Superannuation Members Home Loans Global Fund, Series 7, Class A1, 3 mo. LIBOR + .14%, 0.77%, due 03/09/36 | 64,808 | |||||||||||||
61,249 | Superannuation Members Home Loans Global Fund, Series 8, Class A1, 3 mo. LIBOR + .07%, 0.58%, due 01/12/37 | 52,790 | |||||||||||||
402,794 | Westpac Securitization Trust, Series 07-1G, Class A2A, 3 mo. LIBOR + .05%, 0.47%, due 05/21/38 | 343,608 | |||||||||||||
Total Residential Mortgage-Backed Securities (Australian) | 3,780,005 |
See accompanying notes to the financial statements.
17
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Mortgage-Backed Securities (European) — 0.2% | |||||||||||||||
430,556 | Aire Valley Mortgages, Series 06-1A, Class 1A, 144A, 3 mo. LIBOR + .11%, 0.72%, due 09/20/66 | 215,278 | |||||||||||||
500,000 | Aire Valley Mortgages, Series 07-1A, Class 1A2, 144A, 3 mo. LIBOR + .09%, 0.70%, due 03/20/30 | 250,000 | |||||||||||||
1,100,000 | Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.61%, due 01/13/39 | 965,594 | |||||||||||||
89,985 | Gracechurch Mortgage Funding Plc, Series 1A, Class A2B, 144A, 3 mo. LIBOR + .07%, 0.58%, due 10/11/41 | 84,911 | |||||||||||||
200,498 | Granite Master Issuer Plc, Series 06-2, Class A4, 1 mo. LIBOR + .04%, 0.31%, due 12/20/54 | 156,389 | |||||||||||||
108,345 | Granite Mortgages Plc, Series 04-3, Class 2A1, 3 mo. LIBOR + .14%, 0.75%, due 09/20/44 | 80,175 | |||||||||||||
579,065 | Kildare Securities Ltd., Series 07-1A, Class A2, 144A, 3 mo. LIBOR + .06%, 0.71%, due 12/10/43 | 507,347 | |||||||||||||
27,078 | Leek Finance Plc, Series 14A, Class A2B, 144A, 3 mo. LIBOR + .18%, 0.79%, due 09/21/36 | 25,394 | |||||||||||||
103,775 | Leek Finance Plc, Series 15A, Class AB, 144A, 3 mo. LIBOR + .14%, 0.75%, due 03/21/37 | 91,371 | |||||||||||||
101,088 | Leek Finance Plc, Series 17A, Class A2B, 144A, 3 mo. LIBOR + .14%, 0.75%, due 12/21/37 | 78,833 | |||||||||||||
207,063 | Paragon Mortgages Plc, Series 7A, Class A1A, 144A, 3 mo. LIBOR + .21%, 0.65%, due 05/15/34 | 136,173 | |||||||||||||
330,420 | Paragon Mortgages Plc, Series 12A, Class A2C, 144A, 3 mo. LIBOR + .11%, 0.55%, due 11/15/38 | 185,465 | |||||||||||||
231,659 | Paragon Mortgages Plc, Series 14A, Class A2C, 144A, 3 mo. LIBOR + .10%, 0.73%, due 09/15/39 | 119,934 | |||||||||||||
1,300,000 | Pendeford Master Issuer Plc, Series 07-1A, Class 3A, 144A, 3 mo. LIBOR + .10%, 0.56%, due 02/12/16 | 1,222,000 | |||||||||||||
1,000,000 | Permanent Master Issuer Plc, Series 06-1, Class 5A, 3 mo. LIBOR + .11%, 0.62%, due 07/15/33 | 795,000 | |||||||||||||
200,000 | Permanent Master Issuer Plc, Series 07-1, Class 4A, 3 mo. LIBOR + .08%, 0.59%, due 10/15/33 | 175,112 | |||||||||||||
Total Residential Mortgage-Backed Securities (European) | 5,088,976 |
See accompanying notes to the financial statements.
18
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Mortgage-Backed Securities (United States) — 0.0% | |||||||||||||||
27,731 | Chevy Chase Mortgage Funding Corp., Series 04-3A, Class A2, 144A, 1 mo. LIBOR + .30%, 0.57%, due 08/25/35 | 13,311 | |||||||||||||
45,573 | GreenPoint Mortgage Funding Trust, Series 05-HE4, Class 2A3C, 1 mo. LIBOR + .25%, 0.52%, due 07/25/30 | 39,400 | |||||||||||||
103,154 | Mellon Residential Funding Corp., Series 04-TBC1, Class A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 02/26/34 | 69,935 | |||||||||||||
Total Residential Mortgage-Backed Securities (United States) | 122,646 | ||||||||||||||
Student Loans — 0.1% | |||||||||||||||
400,000 | College Loan Corp. Trust, Series 06-1, Class A2, 3 mo. LIBOR + .02%, 0.52%, due 04/25/22 | 398,500 | |||||||||||||
148,000 | College Loan Corp. Trust, Series 07-1, Class A1, 3 mo. LIBOR + .01%, 0.51%, due 01/25/23 | 147,075 | |||||||||||||
700,000 | College Loan Corp. Trust, Series 07-2, Class A1, 3 mo. LIBOR + .25%, 0.75%, due 01/25/24 | 697,594 | |||||||||||||
126,835 | Goal Capital Funding Trust, Series 06-1, Class A1, 3 mo. LIBOR, 0.39%, due 08/25/20 | 125,836 | |||||||||||||
146,488 | Goal Capital Funding Trust, Series 07-1, Class A1, 3 mo. LIBOR + .02%, 0.63%, due 06/25/21 | 144,085 | |||||||||||||
13,357 | Keycorp Student Loan Trust, Series 05-A, Class 2A1, 3 mo. LIBOR + .05%, 0.65%, due 09/27/21 | 13,312 | |||||||||||||
100,425 | Montana Higher Education Student Assistance Corp., Series 05-1, Class A, 3 mo. LIBOR + .04%, 0.65%, due 06/20/15 | 99,803 | |||||||||||||
312,737 | National Collegiate Student Loan Trust, Series 06-1, Class A2, 1 mo. LIBOR + .14%, 0.41%, due 08/25/23 | 289,285 | |||||||||||||
194,684 | National Collegiate Student Loan Trust, Series 06-A, Class A1, 144A, 1 mo. LIBOR + .08%, 0.35%, due 08/26/19 | 189,330 | |||||||||||||
400,000 | Nelnet Student Loan Trust, Series 05-2, Class A4, 3 mo. LIBOR + .08%, 0.69%, due 12/23/19 | 390,336 | |||||||||||||
367,528 | SLM Student Loan Trust, Series 07-A, Class A1, 3 mo. LIBOR + .03%, 0.66%, due 09/15/22 | 334,450 | |||||||||||||
Total Student Loans | 2,829,606 |
See accompanying notes to the financial statements.
19
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) / Shares | Description | Value ($) | |||||||||||||
Time Share — 0.0% | |||||||||||||||
232,854 | Sierra Receivables Funding Co., Series 08-1A, Class A2, 144A, 1 mo. LIBOR + 4.00%, 4.27%, due 02/20/20 | 227,615 | |||||||||||||
Total Asset-Backed Securities | 102,706,527 | ||||||||||||||
Corporate Debt — 0.0% | |||||||||||||||
598,000 | Health Care Property Investors, Inc., Series G, MTN, 5.63%, due 02/28/13 | 564,093 | |||||||||||||
U.S. Government Agency — 0.1% | |||||||||||||||
234,100 | Agency for International Development Floater (Support of C.A.B.E.I), 6 mo. U.S. Treasury Bill + .40%, 0.66%, due 10/01/12 (a) | 227,811 | |||||||||||||
168,317 | Agency for International Development Floater (Support of Honduras), 3 mo. U.S. Treasury Bill x 117%, 0.21%, due 10/01/11 (a) | 164,286 | |||||||||||||
945,000 | Agency for International Development Floater (Support of India), 3 mo. LIBOR + .10%, 0.58%, due 02/01/27 (a) | 800,926 | |||||||||||||
628,867 | Agency for International Development Floater (Support of Jamaica), 6 mo. U.S. Treasury Bill + 0.75%, 1.01%, due 03/30/19 (a) | 589,394 | |||||||||||||
74,879 | Agency for International Development Floater (Support of Peru), Series B, 6 mo. U.S. Treasury Bill +.35%, 0.61%, due 05/01/14 (a) | 71,761 | |||||||||||||
500,001 | Agency for International Development Floater (Support of Zimbabwe), 3 mo. U.S. Treasury Bill x 115%, 0.20%, due 01/01/12 (a) | 485,456 | |||||||||||||
Total U.S. Government Agency | 2,339,634 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $102,611,141) | 105,610,254 | ||||||||||||||
PREFERRED STOCKS — 0.0% | |||||||||||||||
Banking — 0.0% | |||||||||||||||
1,000 | Home Ownership Funding 2 Preferred 144A, 1.00% (a) | 90,000 | |||||||||||||
TOTAL PREFERRED STOCKS (COST $158,808) | 90,000 |
See accompanying notes to the financial statements.
20
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 96.7% | |||||||||||||||
Affiliated Issuers — 96.7% | |||||||||||||||
61,151,098 | GMO Alpha Only Fund, Class IV | 304,532,467 | |||||||||||||
6,066,883 | GMO Asset Allocation Bond Fund, Class VI | 155,736,880 | |||||||||||||
25,631,051 | GMO Domestic Bond Fund, Class VI | 166,858,142 | |||||||||||||
1,431,039 | GMO Emerging Country Debt Fund, Class IV | 11,019,004 | |||||||||||||
22,114,764 | GMO Emerging Markets Fund, Class VI | 235,522,235 | |||||||||||||
3,588,159 | GMO Flexible Equities Fund, Class VI | 73,306,096 | |||||||||||||
1,861,635 | GMO Inflation Indexed Plus Bond Fund, Class VI | 31,349,935 | |||||||||||||
13,490,385 | GMO International Core Equity Fund, Class VI | 359,383,858 | |||||||||||||
7,896,564 | GMO International Growth Equity Fund, Class IV | 151,219,203 | |||||||||||||
7,508,523 | GMO International Intrinsic Value Fund, Class IV | 154,450,318 | |||||||||||||
8,656,353 | GMO International Small Companies Fund, Class III | 59,555,711 | |||||||||||||
53,526,147 | GMO Quality Fund, Class VI | 941,524,920 | |||||||||||||
359,741 | GMO Short-Duration Investment Fund, Class III | 2,795,190 | |||||||||||||
3,441,999 | GMO Special Situations Fund, Class VI | 92,865,123 | |||||||||||||
15,583,407 | GMO Strategic Fixed Income Fund, Class VI | 250,425,347 | |||||||||||||
4,374,857 | GMO U.S. Core Equity Fund, Class VI | 42,786,097 | |||||||||||||
1,032,718 | GMO World Opportunity Overlay Fund | 19,993,417 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $3,346,133,961) | 3,053,323,943 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||||||
Money Market Funds — 0.0% | |||||||||||||||
52,956 | State Street Institutional U.S. Government Money Market Fund- Institutional Class | 52,956 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $52,956) | 52,956 | ||||||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $3,448,956,866) | 3,159,077,153 | ||||||||||||||
Other Assets and Liabilities (net) — 0.00% | 45,059 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 3,159,122,212 |
See accompanying notes to the financial statements.
21
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (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.
C.A.B.E.I. - Central American Bank for Economic Integration
CDO - Collateralized Debt Obligation
CMBS - Commercial Mortgage Backed Security
EUR LIBOR - London Interbank Offered Rate denominated in Euros.
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
RMBS - Residential Mortgage Backed Security
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at August 31, 2009, which are subject to change based on the terms of the 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).
Currency Abbreviations:
EUR - Euro
See accompanying notes to the financial statements.
22
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $102,822,905) (Note 2) | $ | 105,753,210 | |||||
Investments in affiliated issuers, at value (cost $3,346,133,961) (Notes 2 and 8) | 3,053,323,943 | ||||||
Receivable for investments sold | 244,063 | ||||||
Interest receivable | 103,794 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 16,678 | ||||||
Miscellaneous receivable | 644 | ||||||
Total assets | 3,159,442,332 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 46 | ||||||
Payable for Fund shares repurchased | 238,467 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 5,565 | ||||||
Accrued expenses | 76,042 | ||||||
Total liabilities | 320,120 | ||||||
Net assets | $ | 3,159,122,212 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 3,833,563,618 | |||||
Accumulated undistributed net investment income | 10,490,136 | ||||||
Accumulated net realized loss | (395,051,829 | ) | |||||
Net unrealized depreciation | (289,879,713 | ) | |||||
$ | 3,159,122,212 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 3,159,122,212 | |||||
Shares outstanding: | |||||||
Class III | 346,305,858 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.12 |
See accompanying notes to the financial statements.
23
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 44,703,639 | |||||
Interest | 4,116,090 | ||||||
Dividends | 3,737 | ||||||
Total investment income | 48,823,466 | ||||||
Expenses: | |||||||
Legal fees | 51,980 | ||||||
Trustees fees and related expenses (Note 3) | 27,230 | ||||||
Custodian, fund accounting agent and transfer agent fees | 26,036 | ||||||
Audit and tax fees | 16,376 | ||||||
Chief Compliance Officer (Note 3) | 12,604 | ||||||
Registration fees | 4,048 | ||||||
Miscellaneous | 5,980 | ||||||
Total expenses | 144,254 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (104,420 | ) | |||||
Expense reductions (Note 2) | (294 | ) | |||||
Net expenses | 39,540 | ||||||
Net investment income (loss) | 48,783,926 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 707,084 | ||||||
Investments in affiliated issuers | (245,253,414 | ) | |||||
Realized gains distributions from affiliated issuers (Note 8) | 11,765,598 | ||||||
Foreign currency and foreign currency related transactions | (68 | ) | |||||
Net realized gain (loss) | (232,780,800 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 12,575,336 | ||||||
Investments in affiliated issuers | 809,399,418 | ||||||
Net unrealized gain (loss) | 821,974,754 | ||||||
Net realized and unrealized gain (loss) | 589,193,954 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 637,977,880 |
See accompanying notes to the financial statements.
24
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 48,783,926 | $ | 267,390,545 | |||||||
Net realized gain (loss) | (232,780,800 | ) | (106,114,266 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 821,974,754 | (959,967,450 | ) | ||||||||
Net increase (decrease) in net assets from operations | 637,977,880 | (798,691,171 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (26,665,875 | ) | (309,984,149 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (146,420,155 | ) | ||||||||
(26,665,875 | ) | (456,404,304 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 113,730,322 | 322,020,967 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 1,092,843 | 1,206,564 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 114,823,165 | 323,227,531 | |||||||||
Total increase (decrease) in net assets | 726,135,170 | (931,867,944 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 2,432,987,042 | 3,364,854,986 | |||||||||
End of period (including accumulated undistributed net investment income of $10,490,136 and distributions in excess of net investment income of $11,627,915, respectively) | $ | 3,159,122,212 | $ | 2,432,987,042 |
See accompanying notes to the financial statements.
25
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.28 | $ | 11.37 | $ | 12.01 | $ | 11.76 | $ | 11.33 | $ | 10.74 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.15 | 0.87 | 0.48 | 0.39 | 0.36 | 0.27 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 1.77 | (3.43 | ) | 0.05 | 0.66 | 0.86 | 0.90 | ||||||||||||||||||||
Total from investment operations | 1.92 | (2.56 | ) | 0.53 | 1.05 | 1.22 | 1.17 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.08 | ) | (1.04 | ) | (0.53 | ) | (0.43 | ) | (0.37 | ) | (0.32 | ) | |||||||||||||||
From net realized gains | — | (0.49 | ) | (0.64 | ) | (0.37 | ) | (0.42 | ) | (0.26 | ) | ||||||||||||||||
Total distributions | (0.08 | ) | (1.53 | ) | (1.17 | ) | (0.80 | ) | (0.79 | ) | (0.58 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.12 | $ | 7.28 | $ | 11.37 | $ | 12.01 | $ | 11.76 | $ | 11.33 | |||||||||||||||
Total Return(b) | 26.46 | %** | (24.30 | )% | 4.10 | % | 9.22 | % | 11.05 | % | 11.07 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 3,159,122 | $ | 2,432,987 | $ | 3,364,855 | $ | 3,079,164 | $ | 1,812,191 | $ | 1,030,238 | |||||||||||||||
Net expenses to average daily net assets(c)(d) | 0.00 | %(e)* | 0.00 | %(e) | 0.00 | %(e) | 0.00 | % | 0.00 | % | 0.00 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 3.51 | %* | 8.81 | % | 3.89 | % | 3.28 | % | 3.17 | % | 2.53 | % | |||||||||||||||
Portfolio turnover rate | 14 | %** | 44 | % | 76 | % | 23 | % | 16 | % | 10 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.01 | % | 0.01 | % | 0.01 | % | 0.02 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.00 | (f) | $ | 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 funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. 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 funds (See Note 3).
(d) Net expenses to average daily net assets were less than 0.01%.
(e) The net expense ratio does not include the effect of expense reductions.
(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.
26
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Global Balanced Asset Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the GMO Global Balanced Index. The GMO Global Balanced Index is a composite index computed by GMO consisting of: (i) the MSCI ACWI (All Country World Index) Index and (ii) the Barclays Capital U.S. Aggregate Index in the following proportions: 65% (MSCI ACWI (All Country World Index) Index) and 35% (Barclays Capital U.S. Aggregate Index). The Fund is a fund of funds and invests primarily in shares or holds assets of other series of the Trust, which may include the GMO International Equity Funds, GMO U.S. Equity Funds, GMO Fixed Income Funds, GMO Alpha Only Fund, GMO Alternative Asset Opportunity Fund, GMO Flexible Equities Fund, GMO Short-Duration Collateral Fund, GMO Special Situations Fund, and GMO World Opportunity Overlay Fund (the GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). The Fund intends to have at least 25% of it s assets invested in fixed income investments and at least 25% of its assets invested in equity investments. In addition, the Fund may hold securities (particularly asset-backed securities) directly or through one or more subsidiaries or other entities. The Fund may be exposed to foreign and U.S. equity securities (including emerging country equities, both growth and value style equities, and equities of any market capitalization), U.S. and foreign fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), the investment returns of commodities and, from time to time, other alternative asset classes. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
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). As of August 31, 2009, shares of GMO Alternative Asset Opportunity Fund, GMO Flexible Equities Fund, GMO Short-Duration Collateral Fund, GMO Special Situations Fund, and GMO World Opportunity Overlay Fund were not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in
27
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
As of August 31, 2009, a portion of the Fund's return of capital received from certain other GMO funds is expected to be classified as dividend income for U.S. federal income tax purposes. Accordingly, "dividends from affiliated issuers" as reported in the Statement of Operations has been increased by the portion estimated to be dividend income as of August 31, 2009. The estimated increase in dividend income is $2,680,596. In addition, all applicable related income disclosures throughout this Semiannual Report have been adjusted by the additional income. The dividends from affiliated issuers are subject to change and will not be finalized until February 28, 2010, the Fund's fiscal year-end. Finally, in early 2010, applicable shareholders will receive Form 1099-DIV that will indicate the appropriate tax character of all distributions paid by the Fund in 2009.
Portfolio valuation
Shares of the underlying funds and other mutual funds are generally valued at their net asset value.
Investments held directly by the Fund and by the underlying funds are valued as follows. Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally 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 fa ir value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 36.40% of th e net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on models used by a third party vendor. Those underlying funds classify such securities under SFAS 157 (as defined below) as level 2.
28
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by the Fund, those alternative sources would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fu nd. As of August 31, 2009, the total value of securities held directly and indirectly that were fair valued or for which no alternative pricing source was available represented 3.77% of the net assets of the Fund.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund valued certain debt securities and preferred stocks using a specified spread above the LIBOR Rate or U.S. Treasury yield.
29
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Asset-Backed Securities | $ | — | $ | 15,007,692 | $ | 87,698,835 | $ | 102,706,527 | |||||||||||
Corporate Debt | — | 564,093 | — | 564,093 | |||||||||||||||
U.S. Government Agency | — | — | 2,339,634 | 2,339,634 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 15,571,785 | 90,038,469 | 105,610,254 | |||||||||||||||
Preferred Stocks | — | — | 90,000 | 90,000 | |||||||||||||||
Mutual Funds | 2,867,159,307 | 186,164,636 | — | 3,053,323,943 | |||||||||||||||
Short-Term Investments | — | 52,956 | — | 52,956 | |||||||||||||||
Total Investments | 2,867,159,307 | 201,789,377 | 90,128,469 | 3,159,077,153 | |||||||||||||||
Total | $ | 2,867,159,307 | $ | 201,789,377 | $ | 90,128,469 | $ | 3,159,077,153 |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 14.19% and (0.02)% of total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2009 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net transfers in to/out of Level 3 | Balances as of August 31, 2009 | |||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||
Asset-Backed Securities | $ | 103,691,094 | $ | (17,486,223 | ) | $ | 1,607,670 | $ | 2,308,653 | $ | 12,585,333 | $ | (15,007,692 | ) | $ | 87,698,835 | |||||||||||||||
U.S. Government Agency | 2,580,169 | (230,466 | ) | 8,963 | 8,852 | (27,884 | ) | — | 2,339,634 | ||||||||||||||||||||||
Total Debt Obligations | 106,271,263 | (17,716,689 | ) | 1,616,633 | 2,317,505 | 12,557,449 | (15,007,692 | ) | 90,038,469 | ||||||||||||||||||||||
Preferred Stocks | 90,000 | — | — | — | — | — | 90,000 | ||||||||||||||||||||||||
Total | $ | 106,361,263 | $ | (17,716,689 | ) | $ | 1,616,633 | $ | 2,317,505 | $ | 12,557,449 | $ | (15,007,692 | ) | $ | 90,128,469 |
30
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $103,692,912.
31
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2010 | $ | (638 | ) | ||||
Total | $ | (638 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 3,621,839,525 | $ | 99,862,076 | $ | (562,624,448 | ) | $ | (462,762,372 | ) |
For the period ended August 31, 2009, the Fund had net realized losses attributed to redemption in-kind transactions of $510,107.
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Income dividends and capital gain distributions from the underlying funds 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 asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may
32
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
From prior to March 1, 2009 through June 29, 2009, the premium on cash purchases was 0.09% of the amount invested and the fee on cash redemptions was 2.00% of the amount redeemed. From June 30, 2009 through August 31, 2009, the purchase premium remained at 0.09% of the amount invested and the redemption fee was changed to 1.00% of the amount redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premi um or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospective or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and/or redemption fees may be waived at the Manager's discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying funds are less than the pruchase premiums and/or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of a Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, inclu ding, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
33
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund, including those risks to which the Fund is exposed as a result of its investments in underlying Funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities held by underlying funds may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Declines in stock market prices generally are likely to result in declines in the value of the underlying funds' investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. An underlying fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Market Risk — Fixed Income Securities — Typically, the value of an underlying fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent an underlying fund from selling securities or closing derivative positions at desirable prices.
• Derivatives Risk — The use of derivatives by underlying funds involves risks different from, and potentially greater than, risks associated with direct investments in securities and other assets. Derivatives may increase other Fund risks, including market risk, liquidity risk, and credit and counterparty risk, and their value may or may not correlate with the value of the relevant underlying asset.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests will not perform as expected. Because the Fund bears the fees and expenses of the underlying Funds in which it invests, investments in underlying funds with higher fees or expenses than the underlying Funds in which the Fund is invested will increase the Fund's total expenses. The fees and expenses associated with an investment in
34
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
the Fund are less predictable and may potentially be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
Other principal risks of an investment in the Fund include Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments by an underlying fund in companies with smaller market capitalizations), Commodities Risk (value of an underlying fund's shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments), Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of an underlying fund's investments denominated in foreign currencies or that the U.S. dollar will decline in value relative to a foreign currency being hedged by an underlying fund), Leveraging Risk (increased risks from use of reverse repurchase agreements and other derivatives and securities lending by an underlying fund), Credit and Counterparty Risk (risk of default of an issuer of a portfolio security or a derivatives counterparty of an underlying fund or a borrower of an underlying fund's securities), Real Estate Risk (r isk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real estate industry may cause the value of the underlying fund's investments to fluctuate more than if it invested in securities of companies in a broader range of industries), Short Sales Risk (risk that an underlying fund's loss on the short sale of securities that it does not own is unlimited), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (ri sk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). Some of the underlying funds are non-diversified investment companies under the 1940 Act, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified.
The Fund invests (including through investment in underlying funds) in asset-backed securities, which may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables, which expose the Fund to additional types of market risk. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations"). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the underlying assets backing the securities. The amount of market risk associated with asset-backed securities depends on many factors, including the deal structure (e.g., the amount of u nderlying assets or other support available to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if too many obligors of the underlying obligations default in payment of the obligations. The obligations of issuers (and obligors of underlying assets) also are subject
35
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Many asset-backed securities in which the Fund has invested are now rated below investment grade.
With the deterioration of worldwide economic and liquidity conditions that became acute in 2008, the markets for asset-backed securities became fractured and uncertainty about the creditworthiness of those securities (and underlying collateral) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities generally. These events reduced liquidity for securitized credits and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not continue or that they will not deteriorate further. Also, government actions and proposals affecting the terms of underl ying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse credit, valuation and liquidity effects on asset-backed securities. There can be no assurance that in the future the market for asset-backed securities will become more liquid.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. In addition, asset-backed securities representing diverse sectors (e.g., auto loans, student loans, sub-prime mortgages, and credit-card receivables) have become more highly correlated since the deterioration of worldwide economic and liquidity conditions referred to above.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund adopted SFAS 161 on March 1, 2009. As of August 31, 2009, the Fund held no derivative contracts for the purposes of SFAS 161.
3. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary
36
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.00% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment co mpany under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, nonrecurring and certain other unusual expenses (including taxes).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 | ||||||||||||
0.384 | % | 0.060 | % | 0.003 | % | 0.447 | % |
The Fund's portion of the fees paid by the Trust to Trust's independent Trustees and CCO during the period ended August 31, 2009 was $21,710 and $12,604, respectively. The compensation and expenses of the CCO are included in the Statement of Operations. The Fund paid no remuneration 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 and class exchanges, for the period ended August 31, 2009 aggregated $661,311,385 and $393,264,840, respectively. Cost of purchases and proceeds from sales of securities for in-kind transactions for the period ended August 31, 2009 were $7,500,795 and $1,953,650, respectively.
37
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 14.33% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 0.13% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||
Class III: | |||||||||||||||||||
Shares sold | 24,596,113 | $ | 209,874,799 | 15,432,640 | $ | 163,016,462 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 2,785,813 | 23,319,640 | 48,859,380 | 425,639,992 | |||||||||||||||
Shares repurchased | (15,121,829 | ) | (119,464,117 | ) | (26,134,315 | ) | (266,635,487 | ) | |||||||||||
Purchase premiums | — | 168,538 | — | 136,196 | |||||||||||||||
Redemption fees | — | 924,305 | — | 1,070,368 | |||||||||||||||
Net increase (decrease) | 12,260,097 | $ | 114,823,165 | 38,157,705 | $ | 323,227,531 |
38
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 IV | $ | 409,903,662 | $ | 124,300,113 | $ | 189,316,450 | $ | 19,717,357 | $ | — | $ | 304,532,467 | |||||||||||||||
GMO Asset Allocation Bond Fund, Class VI | — | 169,782,259 | 17,412,519 | — | — | 155,736,880 | |||||||||||||||||||||
GMO Domestic Bond Fund, Class VI | 204,811,016 | 613,454 | 762,954 | 2,524,369 | 11,765,598 | 166,858,142 | 5 | ||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | 8,197,052 | 207,831 | — | 168,957 | — | 11,019,004 | |||||||||||||||||||||
GMO Emerging Markets Fund, Class VI | 149,513,226 | 22,838,911 | 50,585,531 | 634,624 | — | 235,522,235 | |||||||||||||||||||||
GMO Flexible Equities Fund, Class VI | 51,855,694 | 4,138,885 | 400,407 | — | — | 73,306,096 | |||||||||||||||||||||
GMO Inflation Indexed Plus Bond Fund, Class VI | 27,675,383 | 118,284 | 103,145 | 1,713,196 | * | — | 31,349,935 | ||||||||||||||||||||
GMO International Core Equity Fund, Class VI | 242,284,954 | 19,767,492 | 14,843,073 | 2,718,328 | — | 359,383,858 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | 85,167,566 | 55,638,350 | 31,063,213 | 3,816,724 | — | 151,219,203 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 77,290,040 | 52,292,839 | 31,414,314 | 1,976,208 | — | 154,450,318 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | — | 54,417,591 | — | 195,991 | — | 59,555,711 | |||||||||||||||||||||
GMO Quality Fund, Class VI | 637,315,620 | 156,442,702 | 33,343,247 | 9,751,281 | — | 941,524,920 | |||||||||||||||||||||
GMO Short-Duration Investment Fund, Class III | 2,571,600 | 10,680 | 9,590 | 19,584 | — | 2,795,190 | |||||||||||||||||||||
GMO Special Situations Fund, Class VI | 86,658,653 | 6,018,950 | 4,681,461 | — | — | 92,865,123 | |||||||||||||||||||||
GMO Strategic Fixed Income Fund, Class VI | 270,301,534 | 964,845 | 1,007,117 | 1,017,044 | — | 250,425,347 | t | ||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | 34,489,170 | 1,258,994 | 2,428,470 | 449,976 | — | 42,786,097 |
39
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO World Opportunity Overlay Fund | $ | 19,021,564 | $ | — | $ | 70,842 | $ | — | $ | — | $ | 19,993,417 | o | ||||||||||||||
Totals | $ | 2,307,056,734 | $ | 668,812,180 | $ | 377,442,333 | $ | 44,703,639 | $ | 11,765,598 | $ | 3,053,323,943 |
5 The Fund received return of capital distributions in the amount of $48,293,704. Please note that in early 2010, Form 1099-DIV is anticipated to be sent to applicable shareholders that will state the actual tax characterization of all distributions paid in 2009.
* A significant portion of the dividend is expected to be a return of capital for tax purposes. Please note that in early 2010, Form 1099-DIV is anticipated to be sent to applicable shareholders that will state the actual tax characterization of all distributions paid in 2009.
t The Fund received return of capital distributions in the amount of $59,223,224. Please note that in early 2010, Form 1099-DIV is anticipated to be sent to applicable shareholders that will state the actual tax characterization of all distributions paid in 2009.
o The Fund received return of capital distributions in the amount of $1,731,725.
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. Effective September 14, 2009, the premium on cash purchases was 0.07% of the amount invested and the fee on cash redemptions was 0.08% of the amount redeemed.
40
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees observed that the usefulness of the comparative data provided by the third-party data services was limited because the peer groups they used for the Fund included funds with investment programs that were substantially different from that of the Fund. As a result , the Trustees gave more weight to the Fund's performance relative to its benchmark than to the peer group data. 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.
41
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
The Trustees also 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 so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 and the Trust as a whole (including the effect of recent market events and changes in assets under management and revenues on such profitability); information prepared by third-party data services concerning fees paid to managers of funds deemed by those services 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 with similar objectives.
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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering,
42
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
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.
Following their review, on June 15, 2009, 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, 2009.
43
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.45 | % | $ | 1,000.00 | $ | 1,264.60 | $ | 2.57 | |||||||||||
2) Hypothetical | 0.45 | % | $ | 1,000.00 | $ | 1,022.94 | $ | 2.29 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, 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 International Equity Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 95.4 | % | |||||
Short-Term Investments | 1.9 | ||||||
Preferred Stocks | 1.7 | ||||||
Futures | 0.3 | ||||||
Debt Obligations | 0.1 | ||||||
Private Equity Securities | 0.1 | ||||||
Investment Funds | 0.1 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Convertible Securities | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | 0.3 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Country / Region Summary** | % of Investments | ||||||
Japan | 21.7 | % | |||||
Euro Region*** | 21.7 | ||||||
United Kingdom | 18.0 | ||||||
Switzerland | 6.9 | ||||||
South Korea | 4.0 | ||||||
Sweden | 3.6 | ||||||
Australia | 3.4 | ||||||
Russia | 2.6 | ||||||
Brazil | 2.4 | ||||||
China | 2.1 | ||||||
Taiwan | 2.0 | ||||||
Turkey | 1.9 | ||||||
Canada | 1.4 | ||||||
India | 1.2 | ||||||
Singapore | 1.1 | ||||||
Thailand | 1.1 | ||||||
Denmark | 0.9 | ||||||
Hong Kong | 0.7 | ||||||
Poland | 0.6 | ||||||
Indonesia | 0.5 | ||||||
South Africa | 0.4 | ||||||
Egypt | 0.3 | ||||||
Malaysia | 0.3 | ||||||
Israel | 0.2 | ||||||
Mexico | 0.2 | ||||||
New Zealand | 0.2 | ||||||
Norway | 0.2 | ||||||
Chile | 0.1 | ||||||
Czech Republic | 0.1 | ||||||
Hungary | 0.1 | ||||||
Philippines | 0.1 | ||||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
2
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 100.0% | |||||||||||||||
Affiliated Issuers — 100.0% | |||||||||||||||
16,148,709 | GMO Emerging Markets Fund, Class VI | 171,983,755 | |||||||||||||
916,286 | GMO Flexible Equities Fund, Class VI | 18,719,721 | |||||||||||||
16,352,746 | GMO International Growth Equity Fund, Class IV | 313,155,085 | |||||||||||||
15,470,434 | GMO International Intrinsic Value Fund, Class IV | 318,226,820 | |||||||||||||
2,271,693 | GMO International Small Companies Fund, Class III | 15,629,245 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $983,988,109) | 837,714,626 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||||||
26,854 | State Street Eurodollar Time Deposit, 0.01%, due 09/01/09 | 26,854 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $26,854) | 26,854 | ||||||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $984,014,963) | 837,741,480 | ||||||||||||||
Other Assets and Liabilities (net) — (0.0%) | (36,538 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 837,704,942 |
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, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $26,854) (Note 2) | $ | 26,854 | |||||
Investments in affiliated issuers, at value (cost $983,988,109) (Notes 2 and 8) | 837,714,626 | ||||||
Receivable for investments sold | 24,508 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 10,478 | ||||||
Miscellaneous receivable | 43 | ||||||
Total assets | 837,776,509 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 23,964 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 1,240 | ||||||
Accrued expenses | 46,363 | ||||||
Total liabilities | 71,567 | ||||||
Net assets | $ | 837,704,942 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 1,042,740,124 | |||||
Accumulated undistributed net investment income | 11,569,248 | ||||||
Accumulated net realized loss | (70,330,947 | ) | |||||
Net unrealized depreciation | (146,273,483 | ) | |||||
$ | 837,704,942 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 837,704,942 | |||||
Shares outstanding: | |||||||
Class III | 93,611,617 | ||||||
Net asset value per share: | |||||||
Class III | $ | 8.95 |
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, 2009 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 11,577,600 | |||||
Total investment income | 11,577,600 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 24,012 | ||||||
Audit and tax fees | 16,376 | ||||||
Legal fees | 12,604 | ||||||
Trustees fees and related expenses (Note 3) | 6,551 | ||||||
Registration fees | 3,772 | ||||||
Miscellaneous | 5,058 | ||||||
Total expenses | 68,373 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (58,880 | ) | |||||
Expense reductions (Note 2) | (1,141 | ) | |||||
Net expenses | 8,352 | ||||||
Net investment income (loss) | 11,569,248 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (13,805,708 | ) | |||||
Net realized gain (loss) | (13,805,708 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in affiliated issuers | 261,752,299 | ||||||
Net realized and unrealized gain (loss) | 247,946,591 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 259,515,839 |
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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 11,569,248 | $ | 23,486,299 | |||||||
Net realized gain (loss) | (13,805,708 | ) | 20,403,838 | ||||||||
Change in net unrealized appreciation (depreciation) | 261,752,299 | (463,476,207 | ) | ||||||||
Net increase (decrease) in net assets from operations | 259,515,839 | (419,586,070 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (24,219,892 | ) | ||||||||
Net realized gains | |||||||||||
Class III | (9,699,836 | ) | (163,749,117 | ) | |||||||
(9,699,836 | ) | (187,969,009 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 68,047,070 | 370,949,981 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 178,982 | 725,960 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 68,226,052 | 371,675,941 | |||||||||
Total increase (decrease) in net assets | 318,042,055 | (235,879,138 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 519,662,887 | 755,542,025 | |||||||||
End of period (including accumulated undistributed net investment income of $11,569,248 and $0, respectively) | $ | 837,704,942 | $ | 519,662,887 |
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.17 | $ | 16.45 | $ | 17.96 | $ | 17.13 | $ | 15.19 | $ | 12.83 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.13 | 0.40 | 0.31 | 0.33 | 0.18 | 0.29 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.75 | (7.20 | ) | 1.32 | 2.85 | 2.90 | 2.65 | ||||||||||||||||||||
Total from investment operations | 2.88 | (6.80 | ) | 1.63 | 3.18 | 3.08 | 2.94 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.39 | ) | (1.00 | ) | (0.83 | ) | (0.47 | ) | (0.42 | ) | ||||||||||||||||
From net realized gains | (0.10 | ) | (3.09 | ) | (2.14 | ) | (1.52 | ) | (0.67 | ) | (0.16 | ) | |||||||||||||||
Total distributions | (0.10 | ) | (3.48 | ) | (3.14 | ) | (2.35 | ) | (1.14 | ) | (0.58 | ) | |||||||||||||||
Net asset value, end of period | $ | 8.95 | $ | 6.17 | $ | 16.45 | $ | 17.96 | $ | 17.13 | $ | 15.19 | |||||||||||||||
Total Return(b) | 47.01 | %** | (48.63 | )% | 7.81 | % | 19.33 | % | 21.15 | % | 23.25 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 837,705 | $ | 519,663 | $ | 755,542 | $ | 758,757 | $ | 659,520 | $ | 489,026 | |||||||||||||||
Net expenses to average daily net assets(c)(d) | 0.00 | %(e)* | 0.00 | %(e) | 0.00 | %(e) | 0.00 | % | 0.00 | % | 0.00 | % | |||||||||||||||
Net investment income to average daily net assets(a) | 3.30 | %* | 3.46 | % | 1.66 | % | 1.87 | % | 1.15 | % | 2.18 | % | |||||||||||||||
Portfolio turnover rate | 5 | %** | 33 | % | 9 | % | 4 | % | 7 | % | 15 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.01 | % | 0.01 | % | 0.02 | % | 0.03 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.01 | $ | 0.00 | (f) | $ | 0.00 | (f) | $ | 0.00 | (f) | $ | 0.01 |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. 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 funds (See Note 3).
(d) Net expenses to average daily net assets were less than 0.01%.
(e) The net expense ratio does not include the effect of expense reductions.
(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, 2009 (Unaudited)
1. Organization
GMO International Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, 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. The Fund also may invest in shares of other series of the Trust, including the GMO Fixed Income Funds, GMO Alpha Only Fund, GMO Flexible Equities Fund, and GMO Alternative Asset Opportunity Fund (the GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). Although the Fund's primary exposure is to foreign equity securities (including emerging country equities, both growth and value style equities, and equities of any market capitalization), the Fund also may have exposure to foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), as well as to the investment returns of commodities and, from time to time, other alternative asset classes. Under normal circumstances, the Fund invests at least 80% of its assets in equity investments (which include common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depository receipts). The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and other cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
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. As of August 31, 2009, shares of GMO Flexible Equities Fund were not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
8
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Portfolio valuation
Shares of the underlying funds and other mutual funds are generally valued at their net asset value.
Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 89.34% of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on models used by a third party vendor. Those underlying funds classify such securities under SFAS 157 (as defined below) as Level 2.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based on inputs that are unobservable and significant.
9
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | 818,994,905 | $ | 18,719,721 | $ | — | $ | 837,714,626 | |||||||||||
Short-Term Investments | 26,854 | — | — | 26,854 | |||||||||||||||
Total | $ | 819,021,759 | $ | 18,719,721 | $ | — | $ | 837,741,480 |
Underlying funds are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuations notes in their financial statements. The aggregate net value of the Fund's indirect investments in securities using Level 3 inputs was 1.30% of total net assets.
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
10
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,051,506,025 | $ | 2,462,524 | $ | (216,227,069 | ) | $ | (213,764,545 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Income dividends and capital gain distributions from the underlying funds 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 asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average
11
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the six-month period ended August 31, 2009, the premium on cash purchases and the fee on cash redemptions were each 0.18% of the amount invested or redeemed. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospective or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and/or redemption fees may be waived at the Manager's discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and/or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemptio n of a Fund's shares if the Fund will not incur transaction costs or will incur/reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of a Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund, including those risks to which the Fund is exposed as a result
12
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities held by underlying funds may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and its underlying funds generally seek to be fully invested and normally do not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's and the underlying funds' investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. An underlying fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments. These and other risks (e.g., nationalization, expropriation, or other confiscation) are greater for the Fund's investments in emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of an underlying fund's foreign currency holdings and investments denominated in foreign currencies.
• Liquidity Risk — Low trading volume, lack of a market maker, or legal restrictions may limit or prevent an underlying fund from selling securities or closing derivative positions at desirable prices.
• Derivatives Risk — The use of derivatives by underlying funds involves risks different from, and potentially greater than, risks associated with direct investments in securities and other assets. Derivatives may increase other Fund risks, including market risk, liquidity risk, and credit and counterparty risk, and their value may or may not correlate with the value of the relevant underlying asset.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests will not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, investments in underlying funds with higher fees or expenses than the underlying funds in which the Fund is invested will increase the Fund's total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may potentially be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
Other principal risks of an investment in the Fund include Market Risk — Fixed Income Securities (risk that the value of an underlying fund's fixed income securities will decline during periods of rising interest
13
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
rates and widening of credit spreads), Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments by an underlying fund in companies with smaller market capitalizations), Commodities Risk (value of an underlying fund's shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments), Leveraging Risk (increased risks from use of reverse repurchase agreem ents and other derivatives and securities lending by an underlying fund), Credit and Counterparty Risk (risk of default of an issuer of a portfolio security or a derivatives counterparty of an underlying fund or a borrower of an underlying fund's securities), Short Sales Risk (risk that an underlying fund's loss on the short sale of securities that it does not own is unlimited), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Mar ket Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis). Some of the underlying funds are non-diversified investment companies under the 1940 Act, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund adopted SFAS 161 on March 1, 2009. As of August 31, 2009, the Fund held no derivative contracts for the purposes of SFAS 161.
3. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.00% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest
14
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, nonrecurring and certain other unusual expenses (including taxes).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2009, 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 | |||||||||
0.585 | % | 0.083 | % | 0.668 | % |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $5,171 and $2,944, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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 and class exchanges, for the period ended August 31, 2009 aggregated $105,695,863 and $35,609,053, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 11.62% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
15
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 11,362,161 | $ | 84,022,719 | 31,165,724 | $ | 323,942,000 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,153,252 | 8,937,700 | 18,335,555 | 179,922,703 | |||||||||||||||
Shares repurchased | (3,102,351 | ) | (24,913,349 | ) | (11,239,414 | ) | (132,914,722 | ) | |||||||||||
Purchase premiums | — | 143,769 | — | 547,551 | |||||||||||||||
Redemption fees | — | 35,213 | — | 178,409 | |||||||||||||||
Net increase (decrease) | 9,413,062 | $ | 68,226,052 | 38,261,865 | $ | 371,675,941 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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 VI | $ | 89,475,333 | $ | 20,088,399 | $ | 4,211,537 | $ | 396,342 | $ | — | $ | 171,983,755 | |||||||||||||||
GMO Flexible Equities Fund, Class VI | 11,496,954 | 2,909,984 | 194,910 | — | — | 18,719,721 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | 214,063,176 | 38,511,017 | 13,189,998 | 7,337,990 | — | 313,155,085 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 204,645,762 | 29,909,698 | 18,012,608 | 3,791,430 | — | 318,226,820 | |||||||||||||||||||||
GMO International Small Companies III | — | 14,276,765 | — | 51,838 | — | 15,629,245 | |||||||||||||||||||||
Totals | $ | 519,681,225 | $ | 105,695,863 | $ | 35,609,053 | $ | 11,577,600 | $ | — | $ | 837,714,626 |
16
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
17
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one-, five- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 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 so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's
18
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 profi tability with respect to the other funds of the Trust and the Trust as a whole (including the effect of recent market events and changes in assets under management and revenues on such profitability); information prepared by third-party data services concerning fees paid to managers of funds deemed by those services 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 with similar objectives.
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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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.
19
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (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.
Following their review, on June 15, 2009, 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, 2009.
20
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.67 | % | $ | 1,000.00 | $ | 1,470.10 | $ | 4.17 | |||||||||||
2) Hypothetical | 0.67 | % | $ | 1,000.00 | $ | 1,021.83 | $ | 3.41 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2009, 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 Developed World Stock Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Developed World Stock Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 95.8 | % | |||||
Short-Term Investments | 3.4 | ||||||
Futures Contracts | 0.2 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Other | 0.5 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
United States | 48.0 | % | |||||
Japan | 14.4 | ||||||
United Kingdom | 13.1 | ||||||
France | 7.9 | ||||||
Italy | 3.9 | ||||||
Germany | 2.3 | ||||||
Singapore | 2.0 | ||||||
Switzerland | 1.8 | ||||||
Netherlands | 1.5 | ||||||
Sweden | 1.4 | ||||||
Spain | 1.1 | ||||||
Canada | 0.8 | ||||||
Belgium | 0.6 | ||||||
Australia | 0.4 | ||||||
Greece | 0.3 | ||||||
Hong Kong | 0.3 | ||||||
Ireland | 0.2 | ||||||
100.0 | % |
1
GMO Developed World Stock Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Industry Group Summary | % of Equity Investments | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 14.7 | % | |||||
Banks | 9.4 | ||||||
Energy | 8.8 | ||||||
Capital Goods | 6.8 | ||||||
Food, Beverage & Tobacco | 5.6 | ||||||
Materials | 5.3 | ||||||
Software & Services | 5.0 | ||||||
Insurance | 4.7 | ||||||
Technology Hardware & Equipment | 4.5 | ||||||
Diversified Financials | 4.4 | ||||||
Utilities | 4.0 | ||||||
Retailing | 3.8 | ||||||
Telecommunication Services | 3.7 | ||||||
Automobiles & Components | 3.6 | ||||||
Food & Staples Retailing | 3.4 | ||||||
Health Care Equipment & Services | 3.3 | ||||||
Transportation | 2.2 | ||||||
Consumer Durables & Apparel | 1.7 | ||||||
Household & Personal Products | 1.6 | ||||||
Consumer Services | 1.1 | ||||||
Semiconductors & Semiconductor Equipment | 1.1 | ||||||
Media | 0.6 | ||||||
Real Estate | 0.5 | ||||||
Commercial & Professional Services | 0.2 | ||||||
100.0 | % |
2
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 95.8% | |||||||||||||||
Australia — 0.4% | |||||||||||||||
18,931 | BHP Billiton Ltd | 588,818 | |||||||||||||
23,697 | Woodside Petroleum Ltd | 983,267 | |||||||||||||
Total Australia | 1,572,085 | ||||||||||||||
Belgium — 0.5% | |||||||||||||||
26,561 | Anheuser-Busch InBev NV | 1,148,407 | |||||||||||||
111,806 | Dexia SA * | 958,953 | |||||||||||||
Total Belgium | 2,107,360 | ||||||||||||||
Canada — 0.8% | |||||||||||||||
16,000 | Bank of Nova Scotia | 670,254 | |||||||||||||
9,400 | Canadian National Railway Co | 454,394 | |||||||||||||
24,700 | Canadian Pacific Railway Ltd | 1,182,712 | |||||||||||||
21,400 | Husky Energy Inc | 576,270 | |||||||||||||
Total Canada | 2,883,630 | ||||||||||||||
France — 7.5% | |||||||||||||||
37,359 | ArcelorMittal | 1,336,115 | |||||||||||||
85,034 | AXA | 1,942,221 | |||||||||||||
82,239 | BNP Paribas | 6,631,080 | |||||||||||||
9,104 | Bouygues SA | 453,013 | |||||||||||||
11,634 | Casino Guichard-Perrachon SA | 882,798 | |||||||||||||
7,730 | CNP Assurances | 772,246 | |||||||||||||
24,134 | Compagnie de Saint-Gobain | 1,090,360 | |||||||||||||
27,221 | France Telecom SA | 692,286 | |||||||||||||
11,805 | GDF Suez | 498,977 | |||||||||||||
7,450 | Lafarge SA | 634,880 | |||||||||||||
30,902 | Peugeot SA * | 896,942 | |||||||||||||
3,325 | PPR | 387,076 | |||||||||||||
32,259 | Renault SA * | 1,455,580 | |||||||||||||
60,286 | Sanofi-Aventis | 4,104,736 | |||||||||||||
31,571 | Societe Generale | 2,551,872 |
See accompanying notes to the financial statements.
3
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
France — continued | |||||||||||||||
75,787 | Total SA | 4,348,637 | |||||||||||||
2,608 | Vallourec SA | 397,427 | |||||||||||||
Total France | 29,076,246 | ||||||||||||||
Germany — 2.2% | |||||||||||||||
12,577 | BASF AG | 657,287 | |||||||||||||
26,787 | Bayerische Motoren Werke AG | 1,222,609 | |||||||||||||
11,029 | Deutsche Bank AG (Registered) | 749,058 | |||||||||||||
32,694 | Deutsche Post AG (Registered) | 565,237 | |||||||||||||
66,032 | Deutsche Telekom AG (Registered) | 879,211 | |||||||||||||
25,581 | Hannover Rueckversicherung AG (Registered) * | 1,126,982 | |||||||||||||
5,408 | MAN SE | 414,588 | |||||||||||||
4,684 | Metro AG | 254,117 | |||||||||||||
2,027 | Muenchener Rueckversicherungs-Gesellschaft AG (Registered) | 302,884 | |||||||||||||
7,309 | Salzgitter AG | 697,601 | |||||||||||||
1,174 | Solarworld AG | 25,109 | |||||||||||||
35,493 | Suedzucker AG | 690,617 | |||||||||||||
29,521 | ThyssenKrupp AG | 1,006,805 | |||||||||||||
Total Germany | 8,592,105 | ||||||||||||||
Greece — 0.3% | |||||||||||||||
35,930 | National Bank of Greece SA * | 1,128,535 | |||||||||||||
Hong Kong — 0.3% | |||||||||||||||
41,000 | CLP Holdings Ltd | 274,332 | |||||||||||||
51,900 | Esprit Holdings Ltd | 314,446 | |||||||||||||
94,000 | Hong Kong Electric Holdings Ltd | 525,474 | |||||||||||||
Total Hong Kong | 1,114,252 | ||||||||||||||
Ireland — 0.2% | |||||||||||||||
25,410 | CRH Plc | 650,137 | |||||||||||||
Italy — 3.7% | |||||||||||||||
295,211 | Enel SPA | 1,744,646 | |||||||||||||
248,498 | ENI SPA | 5,904,452 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Italy — continued | |||||||||||||||
87,940 | Mediaset SPA | 579,705 | |||||||||||||
129,635 | Parmalat SPA | 333,346 | |||||||||||||
11,844 | Saipem SPA | 318,383 | |||||||||||||
116,744 | Snam Rete Gas SPA | 543,006 | |||||||||||||
400,822 | Telecom Italia SPA | 649,569 | |||||||||||||
287,344 | Telecom Italia SPA-Di RISP | 326,449 | |||||||||||||
80,560 | Terna SPA | 297,231 | |||||||||||||
1,017,113 | UniCredit SPA * | 3,694,730 | |||||||||||||
Total Italy | 14,391,517 | ||||||||||||||
Japan — 13.8% | |||||||||||||||
13,400 | Astellas Pharma Inc | 535,596 | |||||||||||||
13,000 | Canon Inc | 496,947 | |||||||||||||
20,700 | Chubu Electric Power Co Inc | 481,284 | |||||||||||||
15,200 | Chugai Pharmaceutical Co Ltd | 309,586 | |||||||||||||
157,000 | Cosmo Oil Co Ltd | 481,890 | |||||||||||||
100,000 | Daiwa Securities Group Inc | 615,870 | |||||||||||||
14,800 | Denso Corp | 430,710 | |||||||||||||
5,900 | East Japan Railway Co | 385,300 | |||||||||||||
7,600 | Eisai Co Ltd | 277,741 | |||||||||||||
17,200 | Fast Retailing Co Ltd | 2,059,375 | |||||||||||||
188,000 | Fuji Heavy Industries Ltd | 812,379 | |||||||||||||
10,700 | FujiFilm Holdings Corp | 318,451 | |||||||||||||
106,000 | Hitachi Ltd | 372,879 | |||||||||||||
103,200 | Honda Motor Co Ltd | 3,235,893 | |||||||||||||
13,500 | Ibiden Co Ltd | 479,312 | |||||||||||||
50 | INPEX Corp | 407,143 | |||||||||||||
155,000 | Itochu Corp | 1,097,098 | |||||||||||||
22,700 | JFE Holdings Inc | 792,215 | |||||||||||||
25,900 | Kansai Electric Power Co Inc | 595,180 | |||||||||||||
15,000 | Kao Corp | 379,910 | |||||||||||||
93,000 | Kawasaki Kisen Kaisha Ltd | 407,697 | |||||||||||||
179 | KDDI Corp | 1,017,581 | |||||||||||||
2,230 | Keyence Corp | 470,584 | |||||||||||||
30,700 | Komatsu Ltd | 553,116 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
33,000 | Kubota Corp | 272,472 | |||||||||||||
7,100 | Kyocera Corp | 590,061 | |||||||||||||
134,000 | Marubeni Corp | 665,458 | |||||||||||||
279,000 | Mazda Motor Corp | 774,341 | |||||||||||||
24,800 | Mitsubishi Corp | 501,329 | |||||||||||||
46,000 | Mitsui OSK Lines Ltd | 293,359 | |||||||||||||
11,200 | Murata Manufacturing Co Ltd | 530,895 | |||||||||||||
17,000 | NGK Insulators Ltd | 395,575 | |||||||||||||
4,800 | Nintendo Co Ltd | 1,300,911 | |||||||||||||
188,500 | Nippon Mining Holdings Inc | 937,493 | |||||||||||||
208,000 | Nippon Oil Corp | 1,187,606 | |||||||||||||
71,000 | Nippon Steel Corp | 278,359 | |||||||||||||
39,300 | Nippon Telegraph & Telephone Corp | 1,749,556 | |||||||||||||
78,000 | Nippon Yusen KK | 337,415 | |||||||||||||
396,100 | Nissan Motor Co Ltd | 2,763,728 | |||||||||||||
66,200 | Nomura Holdings Inc | 586,615 | |||||||||||||
1,319 | NTT Docomo Inc | 2,030,754 | |||||||||||||
15,760 | ORIX Corp | 1,207,615 | |||||||||||||
174,000 | Osaka Gas Co Ltd | 601,347 | |||||||||||||
731 | Rakuten Inc | 441,568 | |||||||||||||
80,000 | Ricoh Company Ltd | 1,150,902 | |||||||||||||
3,500 | Rohm Co Ltd | 236,236 | |||||||||||||
14,100 | Sankyo Co Ltd | 886,895 | |||||||||||||
68,600 | Seven & I Holdings Co Ltd | 1,655,638 | |||||||||||||
36,000 | Sharp Corp | 415,558 | |||||||||||||
32,200 | Shin-Etsu Chemical Co Ltd | 1,901,443 | |||||||||||||
61,200 | Showa Shell Sekiyu KK | 638,418 | |||||||||||||
438,000 | Sojitz Corp | 935,919 | |||||||||||||
58,700 | SUMCO Corp | 1,197,044 | |||||||||||||
137,600 | Sumitomo Corp | 1,407,781 | |||||||||||||
242,000 | Sumitomo Metal Industries Ltd | 605,597 | |||||||||||||
38,000 | Sumitomo Metal Mining Co Ltd | 584,672 | |||||||||||||
224,000 | Taisei Corp | 491,042 | |||||||||||||
27,000 | Taisho Pharmaceutical Co Ltd | 529,416 | |||||||||||||
33,900 | Takeda Pharmaceutical Co Ltd | 1,363,701 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
33,400 | Tokyo Electric Power Co Inc (The) | 870,029 | |||||||||||||
8,900 | Tokyo Electron Ltd | 483,369 | |||||||||||||
149,000 | Tokyo Gas Co Ltd | 596,676 | |||||||||||||
72,000 | TonenGeneral Sekiyu KK | 688,355 | |||||||||||||
25,700 | Toyota Motor Corp | 1,095,700 | |||||||||||||
65,300 | Toyota Tsusho Corp | 1,058,096 | |||||||||||||
Total Japan | 53,252,681 | ||||||||||||||
Netherlands — 1.4% | |||||||||||||||
193,372 | Aegon NV * | 1,457,820 | |||||||||||||
227,850 | ING Groep NV * | 3,435,513 | |||||||||||||
13,071 | Koninklijke DSM NV | 477,122 | |||||||||||||
Total Netherlands | 5,370,455 | ||||||||||||||
Singapore — 1.9% | |||||||||||||||
263,000 | Capitaland Ltd | 676,689 | |||||||||||||
42,000 | DBS Group Holdings Ltd | 368,830 | |||||||||||||
1,785,000 | Golden Agri-Resources Ltd * | 588,362 | |||||||||||||
81,000 | Oversea-Chinese Banking Corp Ltd | 435,139 | |||||||||||||
258,000 | Sembcorp Industries Ltd | 574,886 | |||||||||||||
111,200 | Singapore Airlines Ltd | 993,340 | |||||||||||||
81,176 | Singapore Airport Terminal Services Ltd | 139,285 | |||||||||||||
102,000 | Singapore Exchange Ltd | 591,952 | |||||||||||||
108,000 | Singapore Technologies Engineering Ltd | 194,184 | |||||||||||||
527,600 | Singapore Telecommunications | 1,150,034 | |||||||||||||
87,000 | United Overseas Bank Ltd | 1,009,093 | |||||||||||||
146,000 | Wilmar International Ltd | 663,125 | |||||||||||||
Total Singapore | 7,384,919 | ||||||||||||||
Spain — 1.1% | |||||||||||||||
64,300 | Banco Bilbao Vizcaya Argentaria SA | 1,143,209 | |||||||||||||
50,432 | Banco Santander SA | 776,408 | |||||||||||||
20,584 | Gas Natural SDG SA | 433,003 | |||||||||||||
48,985 | Repsol YPF SA | 1,217,557 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Spain — continued | |||||||||||||||
21,979 | Telefonica SA | 555,739 | |||||||||||||
Total Spain | 4,125,916 | ||||||||||||||
Sweden — 1.4% | |||||||||||||||
60,822 | Boliden AB | 626,479 | |||||||||||||
43,913 | Electrolux AB Series B * | 912,832 | |||||||||||||
71,452 | Ericsson LM B Shares | 685,630 | |||||||||||||
16,121 | Hennes & Mauritz AB Class B | 895,110 | |||||||||||||
89,658 | Skandinaviska Enskilda Banken AB Class A * | 632,296 | |||||||||||||
68,561 | Svenska Cellulosa AB Class B | 896,224 | |||||||||||||
52,837 | Swedbank AB Class A * | 554,773 | |||||||||||||
Total Sweden | 5,203,344 | ||||||||||||||
Switzerland — 1.8% | |||||||||||||||
12,275 | Credit Suisse Group AG (Registered) | 626,258 | |||||||||||||
53,177 | Novartis AG (Registered) | 2,470,237 | |||||||||||||
1,879 | Swisscom AG (Registered) | 651,099 | |||||||||||||
3,408 | Synthes Inc | 399,286 | |||||||||||||
143,233 | UBS AG (Registered) * | 2,636,837 | |||||||||||||
Total Switzerland | 6,783,717 | ||||||||||||||
United Kingdom — 12.5% | |||||||||||||||
91,629 | 3i Group Plc | 448,360 | |||||||||||||
42,220 | Antofagasta Plc | 521,546 | |||||||||||||
106,677 | AstraZeneca Plc | 4,950,314 | |||||||||||||
16,096 | Autonomy Corp Plc * | 339,473 | |||||||||||||
335,701 | Aviva Plc | 2,198,387 | |||||||||||||
928,491 | Barclays Plc * | 5,683,510 | |||||||||||||
33,559 | BG Group Plc | 550,607 | |||||||||||||
166,117 | BP Plc | 1,423,722 | |||||||||||||
30,800 | British American Tobacco Plc | 935,867 | |||||||||||||
28,304 | British Sky Broadcasting Group Plc | 250,168 | |||||||||||||
649,418 | BT Group Plc | 1,473,813 | |||||||||||||
187,517 | Cable & Wireless Plc | 450,758 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
11,960 | Carnival Plc | 364,838 | |||||||||||||
72,345 | Compass Group Plc | 382,101 | |||||||||||||
66,212 | Experian Plc | 554,092 | |||||||||||||
287,989 | GlaxoSmithKline Plc | 5,623,789 | |||||||||||||
80,626 | Home Retail Group Plc | 406,455 | |||||||||||||
112,656 | HSBC Holdings Plc | 1,217,644 | |||||||||||||
75,566 | J Sainsbury Plc | 398,620 | |||||||||||||
384,209 | Kingfisher Plc | 1,316,318 | |||||||||||||
571,070 | Legal & General Group Plc | 710,235 | |||||||||||||
2,210,882 | Lloyds Banking Group Plc | 3,958,838 | |||||||||||||
91,742 | Marks & Spencer Group Plc | 504,666 | |||||||||||||
28,977 | Next Plc | 768,626 | |||||||||||||
793,203 | Old Mutual Plc | 1,202,700 | |||||||||||||
37,452 | Pearson Plc | 455,579 | |||||||||||||
14,976 | Reckitt Benckiser Group Plc | 692,452 | |||||||||||||
1,598,458 | Royal Bank of Scotland Group Plc | 1,480,381 | |||||||||||||
24,702 | Royal Dutch Shell Plc A Shares (Amsterdam) | 685,127 | |||||||||||||
148,474 | Royal Dutch Shell Plc A Shares (London) | 4,106,552 | |||||||||||||
14,188 | SABMiller Plc | 327,195 | |||||||||||||
48,572 | Tesco Plc | 295,669 | |||||||||||||
167,734 | Tomkins Plc | 483,711 | |||||||||||||
22,986 | Tullow Oil Plc | 400,285 | |||||||||||||
11,149 | Vedanta Resources Plc | 322,017 | |||||||||||||
69,706 | Wolseley Plc * | 1,631,186 | |||||||||||||
232,511 | Wolseley Plc (Deferred) * | — | |||||||||||||
63,481 | Xstrata Plc | 842,225 | |||||||||||||
Total United Kingdom | 48,357,826 | ||||||||||||||
United States — 46.0% | |||||||||||||||
44,000 | 3M Co. | 3,172,400 | |||||||||||||
91,700 | Abbott Laboratories | 4,147,591 | |||||||||||||
15,400 | Accenture Ltd.-Class A | 508,200 | |||||||||||||
6,600 | ACE Ltd. | 344,388 | |||||||||||||
10,300 | Alcon Inc | 1,333,541 | |||||||||||||
38,700 | Allstate Corp. (The) | 1,137,393 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United States — continued | |||||||||||||||
16,300 | Altera Corp. | 313,123 | |||||||||||||
76,600 | Altria Group, Inc. | 1,400,248 | |||||||||||||
10,900 | Amazon.com, Inc. * | 884,971 | |||||||||||||
16,600 | AMDOCS Ltd. * | 403,712 | |||||||||||||
12,000 | Amgen, Inc. * | 716,880 | |||||||||||||
35,600 | Annaly Capital Management, Inc. REIT | 617,304 | |||||||||||||
14,100 | Aon Corp. | 588,816 | |||||||||||||
8,400 | Apollo Group, Inc.-Class A * | 544,488 | |||||||||||||
21,000 | Apple, Inc. * | 3,532,410 | |||||||||||||
7,600 | Assurant, Inc. | 227,620 | |||||||||||||
39,100 | AT&T, Inc. | 1,018,555 | |||||||||||||
56,200 | Automatic Data Processing, Inc. | 2,155,270 | |||||||||||||
39,800 | AutoNation, Inc. * | 755,404 | |||||||||||||
2,400 | AutoZone, Inc. * | 353,400 | |||||||||||||
92,991 | Bank of America Corp. | 1,635,712 | |||||||||||||
31,400 | Baxter International, Inc. | 1,787,288 | |||||||||||||
20,500 | BB&T Corp. | 572,770 | |||||||||||||
16,900 | Becton, Dickinson and Co. | 1,176,578 | |||||||||||||
14,800 | Best Buy Co., Inc. | 536,944 | |||||||||||||
30,500 | Bristol-Myers Squibb Co. | 674,965 | |||||||||||||
12,900 | Broadcom Corp.-Class A * | 367,005 | |||||||||||||
42,200 | CenterPoint Energy, Inc. | 523,280 | |||||||||||||
19,900 | CH Robinson Worldwide, Inc. | 1,119,574 | |||||||||||||
58,200 | Cisco Systems, Inc. * | 1,257,120 | |||||||||||||
37,400 | Coach, Inc. | 1,058,046 | |||||||||||||
144,900 | Coca-Cola Co. (The) | 7,066,773 | |||||||||||||
19,800 | Cognizant Technology Solutions Corp.-Class A * | 690,624 | |||||||||||||
9,300 | Colgate-Palmolive Co. | 676,110 | |||||||||||||
16,200 | Comerica, Inc. | 432,054 | |||||||||||||
24,200 | Computer Sciences Corp. * | 1,182,170 | |||||||||||||
48,853 | ConocoPhillips | 2,199,850 | |||||||||||||
13,300 | Consolidated Edison, Inc. | 534,527 | |||||||||||||
28,900 | Convergys Corp. * | 313,276 | |||||||||||||
41,600 | Corning, Inc. | 627,328 | |||||||||||||
9,400 | CR Bard, Inc. | 757,452 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United States — continued | |||||||||||||||
17,600 | Denbury Resources, Inc. * | 267,872 | |||||||||||||
25,700 | DirectTV Group (The), Inc. * | 636,332 | |||||||||||||
30,500 | Dow Chemical Co. (The) | 649,345 | |||||||||||||
23,300 | DTE Energy Co. | 810,374 | |||||||||||||
51,400 | Duke Energy Corp. | 796,186 | |||||||||||||
29,700 | Ecolab, Inc. | 1,256,013 | |||||||||||||
77,200 | Eli Lilly & Co. | 2,583,112 | |||||||||||||
18,300 | Emerson Electric Co. | 674,721 | |||||||||||||
26,800 | Expeditors International of Washington, Inc. | 875,288 | |||||||||||||
6,200 | Fastenal Co. | 224,440 | |||||||||||||
17,692 | Fidelity National Financial, Inc.-Class A | 265,734 | |||||||||||||
11,900 | First American Corp. | 375,088 | |||||||||||||
3,500 | First Solar, Inc. * | 425,530 | |||||||||||||
8,000 | Fiserv, Inc. * | 386,000 | |||||||||||||
13,400 | FLIR Systems, Inc. * | 308,468 | |||||||||||||
69,400 | Ford Motor Co. * | 527,440 | |||||||||||||
20,500 | Forest Laboratories, Inc. * | 600,035 | |||||||||||||
7,400 | FPL Group, Inc. | 415,732 | |||||||||||||
9,700 | Freeport-McMoRan Copper & Gold, Inc. | 610,906 | |||||||||||||
42,700 | Gannett Co., Inc. | 368,928 | |||||||||||||
33,800 | General Dynamics Corp. | 2,000,622 | |||||||||||||
10,100 | General Mills, Inc. | 603,273 | |||||||||||||
11,600 | Genuine Parts Co. | 429,664 | |||||||||||||
45,100 | Genworth Financial, Inc.-Class A | 476,256 | |||||||||||||
10,300 | Gilead Sciences, Inc. * | 464,118 | |||||||||||||
9,600 | Goldman Sachs Group (The), Inc. | 1,588,416 | |||||||||||||
12,100 | Google, Inc.-Class A * | 5,586,207 | |||||||||||||
48,000 | Hartford Financial Services Group (The), Inc. | 1,138,560 | |||||||||||||
19,200 | Hewlett-Packard Co. | 861,888 | |||||||||||||
39,900 | Home Depot, Inc. | 1,088,871 | |||||||||||||
22,000 | Hospitality Properties Trust REIT | 400,840 | |||||||||||||
36,800 | Hudson City Bancorp, Inc. | 482,816 | |||||||||||||
33,400 | Illinois Tool Works, Inc. | 1,396,788 | |||||||||||||
3,900 | IntercontinentalExchange, Inc. * | 365,820 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United States — continued | |||||||||||||||
15,200 | International Business Machines Corp. | 1,794,360 | |||||||||||||
2,600 | ITT Educational Services, Inc. * | 272,974 | |||||||||||||
227,100 | Johnson & Johnson | 13,725,924 | |||||||||||||
46,800 | Kimberly-Clark Corp. | 2,829,528 | |||||||||||||
9,800 | Kohl's Corp. * | 505,582 | |||||||||||||
17,400 | Lexmark International, Inc. * | 327,816 | |||||||||||||
23,700 | Lincoln National Corp. | 598,188 | |||||||||||||
4,600 | Lockheed Martin Corp. | 344,908 | |||||||||||||
23,700 | Lowe's Cos., Inc. | 509,550 | |||||||||||||
51,100 | Macy's, Inc. | 793,072 | |||||||||||||
28,100 | Marathon Oil Corp. | 867,447 | |||||||||||||
8,800 | McAfee, Inc. * | 350,064 | |||||||||||||
39,100 | McDonald's Corp. | 2,198,984 | |||||||||||||
13,000 | Medco Health Solutions, Inc. * | 717,860 | |||||||||||||
56,900 | Medtronic, Inc. | 2,179,270 | |||||||||||||
143,200 | Merck & Co., Inc. | 4,643,976 | |||||||||||||
49,200 | Microsoft Corp. | 1,212,780 | |||||||||||||
29,700 | Morgan Stanley | 860,112 | |||||||||||||
6,500 | Murphy Oil Corp. | 370,500 | |||||||||||||
8,300 | Newfield Exploration Co. * | 321,127 | |||||||||||||
16,500 | Newmont Mining Corp. | 663,135 | |||||||||||||
34,200 | Nike, Inc.-Class B | 1,894,338 | |||||||||||||
49,000 | NiSource, Inc. | 647,290 | |||||||||||||
6,700 | Noble Energy, Inc. | 405,082 | |||||||||||||
23,400 | NVIDIA Corp. * | 339,768 | |||||||||||||
10,200 | Occidental Petroleum Corp. | 745,620 | |||||||||||||
42,225 | Old Republic International Corp. | 502,900 | |||||||||||||
47,100 | Oracle Corp. | 1,030,077 | |||||||||||||
52,800 | Paychex, Inc. | 1,493,712 | |||||||||||||
14,700 | Pepco Holdings, Inc. | 210,651 | |||||||||||||
94,700 | PepsiCo, Inc. | 5,366,649 | |||||||||||||
13,200 | PetroHawk Energy Corp. * | 284,196 | |||||||||||||
290,200 | Pfizer, Inc. | 4,846,340 | |||||||||||||
16,000 | PG&E Corp. | 649,440 | |||||||||||||
37,700 | Philip Morris International, Inc. | 1,723,267 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United States — continued | |||||||||||||||
10,600 | Pinnacle West Capital Corp. | 348,846 | |||||||||||||
6,500 | PPG Industries, Inc. | 360,100 | |||||||||||||
18,300 | Praxair, Inc. | 1,402,146 | |||||||||||||
28,000 | Procter & Gamble Co. (The) | 1,515,080 | |||||||||||||
17,500 | Progress Energy, Inc. | 691,775 | |||||||||||||
30,700 | Qualcomm, Inc. | 1,425,094 | |||||||||||||
6,200 | Range Resources Corp. | 299,894 | |||||||||||||
66,200 | Regions Financial Corp. | 387,932 | |||||||||||||
14,400 | Rockwell Collins, Inc. | 662,976 | |||||||||||||
9,400 | Ryder System, Inc. | 357,200 | |||||||||||||
19,700 | SanDisk Corp. * | 348,690 | |||||||||||||
13,800 | Sigma-Aldrich Corp. | 701,040 | |||||||||||||
26,200 | Southern Co. | 817,440 | |||||||||||||
19,900 | Southern Copper Corp. | 562,374 | |||||||||||||
12,900 | Southwestern Energy Co. * | 475,494 | |||||||||||||
11,700 | St Jude Medical, Inc. * | 450,918 | |||||||||||||
11,200 | State Street Corp. | 587,776 | |||||||||||||
29,500 | Stryker Corp. | 1,223,070 | |||||||||||||
9,200 | Sunoco, Inc. | 247,480 | |||||||||||||
24,542 | Supervalu, Inc. | 352,178 | |||||||||||||
28,100 | Symantec Corp. * | 424,872 | |||||||||||||
49,000 | Sysco Corp. | 1,249,010 | |||||||||||||
15,800 | TD Ameritrade Holding Corp. * | 303,992 | |||||||||||||
22,000 | Texas Instruments, Inc. | 540,980 | |||||||||||||
26,300 | TJX Cos. (The), Inc. | 945,485 | |||||||||||||
9,600 | Torchmark Corp. | 409,056 | |||||||||||||
25,600 | Travelers Cos. (The), Inc. | 1,290,752 | |||||||||||||
25,400 | Tyco Electronics Ltd. | 579,628 | |||||||||||||
18,500 | United Parcel Service, Inc.-Class B | 989,010 | |||||||||||||
47,300 | United Technologies Corp. | 2,807,728 | |||||||||||||
38,815 | UnitedHealth Group, Inc. | 1,086,820 | |||||||||||||
68,100 | Valero Energy Corp. | 1,276,194 | |||||||||||||
36,600 | Verizon Communications, Inc. | 1,136,064 | |||||||||||||
9,800 | VF Corp. | 681,688 | |||||||||||||
7,500 | Visa, Inc.-Class A | 533,250 |
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, 2009 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||||||
United States — continued | |||||||||||||||
148,500 | Wal-Mart Stores, Inc. | 7,554,195 | |||||||||||||
18,200 | WellPoint, Inc. * | 961,870 | |||||||||||||
13,800 | Western Digital Corp. * | 473,064 | |||||||||||||
25,700 | Western Union Co. | 463,628 | |||||||||||||
6,400 | Whirlpool Corp. | 410,944 | |||||||||||||
9,700 | WW Grainger, Inc. | 848,459 | |||||||||||||
36,300 | Wyeth | 1,736,955 | |||||||||||||
37,200 | Xcel Energy, Inc. | 734,700 | |||||||||||||
19,600 | Xilinx, Inc. | 435,904 | |||||||||||||
22,700 | XL Capital Ltd.-Class A | 393,845 | |||||||||||||
11,700 | Yum! Brands, Inc. | 400,725 | |||||||||||||
Total United States | 177,399,651 | ||||||||||||||
TOTAL COMMON STOCKS (COST $422,349,322) | 369,394,376 | ||||||||||||||
SHORT-TERM INVESTMENTS — 3.4% | |||||||||||||||
USD | 2,500,000 | Allied Irish Bank Time Deposit, 0.03%, due 09/01/09 | 2,500,000 | ||||||||||||
CAD | 23,137 | Bank of America Time Deposit, 0.04%, due 09/01/09 | 21,134 | ||||||||||||
USD | 2,500,000 | Bank of Ireland Time Deposit, 0.03%, due 09/01/09 | 2,500,000 | ||||||||||||
AUD | 11,964 | Brown Brothers Harriman Time Deposit, 2.17%, due 09/01/09 | 10,112 | ||||||||||||
CHF | 11,053 | Brown Brothers Harriman Time Deposit, 0.02%, due 09/01/09 | 10,439 | ||||||||||||
DKK | 68,906 | Brown Brothers Harriman Time Deposit, 0.30%, due 09/01/09 | 13,272 | ||||||||||||
EUR | 12,882 | Brown Brothers Harriman Time Deposit, 0.06%, due 09/01/09 | 18,468 | ||||||||||||
HKD | 77,503 | Brown Brothers Harriman Time Deposit, 0.01%, due 09/01/09 | 10,000 | ||||||||||||
NOK | 57,943 | Brown Brothers Harriman Time Deposit, 0.35%, due 09/01/09 | 9,629 | ||||||||||||
SEK | 71,741 | Brown Brothers Harriman Time Deposit, 0.01%, due 09/01/09 | 10,078 | ||||||||||||
USD | 277,621 | Citibank Time Deposit, 0.03%, due 09/01/09 | 277,621 | ||||||||||||
USD | 2,500,000 | Danske Bank Time Deposit, 0.03%, due 09/01/09 | 2,500,000 | ||||||||||||
USD | 2,500,000 | DnB Nor Bank Time Deposit, 0.03%, due 09/01/09 | 2,500,000 | ||||||||||||
JPY | 2,365,720 | HSBC Bank (Hong Kong) Time Deposit, 0.01%, due 09/01/09 | 25,424 | ||||||||||||
SGD | 73,065 | JPMorgan Chase Time Deposit, 0.01%, due 09/01/09 | 50,707 | ||||||||||||
USD | 2,500,000 | Societe Generale Time Deposit, 0.03%, due 09/01/09 | 2,500,000 | ||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $12,956,884) | 12,956,884 | ||||||||||||||
TOTAL INVESTMENTS — 99.2% (Cost $435,306,206) | 382,351,260 | ||||||||||||||
Other Assets and Liabilities (net) — 0.8% | 3,236,581 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 385,587,841 |
See accompanying notes to the financial statements.
14
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys † | |||||||||||||||||||
10/23/09 | CAD | 6,293,907 | $ | 5,749,672 | $ | 63,708 | |||||||||||||
10/23/09 | CAD | 6,293,907 | 5,749,672 | 40,602 | |||||||||||||||
10/23/09 | CHF | 6,060,548 | 5,726,120 | 99,915 | |||||||||||||||
10/23/09 | CHF | 6,060,548 | 5,726,120 | 106,905 | |||||||||||||||
10/23/09 | DKK | 2,226,349 | 428,349 | 6,320 | |||||||||||||||
10/23/09 | JPY | 623,068,551 | 6,698,457 | 112,770 | |||||||||||||||
10/23/09 | SEK | 35,910,405 | 5,045,777 | 104,245 | |||||||||||||||
10/23/09 | SEK | 35,910,405 | 5,045,777 | 102,641 | |||||||||||||||
$ | 40,169,944 | $ | 637,106 | ||||||||||||||||
Sales # | |||||||||||||||||||
10/23/09 | AUD | 818,827 | $ | 689,244 | $ | (18,625 | ) | ||||||||||||
10/23/09 | EUR | 5,866,715 | 8,410,711 | (150,142 | ) | ||||||||||||||
10/23/09 | EUR | 5,866,715 | 8,410,711 | (124,434 | ) | ||||||||||||||
10/23/09 | EUR | 4,072,644 | 5,838,674 | (620 | ) | ||||||||||||||
10/23/09 | GBP | 3,455,864 | 5,625,521 | 83,557 | |||||||||||||||
10/23/09 | HKD | 6,951,868 | 897,330 | 5 | |||||||||||||||
10/23/09 | SGD | 2,239,503 | 1,553,428 | 6,332 | |||||||||||||||
10/23/09 | SGD | 6,379,198 | 4,424,922 | (31,005 | ) | ||||||||||||||
$ | 35,850,541 | $ | (234,932 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
15
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
21 | CAC40 | September 2009 | $ | 1,103,094 | $ | 74,719 | |||||||||||||
5 | DAX | September 2009 | 981,602 | 62,127 | |||||||||||||||
38 | FTSE/MIB | September 2009 | 6,133,076 | 675,958 | |||||||||||||||
61 | FTSE 100 | September 2009 | 4,849,186 | 496,770 | |||||||||||||||
27 | MSCI Singapore | September 2009 | 1,173,801 | (13,415 | ) | ||||||||||||||
34 | TOPIX | September 2009 | 3,508,618 | 67,672 | |||||||||||||||
$ | 17,749,377 | $ | 1,363,831 | ||||||||||||||||
Sales | |||||||||||||||||||
13 | IBEX 35 | September 2009 | $ | 2,121,429 | $ | (150,239 | ) | ||||||||||||
47 | S&P 500 E-Mini Index | September 2009 | 2,396,413 | (35,250 | ) | ||||||||||||||
19 | S&P Toronto 60 | September 2009 | 2,262,471 | (154,224 | ) | ||||||||||||||
14 | SPI 200 | September 2009 | 1,321,255 | (120,078 | ) | ||||||||||||||
$ | 8,101,568 | $ | (459,791 | ) |
As of August 31, 2009, for the futures contracts held, 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.
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 USD - United States Dollar | ||||||
See accompanying notes to the financial statements.
16
GMO Developed World Stock Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $435,306,206) (Note 2) | $ | 382,351,260 | |||||
Dividends receivable | 898,760 | ||||||
Foreign taxes receivable | 67,831 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 727,000 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 2,350,911 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 28,737 | ||||||
Total assets | 386,424,499 | ||||||
Liabilities: | |||||||
Foreign currency due to custodian | 12,078 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 144,230 | ||||||
Shareholder service fee | 41,381 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 745 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 59,595 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 324,826 | ||||||
Miscellaneous payable | 101,852 | ||||||
Accrued expenses | 151,951 | ||||||
Total liabilities | 836,658 | ||||||
Net assets | $ | 385,587,841 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 520,609,659 | |||||
Accumulated undistributed net investment income | 5,241,914 | ||||||
Accumulated net realized loss | (88,616,021 | ) | |||||
Net unrealized depreciation | (51,647,711 | ) | |||||
$ | 385,587,841 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 225,068,653 | |||||
Class IV shares | $ | 160,519,188 | |||||
Shares outstanding: | |||||||
Class III | 14,025,284 | ||||||
Class IV | 9,991,703 | ||||||
Net asset value per share: | |||||||
Class III | $ | 16.05 | |||||
Class IV | $ | 16.07 |
See accompanying notes to the financial statements.
17
GMO Developed World Stock Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $309,575) | $ | 5,107,359 | |||||
Interest | 1,748 | ||||||
Total investment income | 5,109,107 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 725,899 | ||||||
Shareholder service fee – Class III (Note 3) | 137,937 | ||||||
Shareholder service fee – Class IV (Note 3) | 69,353 | ||||||
Custodian and fund accounting agent fees | 122,250 | ||||||
Audit and tax fees | 38,088 | ||||||
Transfer agent fees | 21,160 | ||||||
Legal fees | 6,072 | ||||||
Trustees fees and related expenses (Note 3) | 3,208 | ||||||
Registration fees | 1,012 | ||||||
Miscellaneous | 4,600 | ||||||
Total expenses | 1,129,579 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (191,710 | ) | |||||
Expense reductions (Note 2) | (230 | ) | |||||
Net expenses | 937,639 | ||||||
Net investment income (loss) | 4,171,468 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (40,202,677 | ) | |||||
Closed futures contracts | (1,120,387 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 1,282,784 | ||||||
Net realized gain (loss) | (40,040,280 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 143,647,393 | ||||||
Open futures contracts | 2,724,386 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 1,434,387 | ||||||
Net unrealized gain (loss) | 147,806,166 | ||||||
Net realized and unrealized gain (loss) | 107,765,886 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 111,937,354 |
See accompanying notes to the financial statements.
18
GMO Developed World Stock Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 4,171,468 | $ | 11,358,614 | |||||||
Net realized gain (loss) | (40,040,280 | ) | (46,539,485 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 147,806,166 | (185,489,806 | ) | ||||||||
Net increase (decrease) in net assets from operations | 111,937,354 | (220,670,677 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (1,541,646 | ) | (7,860,790 | ) | |||||||
Class IV | (1,181,946 | ) | (6,163,416 | ) | |||||||
Total distributions from net investment income | (2,723,592 | ) | (14,024,206 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (2,479,946 | ) | ||||||||
Class IV | — | (1,952,911 | ) | ||||||||
Total distributions from net realized gains | — | (4,432,857 | ) | ||||||||
(2,723,592 | ) | (18,457,063 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 7,078,732 | (17,180,224 | ) | ||||||||
Class IV | 1,181,946 | 8,116,327 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 8,260,678 | (9,063,897 | ) | ||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 114,815 | 173,735 | |||||||||
Increase in net assets resulting from purchase premiums and redemption fees | 114,815 | 173,735 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 8,375,493 | (8,890,162 | ) | ||||||||
Total increase (decrease) in net assets | 117,589,255 | (248,017,902 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 267,998,586 | 516,016,488 | |||||||||
End of period (including accumulated undistributed net investment income of $5,241,914 and $3,794,038, respectively) | $ | 385,587,841 | $ | 267,998,586 |
See accompanying notes to the financial statements.
19
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 11.34 | $ | 21.88 | $ | 24.58 | $ | 22.24 | $ | 20.00 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.18 | 0.51 | 0.54 | 0.43 | 0.15 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 4.65 | (10.20 | ) | (0.74 | ) | 2.84 | 2.15 | ||||||||||||||||
Total from investment operations | 4.83 | (9.69 | ) | (0.20 | ) | 3.27 | 2.30 | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.12 | ) | (0.64 | ) | (0.67 | ) | (0.32 | ) | (0.06 | ) | |||||||||||||
From net realized gains | — | (0.21 | ) | (1.83 | ) | (0.61 | ) | — | |||||||||||||||
Total distributions | (0.12 | ) | (0.85 | ) | (2.50 | ) | (0.93 | ) | (0.06 | ) | |||||||||||||
Net asset value, end of period | $ | 16.05 | $ | 11.34 | $ | 21.88 | $ | 24.58 | $ | 22.24 | |||||||||||||
Total Return(b) | 42.73 | %** | (45.56 | )% | (1.73 | )% | 14.87 | % | 11.51 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 225,069 | $ | 155,560 | $ | 309,609 | $ | 282,446 | $ | 179,466 | |||||||||||||
Net expenses to average daily net assets | 0.60 | %(c)* | 0.61 | %(d) | 0.62 | %(d) | 0.62 | % | 0.62 | %* | |||||||||||||
Net investment income to average daily net assets | 2.57 | %* | 2.79 | % | 2.15 | % | 1.83 | % | 1.27 | %* | |||||||||||||
Portfolio turnover rate | 25 | %** | 50 | % | 53 | % | 43 | % | 15 | %††** | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.12 | %* | 0.12 | % | 0.11 | % | 0.12 | % | 0.20 | %* | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.03 | $ | 0.07 |
(a) Period from August 1, 2005 (commencement of operations) through February 28, 2006.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) The net expense ratio does not include the effect of expense reductions.
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the period August 1, 2005 through February 28, 2006.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
20
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 11.35 | $ | 21.90 | $ | 24.59 | $ | 22.25 | $ | 20.24 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.18 | 0.51 | 0.56 | 0.45 | 0.12 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 4.66 | (10.20 | ) | (0.74 | ) | 2.82 | 1.95 | ||||||||||||||||
Total from investment operations | 4.84 | (9.69 | ) | (0.18 | ) | 3.27 | 2.07 | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.12 | ) | (0.65 | ) | (0.68 | ) | (0.32 | ) | (0.06 | ) | |||||||||||||
From net realized gains | — | (0.21 | ) | (1.83 | ) | (0.61 | ) | — | |||||||||||||||
Total distributions | (0.12 | ) | (0.86 | ) | (2.51 | ) | (0.93 | ) | (0.06 | ) | |||||||||||||
Net asset value, end of period | $ | 16.07 | $ | 11.35 | $ | 21.90 | $ | 24.59 | $ | 22.25 | |||||||||||||
Total Return(b) | 42.79 | %** | (45.52 | )% | (1.66 | )% | 14.88 | % | 10.23 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 160,519 | $ | 112,438 | $ | 206,408 | $ | 209,937 | $ | 137,409 | |||||||||||||
Net expenses to average daily net assets | 0.55 | %(c)* | 0.56 | %(d) | 0.57 | %(d) | 0.57 | % | 0.57 | %* | |||||||||||||
Net investment income to average daily net assets | 2.61 | %* | 2.82 | % | 2.22 | % | 1.93 | % | 1.20 | %* | |||||||||||||
Portfolio turnover rate | 25 | %** | 50 | % | 53 | % | 43 | % | 15 | %††** | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.12 | %* | 0.12 | % | 0.11 | % | 0.12 | % | 0.17 | %* | |||||||||||||
Redemption fees consisted of the following per share amounts:† | 0.00 | (e) | — | (f) | — | (f) | $ | 0.02 | $ | 0.06 |
(a) Period from September 1, 2005 (commencement of operations) through February 28, 2006.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) The net expense ratio does not include the effect of expense reductions.
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
(e) For the period ended August 31, 2009, the class received no purchase premiums or redemption fees.
(f) For the years ended February 28, 2009 and February 29, 2008, the class received no purchase premiums or redemptions fees.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the period August 1, 2005 through February 28, 2006.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
21
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Developed World Stock Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 its benchmark, the MSCI World Index. The Fund typically makes equity investments in companies tied economically to the world's developed markets, including the U.S. Under normal circumstances, the Fund invests at least 80% of its assets in stocks tied economically to developed markets. The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the counter derivatives, including options, futures, and swap contracts. The Fund also may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
Throughout the period ended August 31, 2009, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder service fee.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price.
22
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 48.71% of the net assets of the Fund were valued using fair value prices based on models used by a third party vendor and are classified as using Level 2 inputs in the table below.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation or quoted prices for similar securities.
Level 3 – Valuations based on inputs that are unobservable and significant.
23
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | 588,818 | $ | 983,267 | $ | — | $ | 1,572,085 | |||||||||||
Belgium | — | 2,107,360 | — | 2,107,360 | |||||||||||||||
Canada | 2,883,630 | — | — | 2,883,630 | |||||||||||||||
France | 692,286 | 28,383,960 | — | 29,076,246 | |||||||||||||||
Germany | — | 8,592,105 | — | 8,592,105 | |||||||||||||||
Greece | — | 1,128,535 | — | 1,128,535 | |||||||||||||||
Hong Kong | — | 1,114,252 | — | 1,114,252 | |||||||||||||||
Ireland | — | 650,137 | — | 650,137 | |||||||||||||||
Italy | — | 14,391,517 | — | 14,391,517 | |||||||||||||||
Japan | — | 53,252,681 | — | 53,252,681 | |||||||||||||||
Netherlands | — | 5,370,455 | — | 5,370,455 | |||||||||||||||
Singapore | — | 7,384,919 | — | 7,384,919 | |||||||||||||||
Spain | — | 4,125,916 | — | 4,125,916 | |||||||||||||||
Sweden | — | 5,203,344 | — | 5,203,344 | |||||||||||||||
Switzerland | — | 6,783,717 | — | 6,783,717 | |||||||||||||||
United Kingdom | — | 48,357,826 | — | 48,357,826 | |||||||||||||||
United States | 177,399,651 | — | — | 177,399,651 | |||||||||||||||
TOTAL COMMON STOCKS | 181,564,385 | 187,829,991 | — | 369,394,376 | |||||||||||||||
Short-Term Investments | 12,956,884 | — | — | 12,956,884 | |||||||||||||||
Total Investments | 194,521,269 | 187,829,991 | — | 382,351,260 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | — | 727,000 | — | 727,000 | |||||||||||||||
Futures Contracts | — | 1,377,246 | — | 1,377,246 | |||||||||||||||
Total | $ | 194,521,269 | $ | 189,934,237 | $ | — | $ | 384,455,506 |
24
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | $ | — | $ | (324,826 | ) | $ | — | $ | (324,826 | ) | |||||||||
Futures Contracts | (189,474 | ) | (283,732 | ) | — | (473,206 | ) | ||||||||||||
Total | $ | (189,474 | ) | $ | (608,558 | ) | $ | — | $ | (798,032 | ) |
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to
25
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
meet the terms of the contracts. Most forward currency contracts are not collateralized. 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. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because many foreign exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign futures on those exchanges do not reflect events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor based on that vendor's proprietary models. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a
26
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with
27
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exposure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the
28
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are
29
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $32,763,918.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (12,590,155 | ) | ||||
Total | $ | (12,590,155 | ) |
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 442,882,816 | $ | 17,106,701 | $ | (77,638,257 | ) | $ | (60,531,556 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
30
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 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.
Brown Brothers Harriman & Co. ("BBH") serves as custodian and fund accounting agent of the Fund. State Street Bank and Trust Company ("State Street") serves as transfer agent of the Fund. BBH and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
As of August 31, 2009, the premium on cash purchases of Fund shares and the fee on cash redemptions were each 0.25% of the amount invested or redeemed. An additional purchase premium and redemption fee of 0.005% is charged for any purchases/redemptions (or any portion of a purchase/redemption) effected in a currency other than the U.S. dollar. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or r edemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees)
31
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund's securities may not increase to what the Manager believes to be their fundamental value or that the Manager may have overestimated their fundamental value), Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Credit and Counterparty Risk (risk of default of a derivatives counterparty or borrower of the Fund's securities), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's
32
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives
33
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictability of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of
34
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | 1,377,246 | — | 1,377,246 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 727,000 | — | — | — | 727,000 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | 727,000 | $ | — | $ | 1,377,246 | $ | — | $ | 2,104,246 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | (473,206 | ) | — | (473,206 | ) | |||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | (324,826 | ) | — | — | — | (324,826 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | (324,826 | ) | $ | — | $ | (473,206 | ) | $ | — | $ | (798,032 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's
35
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Notes to Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (16,156 | ) | $ | — | $ | (16,156 | ) | |||||||||||||
Futures contracts | — | — | — | (1,120,387 | ) | — | (1,120,387 | ) | |||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 1,183,206 | — | — | — | 1,183,206 | |||||||||||||||||||||
Total | $ | — | $ | 1,183,206 | $ | — | $ | (1,136,543 | ) | $ | — | $ | 46,663 | ||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | 102,638 | $ | — | $ | 102,638 | |||||||||||||||
Futures contracts | — | — | — | 2,724,386 | — | 2,724,386 | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 1,419,514 | — | — | — | 1,419,514 | |||||||||||||||||||||
Total | $ | — | $ | 1,419,514 | $ | — | $ | 2,827,024 | $ | — | $ | 4,246,538 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Forwards | Futures | Rights/Warrants | |||||||||||||
Average notional amount outstanding | $ | 86,609,614 | $ | 25,271,938 | $ | 73,322 | |||||||||
Highest notional amount outstanding | 113,038,586 | 30,002,853 | 463,989 | ||||||||||||
Lowest notional amount outstanding | 71,331,014 | 20,194,751 | — |
36
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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 clientand shareholder service,reporting, and other support. Pursuant to the Shareholder Service Plan, theshareholder service fee is calculated based on 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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.45% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fun d) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.45% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.45% of the Fund's average daily net assets.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009, was $2,564 and $1,472, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $92,614,488 and $77,125,697, respectively.
37
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 51.84% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2009, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,740,173 | $ | 25,939,524 | 1,345,030 | $ | 22,152,501 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 75,777 | 1,060,885 | 465,528 | 7,953,416 | |||||||||||||||
Shares repurchased | (1,509,767 | ) | (19,921,677 | ) | (2,243,384 | ) | (47,286,141 | ) | |||||||||||
Purchase premiums | — | 65,011 | — | 55,520 | |||||||||||||||
Redemption fees | — | 49,804 | — | 118,215 | |||||||||||||||
Net increase (decrease) | 306,183 | $ | 7,193,547 | (432,826 | ) | $ | (17,006,489 | ) |
38
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | — | $ | — | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 84,364 | 1,181,946 | 482,092 | 8,116,327 | |||||||||||||||
Shares repurchased | — | — | — | — | |||||||||||||||
Purchase premiums | — | — | — | — | |||||||||||||||
Redemption fees | — | — | — | — | |||||||||||||||
Net increase (decrease) | 84,364 | $ | 1,181,946 | 482,092 | $ | 8,116,327 |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
39
GMO Developed World Stock Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including a one-year period and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature.
40
GMO Developed World Stock Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, 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 to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to separate account clients and the impact on the Manager of, and expenses and risks associated with, the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent market events and c hanges in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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 fa ctors, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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
41
GMO Developed World Stock Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
42
GMO Developed World Stock Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.60 | % | $ | 1,000.00 | $ | 1,427.30 | $ | 3.67 | |||||||||||
2) Hypothetical | 0.60 | % | $ | 1,000.00 | $ | 1,022.18 | $ | 3.06 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.55 | % | $ | 1,000.00 | $ | 1,427.90 | $ | 3.37 | |||||||||||
2) Hypothetical | 0.55 | % | $ | 1,000.00 | $ | 1,022.43 | $ | 2.80 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2009, 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 International Growth Equity Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO International Growth Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.5 | % | |||||
Short-Term Investments | 2.5 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Futures Contracts | 0.1 | ||||||
Other | 0.8 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
United Kingdom | 24.2 | % | |||||
Japan | 22.4 | ||||||
Switzerland | 12.6 | ||||||
Australia | 5.9 | ||||||
France | 5.4 | ||||||
Spain | 5.0 | ||||||
Germany | 4.8 | ||||||
Sweden | 4.2 | ||||||
Canada | 4.1 | ||||||
Belgium | 2.0 | ||||||
Denmark | 1.9 | ||||||
Netherlands | 1.9 | ||||||
Hong Kong | 1.7 | ||||||
Greece | 1.1 | ||||||
Singapore | 1.0 | ||||||
Portugal | 0.5 | ||||||
Finland | 0.4 | ||||||
Italy | 0.4 | ||||||
Norway | 0.4 | ||||||
Ireland | 0.1 | ||||||
100.0 | % |
1
GMO International Growth Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2009 (Unaudited)
Industry Group Summary | % of Equity Investments | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 21.4 | % | |||||
Food, Beverage & Tobacco | 9.9 | ||||||
Telecommunication Services | 8.4 | ||||||
Materials | 7.1 | ||||||
Retailing | 5.2 | ||||||
Household & Personal Products | 4.5 | ||||||
Banks | 4.4 | ||||||
Energy | 4.2 | ||||||
Utilities | 4.2 | ||||||
Software & Services | 3.9 | ||||||
Food & Staples Retailing | 3.7 | ||||||
Technology Hardware & Equipment | 3.2 | ||||||
Capital Goods | 2.9 | ||||||
Health Care Equipment & Services | 2.5 | ||||||
Diversified Financials | 2.4 | ||||||
Consumer Durables & Apparel | 2.2 | ||||||
Transportation | 2.0 | ||||||
Commercial & Professional Services | 2.0 | ||||||
Media | 1.7 | ||||||
Automobiles & Components | 1.6 | ||||||
Insurance | 1.2 | ||||||
Consumer Services | 0.7 | ||||||
Semiconductors & Semiconductor Equipment | 0.5 | ||||||
Real Estate | 0.2 | ||||||
100.0 | % |
2
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 96.5% | |||||||||||
Australia — 5.7% | |||||||||||
480,384 | AMP Ltd | 2,579,319 | |||||||||
187,432 | Australian Stock Exchange Ltd | 5,242,535 | |||||||||
365,463 | BHP Billiton Ltd | 11,367,127 | |||||||||
772,562 | Brambles Ltd | 4,852,429 | |||||||||
128,581 | Cochlear Ltd | 6,110,382 | |||||||||
324,080 | CSL Ltd | 8,808,150 | |||||||||
597,549 | Foster's Group Ltd | 2,764,133 | |||||||||
1,100,514 | Harvey Norman Holdings Ltd | 3,661,357 | |||||||||
189,243 | JB Hi-Fi Ltd | 2,848,390 | |||||||||
1,374,391 | Lihir Gold Ltd * | 3,180,550 | |||||||||
278,553 | Newcrest Mining Ltd | 7,096,977 | |||||||||
94,808 | Orica Ltd | 1,809,875 | |||||||||
464,303 | Origin Energy Ltd | 6,005,523 | |||||||||
541,706 | QBE Insurance Group Ltd | 10,468,429 | |||||||||
81,637 | Rio Tinto Ltd | 3,880,228 | |||||||||
2,668,806 | Telstra Corp Ltd | 7,347,662 | |||||||||
249,486 | Westpac Banking Corp | 5,124,223 | |||||||||
362,401 | Woodside Petroleum Ltd | 15,037,227 | |||||||||
1,492,552 | Woolworths Ltd | 35,287,284 | |||||||||
107,283 | WorleyParsons Ltd | 2,585,362 | |||||||||
Total Australia | 146,057,162 | ||||||||||
Belgium — 1.9% | |||||||||||
880,409 | Anheuser-Busch InBev NV | 38,065,888 | |||||||||
96,576 | Belgacom SA | 3,627,693 | |||||||||
23,836 | Colruyt SA | 5,472,794 | |||||||||
24,382 | Delhaize Group | 1,635,098 | |||||||||
Total Belgium | 48,801,473 | ||||||||||
Canada — 3.9% | |||||||||||
55,600 | Agnico-Eagle Mines Ltd | 3,188,969 | |||||||||
284,000 | Barrick Gold Corp | 9,800,886 | |||||||||
304,800 | Canadian National Railway Co | 14,733,972 |
See accompanying notes to the financial statements.
3
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
Canada — continued | |||||||||||
85,800 | Canadian Pacific Railway Ltd | 4,108,368 | |||||||||
257,000 | Eldorado Gold Corp * | 2,652,752 | |||||||||
140,300 | Enbridge Inc | 5,241,626 | |||||||||
9,300 | Fairfax Financial Holdings Ltd | 3,161,703 | |||||||||
60,800 | First Quantum Minerals Ltd | 3,600,515 | |||||||||
48,100 | Husky Energy Inc | 1,295,262 | |||||||||
76,100 | IGM Financial Inc | 2,843,106 | |||||||||
43,900 | Imperial Oil Ltd | 1,578,756 | |||||||||
93,200 | Kinross Gold Corp | 1,769,076 | |||||||||
103,100 | Metro Inc Class A | 3,478,889 | |||||||||
178,900 | Research In Motion Ltd * | 13,130,500 | |||||||||
168,100 | Rogers Communications Inc Class B | 4,628,028 | |||||||||
317,300 | Shaw Communications Inc Class B | 5,446,053 | |||||||||
228,200 | Shoppers Drug Mart Corp | 8,963,325 | |||||||||
157,300 | Teck Cominco Ltd Class B * | 3,796,178 | |||||||||
87,200 | Toronto Dominion Bank (The) | 5,390,908 | |||||||||
270,700 | Yamana Gold Inc | 2,490,020 | |||||||||
Total Canada | 101,298,892 | ||||||||||
Denmark — 1.8% | |||||||||||
213 | AP Moller-Maersk A/S Class A | 1,475,497 | |||||||||
198 | AP Moller-Maersk A/S Class B | 1,424,864 | |||||||||
49,682 | Carlsberg A/S Class B | 3,567,483 | |||||||||
122,286 | H Lundbeck A/S | 2,412,563 | |||||||||
574,582 | Novo-Nordisk A/S Class B | 35,054,736 | |||||||||
41,524 | Novozymes A/S Class B | 3,565,232 | |||||||||
Total Denmark | 47,500,375 | ||||||||||
Finland — 0.4% | |||||||||||
121,451 | Alma Media Corp | 1,203,264 | |||||||||
71,919 | Kone Oyj Class B | 2,507,143 | |||||||||
469,409 | Nokia Oyj | 6,589,482 | |||||||||
Total Finland | 10,299,889 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
France — 5.3% | |||||||||||
46,764 | Air Liquide SA | 5,002,261 | |||||||||
25,138 | ArcelorMittal | 899,041 | |||||||||
127,885 | BNP Paribas | 10,311,599 | |||||||||
20,664 | Christian Dior SA | 1,919,342 | |||||||||
124,549 | Danone SA | 6,790,615 | |||||||||
54,092 | Dassault Systemes SA | 2,770,571 | |||||||||
68,842 | Electricite de France | 3,614,589 | |||||||||
100,893 | Essilor International SA | 5,458,557 | |||||||||
106,831 | France Telecom SA | 2,716,933 | |||||||||
63,085 | Hermes International | 9,352,663 | |||||||||
36,454 | Iliad SA | 3,740,359 | |||||||||
131,797 | L'Oreal SA | 13,010,655 | |||||||||
38,736 | Neopost SA | 3,197,058 | |||||||||
117,460 | Publicis Groupe | 4,329,238 | |||||||||
675,691 | Sanofi-Aventis | 46,006,262 | |||||||||
318,150 | SES | 6,245,956 | |||||||||
84,834 | Technip SA | 5,260,831 | |||||||||
82,239 | Total SA | 4,718,851 | |||||||||
Total France | 135,345,381 | ||||||||||
Germany — 4.7% | |||||||||||
90,085 | Adidas AG | 4,248,743 | |||||||||
119,392 | Aixtron AG | 2,348,835 | |||||||||
56,435 | Aurubis AG | 2,151,980 | |||||||||
75,300 | BASF AG | 3,935,256 | |||||||||
106,132 | Beiersdorf AG | 5,387,892 | |||||||||
372,544 | Deutsche Bank AG (Registered) | 25,302,125 | |||||||||
953,047 | Deutsche Telekom AG (Registered) | 12,689,748 | |||||||||
18,249 | Fielmann AG | 1,176,950 | |||||||||
137,201 | Fresenius Medical Care AG & Co | 6,156,203 | |||||||||
67,867 | MTU Aero Engines Holding AG | 2,869,643 | |||||||||
10,739 | Puma AG Rudolf Dassler Sport | 3,029,839 | |||||||||
189,890 | Qiagen NV * | 3,910,605 | |||||||||
845,272 | SAP AG | 41,272,656 |
See accompanying notes to the financial statements.
5
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
Germany — continued | |||||||||||
37,670 | Software AG | 2,891,150 | |||||||||
147,031 | Suedzucker AG | 2,860,904 | |||||||||
Total Germany | 120,232,529 | ||||||||||
Greece — 1.0% | |||||||||||
107,533 | Alpha Bank A.E. * | 1,785,524 | |||||||||
135,578 | EFG Eurobank Ergasias * | 1,903,675 | |||||||||
256,666 | National Bank of Greece SA * | 8,061,693 | |||||||||
434,361 | OPAP SA | 10,608,914 | |||||||||
139,286 | Piraeus Bank SA * | 2,190,156 | |||||||||
88,155 | Public Power Corp SA * | 2,078,831 | |||||||||
Total Greece | 26,628,793 | ||||||||||
Hong Kong — 1.6% | |||||||||||
1,721,500 | CLP Holdings Ltd | 11,518,587 | |||||||||
885,500 | Esprit Holdings Ltd | 5,364,974 | |||||||||
376,600 | Hang Seng Bank Ltd | 5,348,055 | |||||||||
3,579,400 | Hong Kong & China Gas | 7,760,264 | |||||||||
86,800 | Hong Kong Aircraft Engineering Co Ltd | 1,016,397 | |||||||||
1,344,000 | Hong Kong Electric Holdings Ltd | 7,513,159 | |||||||||
850,000 | Li & Fung Ltd | 2,825,716 | |||||||||
65,000 | Sun Hung Kai Properties Ltd | 877,021 | |||||||||
Total Hong Kong | 42,224,173 | ||||||||||
Ireland — 0.1% | |||||||||||
124,498 | CRH Plc | 3,185,392 | |||||||||
Italy — 0.4% | |||||||||||
161,890 | Ansaldo STS SPA | 3,273,388 | |||||||||
66,780 | ENI SPA | 1,586,730 | |||||||||
522,458 | �� | Intesa San Paolo * | 2,270,221 | ||||||||
1,507,953 | Parmalat SPA | 3,877,580 | |||||||||
Total Italy | 11,007,919 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — 21.7% | |||||||||||
40,200 | ABC-Mart Inc | 1,166,540 | |||||||||
81,300 | Aisin Seiki Co Ltd | 2,032,858 | |||||||||
269,000 | Asahi Glass Co Ltd | 2,339,710 | |||||||||
327,300 | Astellas Pharma Inc | 13,082,124 | |||||||||
225,050 | Canon Inc | 8,602,911 | |||||||||
692 | Central Japan Railway Co | 4,675,241 | |||||||||
198,000 | Chubu Electric Power Co Inc | 4,603,582 | |||||||||
286,500 | Chugai Pharmaceutical Co Ltd | 5,835,282 | |||||||||
365,000 | Cosmo Oil Co Ltd | 1,120,318 | |||||||||
226,100 | Culture Convenience Club Co Ltd | 1,670,510 | |||||||||
206,400 | Daiichi Sankyo Co Ltd | 4,392,793 | |||||||||
67,800 | Daikin Industries Ltd | 2,389,964 | |||||||||
65,700 | Daito Trust Construction Co Ltd | 3,130,975 | |||||||||
193,600 | Denso Corp | 5,634,155 | |||||||||
49,600 | East Japan Railway Co | 3,239,130 | |||||||||
269,800 | Eisai Co Ltd | 9,859,800 | |||||||||
170,600 | Elpida Memory Inc * | 2,660,077 | |||||||||
51,600 | Fanuc Ltd | 4,200,429 | |||||||||
125,100 | Fast Retailing Co Ltd | 14,978,362 | |||||||||
69,700 | FujiFilm Holdings Corp | 2,074,398 | |||||||||
431,000 | Fujitsu Ltd | 2,893,960 | |||||||||
330,000 | GS Yuasa Corp | 2,873,778 | |||||||||
1,025,000 | Hankyu Hanshin Holdings Inc | 4,907,837 | |||||||||
44,300 | Hirose Electric Co Ltd | 5,468,296 | |||||||||
117,200 | Hisamitsu Pharmaceutical Co Inc | 4,515,251 | |||||||||
410,000 | Hitachi Ltd | 1,442,267 | |||||||||
153,000 | Hokuriku Electric Power Co | 3,705,985 | |||||||||
363,900 | Honda Motor Co Ltd | 11,410,286 | |||||||||
228,500 | Hoya Corp | 5,148,578 | |||||||||
58,300 | Ibiden Co Ltd | 2,069,919 | |||||||||
467 | INPEX Corp | 3,802,719 | |||||||||
85,300 | Ito En Ltd | 1,564,250 | |||||||||
161,000 | Itochu Corp | 1,139,566 | |||||||||
1,151 | Japan Tobacco Inc | 3,337,301 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
84,000 | JFE Holdings Inc | 2,931,544 | |||||||||
120,000 | JGC Corp | 2,221,450 | |||||||||
684 | Kakaku.com Inc | 2,556,258 | |||||||||
689,000 | Kao Corp | 17,450,534 | |||||||||
1,034 | KDDI Corp | 5,878,096 | |||||||||
50,130 | Keyence Corp | 10,578,653 | |||||||||
1,077,000 | Kintetsu Corp | 4,663,882 | |||||||||
152,500 | Komatsu Ltd | 2,747,561 | |||||||||
138,000 | Kuraray Co Ltd | 1,503,434 | |||||||||
138,500 | Lawson Inc | 5,996,947 | |||||||||
456,000 | Marubeni Corp | 2,264,543 | |||||||||
106,700 | Mitsubishi Corp | 2,156,930 | |||||||||
1,100,900 | Mizuho Financial Group Inc | 2,678,386 | |||||||||
71,300 | Murata Manufacturing Co Ltd | 3,379,715 | |||||||||
46,300 | Nidec Corp | 3,330,169 | |||||||||
215,000 | Nikon Corp | 3,694,279 | |||||||||
55,600 | Nintendo Co Ltd | 15,068,888 | |||||||||
346,000 | Nippon Electric Glass Co Ltd | 3,589,389 | |||||||||
880,000 | Nippon Mining Holdings Inc | 4,376,624 | |||||||||
287,000 | Nippon Yusen KK | 1,241,515 | |||||||||
535,900 | Nissan Motor Co Ltd | 3,739,161 | |||||||||
70,200 | Nissha Printing Co Ltd | 3,697,230 | |||||||||
116,800 | Nitori Co Ltd | 9,022,959 | |||||||||
147,000 | Nitto Denko Corp | 4,457,941 | |||||||||
144,000 | Nomura Research Institute Ltd | 3,429,059 | |||||||||
9,209 | NTT Docomo Inc | 14,178,329 | |||||||||
784,000 | Odakyu Electric Railway Co Ltd | 7,037,055 | |||||||||
1,288,000 | OJI Paper Co Ltd | 6,068,729 | |||||||||
89,000 | Olympus Corp | 2,412,866 | |||||||||
53,100 | Ono Pharmaceutical Co Ltd | 2,610,272 | |||||||||
32,300 | Oriental Land Co Ltd | 2,183,700 | |||||||||
25,000 | ORIX Corp | 1,915,633 | |||||||||
1,086,000 | Osaka Gas Co Ltd | 3,753,234 | |||||||||
250,000 | Pacific Metals Co Ltd | 2,093,662 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
10,994 | Rakuten Inc | 6,641,032 | |||||||||
321,300 | Resona Holdings Inc | 4,376,564 | |||||||||
27,200 | Rohm Co Ltd | 1,835,891 | |||||||||
88,600 | Sankyo Co Ltd | 5,572,972 | |||||||||
1,054,000 | Sanyo Electric Co Ltd * | 2,841,110 | |||||||||
85,600 | Secom Co Ltd | 3,860,748 | |||||||||
719,500 | Seven & I Holdings Co Ltd | 17,364,890 | |||||||||
686 | Seven Bank Ltd | 1,740,679 | |||||||||
677,000 | Sharp Corp | 7,814,803 | |||||||||
27,200 | Shimamura Co Ltd | 2,434,379 | |||||||||
299,400 | Shin-Etsu Chemical Co Ltd | 17,679,876 | |||||||||
434,000 | Shionogi & Co Ltd | 10,610,541 | |||||||||
225,000 | Shiseido Co Ltd | 3,956,174 | |||||||||
427,600 | SoftBank Corp | 9,574,793 | |||||||||
95,500 | Stanley Electric Co Ltd | 1,924,722 | |||||||||
426,900 | Sumitomo Electric Industries Ltd | 5,507,913 | |||||||||
929,000 | Sumitomo Metal Industries Ltd | 2,324,791 | |||||||||
480,000 | Sumitomo Metal Mining Co Ltd | 7,385,334 | |||||||||
187,200 | Suzuki Motor Corp | 4,461,322 | |||||||||
666,700 | Takeda Pharmaceutical Co Ltd | 26,819,458 | |||||||||
241,400 | Terumo Corp | 12,697,652 | |||||||||
364,000 | Tobu Railway Co Ltd | 2,285,873 | |||||||||
404,500 | Tohoku Electric Power Co Inc | 8,754,782 | |||||||||
732,900 | Tokyo Electric Power Co Inc (The) | 19,091,137 | |||||||||
90,500 | Tokyo Electron Ltd | 4,915,152 | |||||||||
763,000 | Tokyo Gas Co Ltd | 3,055,460 | |||||||||
700,000 | Toshiba Corp | 3,593,601 | |||||||||
104,000 | Toyo Suisan Kaisha Ltd | 2,646,798 | |||||||||
110,900 | Toyoda Gosei Co Ltd | 3,207,831 | |||||||||
160,600 | Toyota Motor Corp | 6,847,061 | |||||||||
120,000 | Toyota Tsusho Corp | 1,944,433 | |||||||||
154,000 | Trend Micro Inc | 6,044,472 | |||||||||
113,300 | Tsumura & Co | 4,016,481 | |||||||||
77,900 | Unicharm Corp | 6,979,403 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
21,797 | Yahoo Japan Corp | 7,406,222 | |||||||||
62,490 | Yamada Denki Co Ltd | 4,248,646 | |||||||||
Total Japan | 559,340,775 | ||||||||||
Netherlands — 1.8% | |||||||||||
129,861 | Crucell NV * | 2,839,638 | |||||||||
129,819 | Heineken NV | 5,491,400 | |||||||||
205,876 | Koninklijke Ahold NV | 2,417,742 | |||||||||
855,188 | Koninklijke KPN NV | 13,162,612 | |||||||||
220,429 | Reed Elsevier NV | 2,342,011 | |||||||||
741,688 | Unilever NV | 20,780,442 | |||||||||
Total Netherlands | 47,033,845 | ||||||||||
Norway — 0.4% | |||||||||||
125,300 | Seadrill Ltd | 2,240,891 | |||||||||
93,450 | StatoilHydro ASA | 2,043,941 | |||||||||
201,300 | Tandberg ASA | 4,185,887 | |||||||||
33,830 | Yara International ASA | 923,251 | |||||||||
Total Norway | 9,393,970 | ||||||||||
Portugal — 0.5% | |||||||||||
310,727 | EDP Renovaveis SA * | 3,088,646 | |||||||||
1,005,647 | Portugal Telecom SGPS SA | 10,427,564 | |||||||||
Total Portugal | 13,516,210 | ||||||||||
Singapore — 0.9% | |||||||||||
427,000 | Keppel Corp Ltd | 2,256,269 | |||||||||
842,000 | Keppel Land Ltd | 1,495,812 | |||||||||
617,000 | Singapore Exchange Ltd | 3,580,726 | |||||||||
1,606,000 | Singapore Press Holdings Ltd | 4,077,564 | |||||||||
2,318,000 | Singapore Technologies Engineering Ltd | 4,167,764 | |||||||||
4,015,500 | Singapore Telecommunications | 8,752,767 | |||||||||
Total Singapore | 24,330,902 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
Spain — 4.9% | |||||||||||
104,385 | ACS Actividades de Construccion y Servicios SA | 5,389,878 | |||||||||
1,065,001 | Banco Santander SA | 16,395,846 | |||||||||
154,501 | Bankinter SA | 2,058,961 | |||||||||
210,287 | Iberdrola SA | 1,952,483 | |||||||||
203,199 | Inditex SA | 11,081,801 | |||||||||
467,310 | Mapfre SA | 1,924,531 | |||||||||
58,585 | Red Electrica de Espana | 2,752,279 | |||||||||
3,322,625 | Telefonica SA | 84,012,527 | |||||||||
Total Spain | 125,568,306 | ||||||||||
Sweden — 4.0% | |||||||||||
211,979 | Alliance Oil Company SDR | 2,439,789 | |||||||||
141,930 | Assa Abloy AB Class B | 2,280,091 | |||||||||
649,835 | Boliden AB | 6,693,439 | |||||||||
91,891 | Elekta AB Class B | 1,624,808 | |||||||||
955,947 | Hennes & Mauritz AB Class B | 53,078,425 | |||||||||
223,238 | Hexagon AB Class B | 2,312,805 | |||||||||
224,357 | Kinnevik Investment AB Class B | 3,053,491 | |||||||||
406,731 | Lundin Petroleum AB * | 3,737,057 | |||||||||
54,307 | Millicom International Cellular SA SDR * | 3,813,350 | |||||||||
64,416 | Modern Times Group AB Class B | 2,632,094 | |||||||||
309,016 | Nordea Bank AB | 3,241,234 | |||||||||
80,954 | Oriflame Cosmetics SA SDR | 3,948,399 | |||||||||
103,247 | Scania AB Class B | 1,277,266 | |||||||||
203,292 | Securitas AB Class B | 1,986,294 | |||||||||
174,000 | Skandinaviska Enskilda Banken AB Class A * | 1,227,102 | |||||||||
147,704 | SKF AB Class B | 2,263,128 | |||||||||
301,334 | Swedish Match AB | 5,817,400 | |||||||||
151,377 | Tele2 AB Class B | 2,108,060 | |||||||||
Total Sweden | 103,534,232 | ||||||||||
Switzerland — 12.1% | |||||||||||
178,600 | Actelion Ltd (Registered) * | 10,319,540 | |||||||||
245,367 | Compagnie Financiere Richemont SA Class A | 6,697,932 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
Switzerland — continued | |||||||||||
223,896 | Credit Suisse Group AG (Registered) | 11,422,947 | |||||||||
26,545 | Geberit AG (Registered) | 4,092,757 | |||||||||
24,790 | Kuehne & Nagel International AG (Registered) | 1,973,834 | |||||||||
54,298 | Lonza Group AG (Registered) | 5,340,938 | |||||||||
1,827,084 | Nestle SA (Registered) | 76,067,130 | |||||||||
70,249 | Nobel Biocare Holding AG (Registered) | 2,152,024 | |||||||||
2,148,222 | Novartis AG (Registered) | 99,791,603 | |||||||||
338,865 | Roche Holding AG (Non Voting) | 53,972,968 | |||||||||
5,392 | SGS SA (Registered) | 6,680,752 | |||||||||
48,544 | Sonova Holding AG (Registered) | 4,652,853 | |||||||||
19,477 | Swatch Group AG | 4,210,313 | |||||||||
11,174 | Swisscom AG (Registered) | 3,871,939 | |||||||||
14,381 | Syngenta AG (Registered) | 3,380,179 | |||||||||
154,517 | Synthes Inc | 18,103,445 | |||||||||
Total Switzerland | 312,731,154 | ||||||||||
United Kingdom — 23.4% | |||||||||||
394,398 | 3i Group Plc | 1,929,871 | |||||||||
243,081 | Admiral Group Plc | 4,213,543 | |||||||||
324,090 | Amlin Plc | 1,937,005 | |||||||||
137,201 | Anglo American Plc * | 4,459,992 | |||||||||
459,093 | Antofagasta Plc | 5,671,201 | |||||||||
871,200 | AstraZeneca Plc | 40,427,771 | |||||||||
579,516 | Autonomy Corp Plc * | 12,222,306 | |||||||||
763,009 | Barclays Plc * | 4,670,556 | |||||||||
533,404 | BG Group Plc | 8,751,628 | |||||||||
50,879 | BHP Billiton Plc | 1,325,298 | |||||||||
840,269 | British American Tobacco Plc | 25,531,818 | |||||||||
578,429 | Burberry Group Plc | 4,530,331 | |||||||||
1,165,585 | Cable & Wireless Plc | 2,801,860 | |||||||||
310,554 | Cadbury Plc | 2,915,981 | |||||||||
1,439,890 | Capita Group Plc | 15,911,950 | |||||||||
2,570,529 | Centrica Plc | 10,505,357 | |||||||||
1,436,721 | Cobham Plc | 4,707,423 |
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, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
1,834,809 | Diageo Plc | 28,393,853 | |||||||||
629,647 | Drax Group Plc | 4,892,976 | |||||||||
265,484 | Eurasian Natural Resources Corp | 3,701,721 | |||||||||
655,698 | Experian Plc | 5,487,176 | |||||||||
6,637,870 | GlaxoSmithKline Plc | 129,622,935 | |||||||||
856,060 | Group 4 Securicor Plc | 3,094,579 | |||||||||
384,464 | ICAP Plc | 2,666,133 | |||||||||
251,223 | Imperial Tobacco Group Plc | 7,046,378 | |||||||||
640,789 | Inmarsat Plc | 5,407,415 | |||||||||
216,084 | Intertek Group Plc | 4,233,897 | |||||||||
223,174 | JD Wetherspoon Plc | 1,712,214 | |||||||||
293,764 | Kazakhmys Plc | 4,662,074 | |||||||||
345,008 | Man Group Plc | 1,494,495 | |||||||||
382,724 | Marks & Spencer Group Plc | 2,105,336 | |||||||||
299,331 | Micro Focus International Plc | 1,836,734 | |||||||||
230,288 | National Grid Plc | 2,210,839 | |||||||||
302,341 | Next Plc | 8,019,710 | |||||||||
162,511 | Pearson Plc | 1,976,838 | |||||||||
565,177 | Petrofac Ltd | 8,043,885 | |||||||||
118,510 | Premier Oil Plc * | 2,476,684 | |||||||||
27,199 | Randgold Resources Ltd | 1,598,477 | |||||||||
1,340,250 | Reckitt Benckiser Group Plc | 61,969,784 | |||||||||
1,304,645 | Reed Elsevier Plc | 9,437,737 | |||||||||
61,069 | Rio Tinto Plc | 2,365,727 | |||||||||
215,789 | Royal Dutch Shell Plc A Shares (London) | 5,968,376 | |||||||||
187,580 | Royal Dutch Shell Plc B Shares (London) | 5,061,008 | |||||||||
202,133 | SABMiller Plc | 4,661,462 | |||||||||
353,315 | Sage Group Plc | 1,263,331 | |||||||||
198,832 | Scottish & Southern Energy Plc | 3,609,313 | |||||||||
738,948 | Shire Plc | 12,227,968 | |||||||||
492,089 | Smith & Nephew Plc | 4,166,410 | |||||||||
182,358 | Smiths Group Plc | 2,365,756 | |||||||||
1,318,899 | Standard Chartered Plc | 29,769,559 | |||||||||
1,806,853 | Standard Life Assurance Plc | 5,735,509 |
See accompanying notes to the financial statements.
13
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
1,458,399 | Tesco Plc | 8,877,618 | |||||||||
144,062 | Thomson Reuters Plc | 4,519,796 | |||||||||
553,239 | TUI Travel Plc | 2,154,352 | |||||||||
668,922 | Tullow Oil Plc | 11,648,810 | |||||||||
172,411 | Unilever Plc | 4,711,293 | |||||||||
155,307 | Vedanta Resources Plc | 4,485,734 | |||||||||
5,386,670 | Vodafone Group Plc | 11,655,805 | |||||||||
727,386 | William Hill Plc | 2,181,839 | |||||||||
415,066 | William Morrison Supermarkets Plc | 1,860,992 | |||||||||
1,474,362 | Xstrata Plc | 19,560,892 | |||||||||
Total United Kingdom | 603,457,311 | ||||||||||
TOTAL COMMON STOCKS (COST $2,522,231,501) | 2,491,488,683 | ||||||||||
SHORT-TERM INVESTMENTS — 2.5% | |||||||||||
EUR | 43,426 | Allied Irish Bank Time Deposit, 0.06%, due 09/01/09 | 62,255 | ||||||||
CAD | 29,717 | Bank of America Time Deposit, 0.04%, due 09/01/09 | 27,145 | ||||||||
USD | 97,855 | Bank of Ireland Time Deposit, 0.03%, due 09/01/09 | 97,855 | ||||||||
USD | 25,000,000 | BNP Paribas Time Deposit, 0.18%, due 09/01/09 | 25,000,000 | ||||||||
AUD | 11,946 | Brown Brothers Harriman Time Deposit, 2.17%, due 09/01/09 | 10,097 | ||||||||
DKK | 52,433 | Brown Brothers Harriman Time Deposit, 0.30%, due 09/01/09 | 10,099 | ||||||||
HKD | 77,507 | Brown Brothers Harriman Time Deposit, 0.01%, due 09/01/09 | 10,000 | ||||||||
NOK | 60,600 | Brown Brothers Harriman Time Deposit, 0.35%, due 09/01/09 | 10,070 | ||||||||
NZD | 1,419 | Brown Brothers Harriman Time Deposit, 1.50%, due 09/01/09 | 974 | ||||||||
SEK | 71,744 | Brown Brothers Harriman Time Deposit, 0.01%, due 09/01/09 | 10,079 | ||||||||
CHF | 24,558 | Deutsche Bank Time Deposit, 0.02%, due 09/01/09 | 23,192 | ||||||||
JPY | 31,311,000 | HSBC Bank (Hong Kong) Time Deposit, 0.01%, due 09/01/09 | 336,497 | ||||||||
SGD | 377,265 | JPMorgan Chase Time Deposit, 0.01%, due 09/01/09 | 261,817 | ||||||||
USD | 13,700,000 | Royal Bank of Canada Time Deposit, 0.15%, due 09/01/09 | 13,700,000 | ||||||||
USD | 25,000,000 | Societe Generale Time Deposit, 0.13%, due 09/01/09 | 25,000,000 | ||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $64,560,080) | 64,560,080 | ||||||||||
TOTAL INVESTMENTS — 99.0% (Cost $2,586,791,581) | 2,556,048,763 | ||||||||||
Other Assets and Liabilities (net) — 1.0% | 24,941,267 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 2,580,990,030 |
See accompanying notes to the financial statements.
14
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys † | |||||||||||||||||||
10/23/09 | EUR | 5,111,185 | $ | 7,327,559 | $ | 116,403 | |||||||||||||
10/23/09 | GBP | 9,842,251 | 16,021,401 | (724,047 | ) | ||||||||||||||
10/23/09 | HKD | 140,539,860 | 18,140,531 | (7,859 | ) | ||||||||||||||
10/23/09 | JPY | 3,273,687,543 | 35,194,614 | 592,512 | |||||||||||||||
10/23/09 | JPY | 644,835,790 | 6,932,472 | 163,963 | |||||||||||||||
10/23/09 | JPY | 3,273,687,543 | 35,194,614 | 627,551 | |||||||||||||||
10/23/09 | JPY | 3,273,687,543 | 35,194,614 | 613,164 | |||||||||||||||
10/23/09 | JPY | 3,273,687,543 | 35,194,614 | 610,680 | |||||||||||||||
10/23/09 | NZD | 16,225,269 | 11,098,208 | 249,798 | |||||||||||||||
10/23/09 | SEK | 151,069,988 | 21,226,871 | 452,813 | |||||||||||||||
10/23/09 | SEK | 151,069,988 | 21,226,871 | 327,365 | |||||||||||||||
10/23/09 | SEK | 151,069,988 | 21,226,871 | 445,838 | |||||||||||||||
10/23/09 | SEK | 151,069,988 | 21,226,871 | 438,549 | |||||||||||||||
$ | 285,206,111 | $ | 3,906,730 | ||||||||||||||||
Sales # | |||||||||||||||||||
10/23/09 | AUD | 32,706,382 | $ | 27,530,463 | $ | (642,219 | ) | ||||||||||||
10/23/09 | AUD | 32,706,382 | 27,530,462 | (782,856 | ) | ||||||||||||||
10/23/09 | CAD | 23,063,804 | 21,069,473 | (183,038 | ) | ||||||||||||||
10/23/09 | CAD | 23,063,804 | 21,069,473 | (242,581 | ) | ||||||||||||||
10/23/09 | CHF | 59,387 | 56,110 | (1,011 | ) | ||||||||||||||
10/23/09 | CHF | 11,617,042 | 10,976,000 | (12,389 | ) | ||||||||||||||
10/23/09 | EUR | 3,512,000 | 5,034,916 | (33,898 | ) | ||||||||||||||
10/23/09 | EUR | 1,796,000 | 2,574,803 | 302 | |||||||||||||||
10/23/09 | GBP | 2,960,000 | 4,818,344 | 144,836 | |||||||||||||||
10/23/09 | GBP | 16,415,030 | 26,720,694 | 396,886 | |||||||||||||||
10/23/09 | GBP | 16,415,030 | 26,720,694 | 405,915 | |||||||||||||||
10/23/09 | HKD | 88,407,686 | 11,411,441 | 626 | |||||||||||||||
10/23/09 | SEK | 88,771,185 | 12,473,255 | (66,728 | ) | ||||||||||||||
10/23/09 | SGD | 22,440,387 | 15,565,745 | (98,150 | ) | ||||||||||||||
$ | 213,551,873 | $ | (1,114,305 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
15
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
5,084 | OMXS 30 | September 2009 | $ | 64,828,850 | $ | 2,946,445 | |||||||||||||
97 | FTSE 100 | September 2009 | 7,711,000 | 1,228,804 | |||||||||||||||
220 | CAC 40 | September 2009 | 11,556,226 | 782,771 | |||||||||||||||
$ | 84,096,076 | $ | 4,958,020 | ||||||||||||||||
Sales | |||||||||||||||||||
15 | Hang Seng | September 2009 | $ | 1,899,670 | $ | 78,337 | |||||||||||||
42 | TOPIX | September 2009 | 4,334,175 | (187,587 | ) | ||||||||||||||
60 | FTSE/MIB | September 2009 | 9,683,803 | (1,326,264 | ) | ||||||||||||||
45 | DAX | September 2009 | 8,834,419 | (390,620 | ) | ||||||||||||||
147 | S&P Toronto 60 | September 2009 | 17,504,380 | (707,562 | ) | ||||||||||||||
2 | IBEX 35 | September 2009 | 326,374 | (23,113 | ) | ||||||||||||||
$ | 42,582,821 | $ | (2,556,809 | ) |
As of August 31, 2009, for the futures contracts held, 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:
SDR - Swedish Depository Receipt
* Non-income producing security.
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
USD - United States Dollar
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, 2009 (Unaudited)
Assets: | |||||||
Investments, at value (cost $2,586,791,581) (Note 2) | $ | 2,556,048,763 | |||||
Foreign currency, at value (cost $602,335) (Note 2) | 597,456 | ||||||
Receivable for investments sold | 300,042 | ||||||
Receivable for Fund shares sold | 8,029,447 | ||||||
Dividends and interest receivable | 6,496,722 | ||||||
Foreign taxes receivable | 2,760,662 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 5,587,201 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 13,475,155 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 95,573 | ||||||
Total assets | 2,593,391,021 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 314,438 | ||||||
Payable for Fund shares repurchased | 6,633,289 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 1,080,586 | ||||||
Shareholder service fee | 227,829 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 4,669 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 822,434 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 2,794,776 | ||||||
Miscellaneous payable | 27,242 | ||||||
Accrued expenses | 495,728 | ||||||
Total liabilities | 12,400,991 | ||||||
Net assets | $ | 2,580,990,030 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 3,443,199,033 | |||||
Accumulated undistributed net investment income | 48,409,161 | ||||||
Accumulated net realized loss | (885,373,793 | ) | |||||
Net unrealized depreciation | (25,244,371 | ) | |||||
$ | 2,580,990,030 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 654,132,118 | |||||
Class IV shares | $ | 1,926,857,912 | |||||
Shares outstanding: | |||||||
Class III | 34,176,327 | ||||||
Class IV | 100,595,898 | ||||||
Net asset value per share: | |||||||
Class III | $ | 19.14 | |||||
Class IV | $ | 19.15 |
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, 2009 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $3,880,892) | $ | 42,424,073 | |||||
Interest | 37,913 | ||||||
Total investment income | 42,461,986 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 5,842,426 | ||||||
Shareholder service fee – Class III (Note 3) | 482,627 | ||||||
Shareholder service fee – Class IV (Note 3) | 762,062 | ||||||
Custodian and fund accounting agent fees | 516,048 | ||||||
Legal fees | 43,976 | ||||||
Audit and tax fees | 39,836 | ||||||
Transfer agent fees | 22,908 | ||||||
Trustees fees and related expenses (Note 3) | 22,736 | ||||||
Registration fees | 2,667 | ||||||
Miscellaneous | 28,336 | ||||||
Total expenses | 7,763,622 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (643,100 | ) | |||||
Expense reductions (Note 2) | (448 | ) | |||||
Net expenses | 7,120,074 | ||||||
Net investment income (loss) | 35,341,912 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (374,153,497 | ) | |||||
Closed futures contracts | 7,754,690 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (20,220,997 | ) | |||||
Net realized gain (loss) | (386,619,804 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 1,028,912,928 | ||||||
Open futures contracts | 9,067,821 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 16,842,571 | ||||||
Net unrealized gain (loss) | 1,054,823,320 | ||||||
Net realized and unrealized gain (loss) | 668,203,516 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 703,545,428 |
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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 35,341,912 | $ | 72,934,068 | |||||||
Net realized gain (loss) | (386,619,804 | ) | (432,238,819 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 1,054,823,320 | (1,217,012,018 | ) | ||||||||
Net increase (decrease) in net assets from operations | 703,545,428 | (1,576,316,769 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (17,065,286 | ) | (30,802,113 | ) | |||||||
Class IV | (45,331,930 | ) | (84,945,522 | ) | |||||||
Total distributions from net investment income | (62,397,216 | ) | (115,747,635 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (33,779,254 | ) | ||||||||
Class IV | — | (88,650,878 | ) | ||||||||
Total distributions from net realized gains | — | (122,430,132 | ) | ||||||||
(62,397,216 | ) | (238,177,767 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (87,247,952 | ) | 40,576,827 | ||||||||
Class IV | 42,615,375 | 223,699,073 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | (44,632,577 | ) | 264,275,900 | ||||||||
Total increase (decrease) in net assets | 596,515,635 | (1,550,218,636 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 1,984,474,395 | 3,534,693,031 | |||||||||
End of period (including accumulated undistributed net investment income of $48,409,161 and $75,464,465, respectively) | $ | 2,580,990,030 | $ | 1,984,474,395 |
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, 2009 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.46 | $ | 27.68 | $ | 31.37 | $ | 29.90 | $ | 27.22 | $ | 23.67 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.26 | 0.54 | 0.69 | 0.77 | 0.53 | 0.40 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 4.88 | (11.93 | ) | 1.28 | 4.80 | 3.57 | 3.94 | ||||||||||||||||||||
Total from investment operations | 5.14 | (11.39 | ) | 1.97 | 5.57 | 4.10 | 4.34 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.46 | ) | (0.88 | ) | (0.40 | ) | (0.49 | ) | (0.10 | ) | (0.33 | ) | |||||||||||||||
From net realized gains | — | (0.95 | ) | (5.26 | ) | (3.61 | ) | (1.32 | ) | (0.46 | ) | ||||||||||||||||
Total distributions | (0.46 | ) | (1.83 | ) | (5.66 | ) | (4.10 | ) | (1.42 | ) | (0.79 | ) | |||||||||||||||
Net asset value, end of period | $ | 19.14 | $ | 14.46 | $ | 27.68 | $ | 31.37 | $ | 29.90 | $ | 27.22 | |||||||||||||||
Total Return(a) | 35.81 | %** | (43.54 | )% | 5.04 | % | 19.21 | % | 15.54 | % | 18.66 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 654,132 | $ | 564,067 | $ | 1,018,040 | $ | 950,332 | $ | 3,119,919 | $ | 1,653,053 | |||||||||||||||
Net expenses to average daily net assets | 0.65 | %(b)* | 0.66 | %(c) | 0.67 | %(c) | 0.67 | % | 0.68 | % | 0.69 | % | |||||||||||||||
Net investment income to average daily net assets | 3.04 | %* | 2.43 | % | 2.13 | % | 2.46 | % | 1.89 | % | 1.64 | % | |||||||||||||||
Portfolio turnover rate | 36 | %** | 63 | % | 92 | % | 74 | % | 57 | % | 52 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | %* | 0.06 | % | 0.05 | % | 0.05 | % | 0.08 | % | 0.09 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† 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 each period)
Six Months Ended August 31, 2009 | Year Ended February 28/29, | ||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 14.46 | $ | 27.70 | $ | 31.38 | $ | 29.92 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.26 | 0.55 | 0.73 | 0.20 | |||||||||||||||
Net realized and unrealized gain (loss) | 4.89 | (11.95 | ) | 1.26 | 4.48 | ||||||||||||||
Total from investment operations | 5.15 | (11.40 | ) | 1.99 | 4.68 | ||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.46 | ) | (0.89 | ) | (0.41 | ) | (0.50 | ) | |||||||||||
From net realized gains | — | (0.95 | ) | (5.26 | ) | (2.72 | ) | ||||||||||||
Total distributions | (0.46 | ) | (1.84 | ) | (5.67 | ) | (3.22 | ) | |||||||||||
Net asset value, end of period | $ | 19.15 | $ | 14.46 | $ | 27.70 | $ | 31.38 | |||||||||||
Total Return(b) | 35.89 | %** | (43.53 | )% | 5.11 | % | 15.79 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 1,926,858 | $ | 1,420,407 | $ | 2,516,653 | $ | 2,864,791 | |||||||||||
Net expenses to average daily net assets | 0.59 | %(c)* | 0.60 | %(d) | 0.61 | %(d) | 0.61 | %* | |||||||||||
Net investment income to average daily net assets | 3.02 | %* | 2.47 | % | 2.24 | % | 1.01 | %* | |||||||||||
Portfolio turnover rate | 36 | %** | 63 | % | 92 | % | 74 | %†† | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.06 | % | 0.05 | % | 0.05 | %* |
(a) Period from July 12, 2006 (commencement of operations) through February 28, 2007.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions.
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
21
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO International Growth Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a diversified investment company as the term is defined in the 1940 Act. 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 its benchmark, the MSCI EAFE Growth Index. The Fund typically makes equity investments in companies tied economically to countries other than the U.S. Under normal circumstances, the Fund invests at least 80% of its assets in equity investments (which include common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depository receipts). The Fund generally seeks to be fully invested and normally does not take temporary defensive positions through investment in cash and cash equivalents. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the counter derivatives, including options, futures, and swap contracts. The Fund al so may invest in unaffiliated money market funds and in GMO U.S. Treasury Fund.
Throughout the period ended August 31, 2009, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder service fee.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for
22
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty. 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, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2009, 92.06% of the net assets of the Fund were valued using fair value prices based on models used by a third party vendor and are classified as using Level 2 inputs in the table below.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation or quoted prices for similar securities.
Level 3 – Valuations based on inputs that are unobservable and significant.
23
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | 11,367,127 | $ | 134,690,035 | $ | — | $ | 146,057,162 | |||||||||||
Belgium | — | 48,801,473 | — | 48,801,473 | |||||||||||||||
Canada | 101,298,892 | — | — | 101,298,892 | |||||||||||||||
Denmark | — | 47,500,375 | — | 47,500,375 | |||||||||||||||
Finland | — | 10,299,889 | — | 10,299,889 | |||||||||||||||
France | 2,716,933 | 132,628,448 | — | 135,345,381 | |||||||||||||||
Germany | — | 120,232,529 | — | 120,232,529 | |||||||||||||||
Greece | — | 26,628,793 | — | 26,628,793 | |||||||||||||||
Hong Kong | — | 42,224,173 | — | 42,224,173 | |||||||||||||||
Ireland | — | 3,185,392 | — | 3,185,392 | |||||||||||||||
Italy | — | 11,007,919 | — | 11,007,919 | |||||||||||||||
Japan | — | 559,340,775 | — | 559,340,775 | |||||||||||||||
Netherlands | — | 47,033,845 | — | 47,033,845 | |||||||||||||||
Norway | — | 9,393,970 | — | 9,393,970 | |||||||||||||||
Portugal | — | 13,516,210 | — | 13,516,210 | |||||||||||||||
Singapore | — | 24,330,902 | — | 24,330,902 | |||||||||||||||
Spain | — | 125,568,306 | — | 125,568,306 | |||||||||||||||
Sweden | — | 103,534,232 | — | 103,534,232 | |||||||||||||||
Switzerland | — | 312,731,154 | — | 312,731,154 | |||||||||||||||
United Kingdom | — | 603,457,311 | — | 603,457,311 | |||||||||||||||
TOTAL COMMON STOCKS | 115,382,952 | 2,376,105,731 | — | 2,491,488,683 | |||||||||||||||
Short-Term Investments | 64,560,080 | — | — | 64,560,080 | |||||||||||||||
Total Investments | 179,943,032 | 2,376,105,731 | — | 2,556,048,763 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | — | 5,587,201 | — | 5,587,201 | |||||||||||||||
Futures Contracts | — | 5,036,357 | — | 5,036,357 | |||||||||||||||
Total | $ | 179,943,032 | $ | 2,386,729,289 | $ | — | $ | 2,566,672,321 |
24
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | $ | — | $ | (2,794,776 | ) | $ | — | $ | (2,794,776 | ) | |||||||||
Futures Contracts | (707,562 | ) | (1,927,584 | ) | — | (2,635,146 | ) | ||||||||||||
Total | $ | (707,562 | ) | $ | (4,722,360 | ) | $ | — | $ | (5,429,922 | ) |
The Fund held no investments or other financial instruments at either February 28, 2009 or August 31, 2009, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
25
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some 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. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because many foreign exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign futures on those exchanges do not reflect events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor based on that vendor's proprietary models. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options
26
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. The Fund had no open written option contracts during the period.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a
27
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exposure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disr uptions. The Fund had no swap agreements outstanding at the end of the period.
28
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, 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.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if 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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
29
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of February 28, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (208,609,786 | ) | ||||
Total | $ | (208,609,786 | ) |
As of February 28, 2009, the Fund elected to defer to March 1, 2009 post-October capital losses of $268,162,473.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 2,605,538,616 | $ | 178,747,485 | $ | (228,237,338 | ) | $ | (49,489,853 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended. The Fund is subject to examination prior to the expiration of the statute of limitations by U.S. federal and state tax authorities for tax returns filed.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
30
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 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.
Brown Brothers Harriman & Co. ("BBH") serves as custodian and fund accounting agent of the Fund. State Street Bank and Trust Company ("State Street") serves as transfer agent of the Fund. BBH and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Foreign Investment Risk — The market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid, and less regulated, and the cost of trading in those markets often is higher, than in U.S. markets. The Fund may need to maintain a license to invest in some foreign markets. Changes in investment, capital, or exchange control regulations could adversely affect the value of the Fund's foreign investments.
• Currency Risk — Fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Market Risk — Growth Securities — Growth securities typically trade at higher multiples of current earnings than other securities. The market prices of growth securities are often more sensitive to market fluctuations because of their heavy dependence on future earnings expectations.
Other principal risks of an investment in the Fund include Derivatives Risk (use of derivatives by the Fund involves risks different from, and potentially greater than, risks associated with direct investments in securities and other investments by the Fund), Credit and Counterparty Risk (risk of default of a
31
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
derivatives counterparty or borrower of the Fund's securities), Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the GMO Funds or other underlying funds in which the Fund invests will not perform as expected).
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Fund also may use currency derivatives in an attempt to
32
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterpart ies may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
33
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | 5,036,357 | — | 5,036,357 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 5,587,201 | — | — | — | 5,587,201 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | 5,587,201 | $ | — | $ | 5,036,357 | $ | — | $ | 10,623,558 |
34
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | (2,635,146 | ) | — | (2,635,146 | ) | |||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | (2,794,776 | ) | — | — | — | (2,794,776 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | (2,794,776 | ) | $ | — | $ | (2,635,146 | ) | $ | — | $ | (5,429,922 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (4,937,950 | ) | $ | — | $ | (4,937,950 | ) | |||||||||||||
Futures contracts | — | — | — | 7,754,690 | — | 7,754,690 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | (22,942,371 | ) | — | — | — | (22,942,371 | ) | |||||||||||||||||||
Total | $ | — | $ | (22,942,371 | ) | $ | — | $ | 2,816,740 | $ | — | $ | (20,125,631 | ) |
35
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Futures contracts | — | — | — | 9,067,821 | — | 9,067,821 | |||||||||||||||||||||
Swap contracts | — | — | — | — | — | — | |||||||||||||||||||||
Written options | — | — | — | — | — | — | |||||||||||||||||||||
Forward currency contracts | — | 16,462,580 | — | — | — | 16,462,580 | |||||||||||||||||||||
Total | $ | — | $ | 16,462,580 | $ | — | $ | 9,067,821 | $ | — | $ | 25,530,401 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Forwards | Futures | ||||||||||
Average notional amount outstanding | $ | 805,835,309 | $ | 101,350,516 | |||||||
Highest notional amount outstanding | 1,149,412,086 | 128,444,726 | |||||||||
Lowest notional amount outstanding | 498,757,984 | 53,041,352 |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at an 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 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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.50% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in other series of the Trust, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities
36
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) exceeds 0.50% of the Fu nd's average daily 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's portion of the fee paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $18,136 and $10,580, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration 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, 2009 aggregated $794,657,844 and $822,976,209, 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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 45.12% of the outstanding shares of the Fund were held by four shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. Three of the shareholders are other funds of the Trust.
As of August 31, 2009, less than 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 96.13% of the Fund's shares were held by accounts for which the Manager had investment discretion.
37
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
7. Share transactions
The Declaration of Trust permits each Fund 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, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 2,356,103 | $ | 39,172,666 | 11,893,535 | $ | 239,774,534 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 749,780 | 13,121,157 | 2,513,470 | 58,342,144 | |||||||||||||||
Shares repurchased | (7,945,540 | ) | (139,541,775 | ) | (12,169,228 | ) | (257,539,851 | ) | |||||||||||
Net increase (decrease) | (4,839,657 | ) | $ | (87,247,952 | ) | 2,237,777 | $ | 40,576,827 | |||||||||||
Six Months Ended August 31, 2009 (Unaudited) | Year Ended February 28, 2009 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 27,434,838 | $ | 425,667,078 | 46,074,272 | $ | 942,225,145 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 2,588,917 | 45,331,930 | 7,579,903 | 172,936,531 | |||||||||||||||
Shares repurchased | (27,640,762 | ) | (428,383,633 | ) | (46,297,143 | ) | (891,462,603 | ) | |||||||||||
Net increase (decrease) | 2,382,993 | $ | 42,615,375 | 7,357,032 | $ | 223,699,073 |
8. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
38
GMO International Growth Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2009, 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, 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 28, 2009 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 their 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 at or prior to a meeting of the Trustees on June 15, 2009.
The Trustees met over the course of the year with the Manager'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 internal resources as well as other resources available to the Manager's personnel, paying particular attention to the possible effects of a decline in the Manager's revenue on such resources. The Trustees also took into account the time and attention devoted by the Manager's 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 other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one- and five-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance relative to its benchmark, 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 third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. The
39
GMO International Growth Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's advisory fee arrangements and other compensation paid to the Manager, 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 to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to separate account clients and the impact on the Manager of, and expenses and risks associated with, the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding the profits it realized on the services (excluding distribu tion services) it provided to the Fund and the Trust, including the effect of recent market events and changes in assets under management and revenues on such profits. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential 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, entering into sub-advisory relationships with other fund groups, and expanding existing client 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, 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, 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. Finally, the Trustees also considere d the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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,
40
GMO International Growth Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight 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.
Following their review, on June 15, 2009, 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, 2009.
41
GMO International Growth Equity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2009.
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, 2009 through August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.65 | % | $ | 1,000.00 | $ | 1,358.10 | $ | 3.86 | |||||||||||
2) Hypothetical | 0.65 | % | $ | 1,000.00 | $ | 1,021.93 | $ | 3.31 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.59 | % | $ | 1,000.00 | $ | 1,358.90 | $ | 3.51 | |||||||||||
2) Hypothetical | 0.59 | % | $ | 1,000.00 | $ | 1,022.23 | $ | 3.01 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2009, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
42
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2009
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) 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 GMO's 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 has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2009 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 106.4 | % | |||||
Short-Term Investments | 2.1 | ||||||
Swaps | 0.4 | ||||||
Options Purchased | 0.2 | ||||||
Written Options | (0.1 | ) | |||||
Reverse Repurchase Agreements | (9.1 | ) | |||||
Other | 0.1 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Par Value ($) / Shares / Contracts/Principal Amount | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 106.4% | |||||||||||||||
U.S. Government — 106.4% | |||||||||||||||
114,165,472 | U.S. Treasury Inflation Indexed Bond, 0.88%, due 04/15/10 (a) (b) (c) | 113,987,146 | |||||||||||||
31,879,500 | U.S. Treasury Inflation Indexed Note, 2.00%, due 04/15/12 (a) | 32,606,735 | |||||||||||||
285,712,900 | U.S. Treasury Inflation Indexed Note, 1.63%, due 01/15/15 (a) | 285,266,616 | |||||||||||||
4,345,760 | U.S. Treasury Inflation Indexed Note, 2.00%, due 01/15/16 (a) | 4,423,167 | |||||||||||||
241,120,385 | U.S. Treasury Inflation Indexed Bond, 2.38%, due 01/15/17 (a) | 251,744,631 | |||||||||||||
37,160,950 | U.S. Treasury Inflation Indexed Bond, 2.13%, due 01/15/19 (a) | 38,287,373 | |||||||||||||
60,000,000 | U.S. Treasury Principal Strip Bond, due 11/15/21 (b) | 35,923,860 | |||||||||||||
50,000,000 | U.S. Treasury Strip Coupon, due 08/15/22 (b) | 28,689,350 | |||||||||||||
Total U.S. Government | 790,928,878 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $796,099,574) | 790,928,878 | ||||||||||||||
MUTUAL FUNDS — 1.9% | |||||||||||||||
Affiliated Issuers — 1.9% | |||||||||||||||
560,036 | GMO U.S. Treasury Fund | 14,006,504 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $14,011,463) | 14,006,504 | ||||||||||||||
OPTIONS PURCHASED — 0.2% | |||||||||||||||
Options on Futures — 0.0% | |||||||||||||||
USD | 3,000 | Euro Dollar Future Option Put, Expires 12/14/09, Strike 98.00 | 56,250 | ||||||||||||
USD | 3,000 | Euro Dollar Future Option Put, Expires 12/14/09, Strike 99.00 | 243,750 | ||||||||||||
Total Options on Futures | 300,000 | ||||||||||||||
Options on Interest Rate Swaps — 0.2% | |||||||||||||||
USD | 300,000,000 | USD Swaption Call, Expires 09/10/09, Strike 1.15% | 1,479,300 | ||||||||||||
Total Options on Interest Rate Swaps | 1,479,300 | ||||||||||||||
TOTAL OPTIONS PURCHASED (COST $1,452,000) | 1,779,300 |
See accompanying notes to the financial statements.
2
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2009 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 0.3% | |||||||||||||||
Money Market Funds — 0.3% | |||||||||||||||
1,974,434 | State Street Institutional U.S. Government Money Market Fund-Institutional Class | 1,974,434 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $1,974,434) | 1,974,434 | ||||||||||||||
TOTAL INVESTMENTS — 108.8% (Cost $813,537,471) | 808,689,116 | ||||||||||||||
Other Assets and Liabilities (net) — (8.8%) | (65,371,071 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 743,318,045 |
See accompanying notes to the financial statements.
3
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
A summary of outstanding financial instruments at August 31, 2009 is as follows:
Reverse Repurchase Agreements
Face Value | Description | Market Value | |||||||||
USD | 11,450,000 | Goldman Sachs, 0.25%, dated 08/14/09, to be repurchased on demand at face value plus accrued interest. | $ | (11,451,431 | ) | ||||||
USD | 23,100,000 | Barclays Bank PLC, 0.40%, dated 08/19/09, to be repurchased on demand at face value plus accrued interest. | (23,100,257 | ) | |||||||
USD | 5,599,750 | Goldman Sachs, 0.24%, dated 08/27/09, to be repurchased on demand at face value plus accrued interest. | (5,599,788 | ) | |||||||
USD | 27,750,000 | Barclays Bank PLC, 0.40%, dated 08/19/09, to be repurchased on demand at face value plus accrued interest. | (27,750,308 | ) | |||||||
$ | (67,901,784 | ) |
Average balance outstanding | $ | (47,357,306 | ) | ||||
Average interest rate | 0.43 | % | |||||
Maximum balance outstanding | $ | (67,899,750 | ) | ||||
Average shares outstanding | 21,642,628 | ||||||
Average balance per share outstanding | $ | (2.19 | ) | ||||
Days outstanding | 132 |
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund has entered into reverse repurchase agreements.
Swap Agreements
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
36,400,000 | USD | 5/26/2014 | Barclays Bank PLC | (Pay) | 2.59 | % | 3 month LIBOR | $ | 137,348 | ||||||||||||||||||||||
36,400,000 | USD | 5/29/2014 | Citigroup | (Pay) | 2.80 | % | 3 month LIBOR | (213,839 | ) | ||||||||||||||||||||||
79,000,000 | USD | 6/9/2014 | Citigroup | (Pay) | 3.30 | % | 3 month LIBOR | (2,212,579 | ) | ||||||||||||||||||||||
23,800,000 | USD | 5/26/2019 | JP Morgan Chase Bank | Receive | 3.45 | % | 3 month LIBOR | (263,924 | ) |
See accompanying notes to the financial statements.
4
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Interest Rate Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
20,000,000 | USD | 5/26/2019 | Barclays Bank PLC | Receive | 3.46 | % | 3 month LIBOR | $ | (211,305 | ) | |||||||||||||||||||||
23,800,000 | USD | 5/29/2019 | Morgan Stanley | Receive | 3.73 | % | 3 month LIBOR | 288,806 | |||||||||||||||||||||||
20,000,000 | USD | 5/29/2019 | Citigroup | Receive | 3.74 | % | 3 month LIBOR | 251,086 | |||||||||||||||||||||||
44,000,000 | USD | 6/9/2019 | Citigroup | Receive | 4.22 | % | 3 month LIBOR | 2,313,568 | |||||||||||||||||||||||
50,000,000 | USD | 6/9/2019 | Goldman Sachs | Receive | 4.20 | % | 3 month LIBOR | 2,565,993 | |||||||||||||||||||||||
40,000,000 | USD | 11/15/2021 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | 1,536,804 | |||||||||||||||||||||||
20,000,000 | USD | 11/15/2021 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | 446,446 | |||||||||||||||||||||||
50,000,000 | USD | 8/15/2022 | Barclays Bank PLC | (Pay) | 0.00 | % | 3 month LIBOR | 451,755 | |||||||||||||||||||||||
11,400,000 | USD | 5/26/2039 | JP Morgan Chase Bank | (Pay) | 3.95 | % | 3 month LIBOR | 253,887 | |||||||||||||||||||||||
11,400,000 | USD | 5/29/2039 | Morgan Stanley | (Pay) | 4.21 | % | 3 month LIBOR | (256,717 | ) | ||||||||||||||||||||||
25,000,000 | USD | 6/9/2039 | Goldman Sachs | (Pay) | 4.52 | % | 3 month LIBOR | (1,911,694 | ) | ||||||||||||||||||||||
$ | 3,175,635 | ||||||||||||||||||||||||||||||
Accretion since inception for zero coupon interest rate swaps | $ | 605,542 |
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
Written Options
A summary of open written option contracts for the Fund at August 31, 2009 is as follows:
Notional Amount/ Contracts | Expiration Date | Description | Premiums | Market Value | |||||||||||||||||||||||
Call | 300,000,000 | 9/10/2009 | USD | Interest Rate Swaption, | |||||||||||||||||||||||
Strike 0.90% | $ | (120,000 | ) | $ | (735,300 | ) | |||||||||||||||||||||
Put | 6,000 | 12/14/2009 | USD | Euro Dollar Future Option Put, Strike 98.50 | (813,000) | (225,000) | |||||||||||||||||||||
$ | (933,000 | ) | $ | (960,300 | ) |
As of August 31, 2009, for the swap contracts held, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
5
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2009 (Unaudited)
Notes to Schedule of Investments:
LIBOR - London Interbank Offered Rate
TIPS - Treasury Inflation Protected Securities
(a) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic.
(b) All or a portion of this security has been pledged to cover collateral requirements on reverse repurchase agreements (Note 2).
(c) All or a portion of this security has been pledged to cover collateral requirements on purchased options (Note 2).
Currency Abbreviations:
USD - United States Dollar
See accompanying notes to the financial statements.
6
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2009 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $799,526,008) (Note 2) | $ | 794,682,612 | |||||
Investments in affiliated issuers, at value (cost $14,011,463) (Notes 2 and 8) | 14,006,504 | ||||||
Receivable for investments sold | 11,000,000 | ||||||
Dividends and interest receivable | 2,088,433 | ||||||
Interest receivable for open swap contracts | 251,688 | ||||||
Receivable for open swap contracts (Note 2) | 8,245,693 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 10,075 | ||||||
Total assets | 830,285,005 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 12,836,665 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 155,308 | ||||||
Shareholder service fee | 38,217 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 309 | ||||||
Payable for open swap contracts (Note 2) | 5,070,058 | ||||||
Payable for reverse repurchase agreements (Note 2) | 67,901,784 | ||||||
Written options outstanding, at value (premiums $933,000) (Note 2) | 960,300 | ||||||
Accrued expenses | 4,319 | ||||||
Total liabilities | 86,966,960 | ||||||
Net assets | $ | 743,318,045 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 729,784,872 | |||||
Accumulated undistributed net investment income | 13,648,104 | ||||||
Accumulated net realized gain | 979,547 | ||||||
Net unrealized depreciation | (1,094,478 | ) | |||||
$ | 743,318,045 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 35,376,991 | |||||
Class VI shares | $ | 707,941,054 | |||||
Shares outstanding: | |||||||
Class III | 1,378,443 | ||||||
Class VI | 27,574,163 | ||||||
Net asset value per share: | |||||||
Class III | $ | 25.66 | |||||
Class VI | $ | 25.67 |
See accompanying notes to the financial statements.
7
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Statement of Operations — Period from March 18, 2009
(commencement of operations) through August 31, 2009 (Unaudited)
Investment Income: | |||||||
Interest | $ | 14,363,037 | |||||
Dividends from affiliated issuers (Note 8) | 13,410 | ||||||
Dividends | 933 | ||||||
Total investment income | 14,377,380 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 519,374 | ||||||
Shareholder service fee – Class III (Note 3) | 32,810 | ||||||
Shareholder service fee – Class VI (Note 3) | 102,232 | ||||||
Interest expense (Note 2) | 72,801 | ||||||
Audit and tax fees | 30,154 | ||||||
Custodian, fund accounting agent and transfer agent fees | 10,518 | ||||||
Legal fees | 5,412 | ||||||
Registration fees | 1,804 | ||||||
Trustees fees and related expenses (Note 3) | 1,773 | ||||||
Miscellaneous | 1,894 | ||||||
Total expenses | 778,772 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (49,066 | ) | |||||
Expense reductions (Note 2) | (430 | ) | |||||
Net expenses | 729,276 | ||||||
Net investment income (loss) | 13,648,104 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (6,122,716 | ) | |||||
Investments in affiliated issuers | (6,948 | ) | |||||
Closed futures contracts | 3,288,999 | ||||||
Closed swap contracts | (1,545,283 | ) | |||||
Written options | 5,365,495 | ||||||
Net realized gain (loss) | 979,547 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | (4,843,396 | ) | |||||
Investments in affiliated issuers | (4,959 | ) | |||||
Open swap contracts | 3,781,177 | ||||||
Written options | (27,300 | ) | |||||
Net unrealized gain (loss) | (1,094,478 | ) | |||||
Net realized and unrealized gain (loss) | (114,931 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | 13,533,173 |
See accompanying notes to the financial statements.
8
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Period from March 18, 2009 (commencement of operations) through August 31, 2009 (Unaudited) | |||||||
Increase (decrease) in net assets: | |||||||
Operations: | |||||||
Net investment income (loss) | $ | 13,648,104 | |||||
Net realized gain (loss) | 979,547 | ||||||
Change in net unrealized appreciation (depreciation) | (1,094,478 | ) | |||||
Net increase (decrease) in net assets from operations | 13,533,173 | ||||||
Net share transactions (Note 7): | |||||||
Class III | 34,296,439 | ||||||
Class VI | 695,488,433 | ||||||
Increase (decrease) in net assets resulting from net share transactions | 729,784,872 | ||||||
Total increase (decrease) in net assets | 743,318,045 | ||||||
Net assets: | |||||||
Beginning of period | — | ||||||
End of period (including accumulated undistributed net investment income of $13,648,104) | $ | 743,318,045 |
See accompanying notes to the financial statements.
9
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
Period from March 27, 2009 (commencement of operations) through August 31, 2009 (Unaudited) | |||||||
Net asset value, beginning of period | $ | 25.15 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)† | 0.64 | ||||||
Net realized and unrealized gain (loss) | (0.13 | ) | |||||
Total from investment operations | 0.51 | ||||||
Net asset value, end of period | $ | 25.66 | |||||
Total Return(a) | 2.03 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 35,377 | |||||
Net operating expenses to average daily net assets | 0.40 | %(b) | |||||
Interest expense to average daily net assets(c) | 0.03 | %* | |||||
Total net expenses to average daily net assets | 0.43 | %(b)* | |||||
Net investment income to average daily net assets | 5.91 | %* | |||||
Portfolio turnover rate | 80 | %††** | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
(c) 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.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the period from March 18, 2009 (commencement of operations) through August 31, 2009.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
10
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout the period)
Period from March 18, 2009 (commencement of operations) through August 31, 2009 (Unaudited) | |||||||
Net asset value, beginning of period | $ | 25.00 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)† | 0.76 | ||||||
Net realized and unrealized gain (loss) | (0.09 | ) | |||||
Total from investment operations | 0.67 | ||||||
Net asset value, end of period | $ | 25.67 | |||||
Total Return(a) | 2.68 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 707,941 | |||||
Net operating expenses to average daily net assets | 0.31 | %(b) | |||||
Interest expense to average daily net assets(c) | 0.03 | %* | |||||
Total net expenses to average daily net assets | 0.34 | %(b)* | |||||
Net investment income to average daily net assets | 6.65 | %* | |||||
Portfolio turnover rate | 80 | %** | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions.
(c) 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.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
11
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2009 (Unaudited)
1. Organization
GMO Asset Allocation Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is a non-diversified investment company as the term is defined in the 1940 Act. 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 that of its benchmark, the Citigroup 3 Month Treasury Bill Index. The Fund may invest in bonds of any kind. Under normal circumstances, the Fund invests (including through investment in other series of the Trust) at least 80% of its assets in bonds. For these purposes, the term "bonds" includes (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by using a futures contract, swap contract, currency forward or option. The Fund may invest in any sector of the bond market and is not required to maintain a minimum or maximum allocation of investments in any one sector. The sectors and types of bonds that the Fund may invest in include, but are not limited to: investment grade bonds denominated in various currencies, including securities issued by the U.S. and foreign governments and their agencies or instrumentalities (including securities neither guaranteed nor insured by the U.S. government), corporate bonds, taxable and tax-exempt municipal bonds, and Rule 144A securities; below investment grade bonds (also known as "junk bonds"); inflation indexed bonds issued by the U.S. and foreign governments and their agencies or instrumentalities (including securities neither guaranteed nor insured by the U.S. government), including Inflation-Protected Securities issued by the U.S. Treasury (TIPS), and inflation indexed bonds issued by corporations; sovereign debt of emerging countries and other bonds issued in emerging countries (including below investment grade bonds (also known as "junk bonds")); and asset-backed securities, including mortgage related and mortgage-backed securities. The Fund may also invest in futures contracts, currency options, currency forwards, swap contracts (including credit default swaps), interest rate options, swaps on interest rates, and other types of derivatives. The Fund may gain exposure to the investments described above through investments in shares of other series of the Trust, including GMO U.S. Treasury Fund. The Fund may invest up to 100% of its assets in below investment grade bonds (also known as "junk bonds"). The Fund may also hold securities that are downgraded to below investment grade status after the time of purchase by the Fund. The Fund may also invest in unaffiliated money market funds.
As of August 31, 2009, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
12
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price on each business day or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid (if the Manager deems the private market to be more relevant in determining market value than an exchange). Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost. Shares of investment funds are generally valued at their net asset value. Securities (including derivatives) 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 persons a cting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the six months ended August 31, 2009, the Fund did not reduce the values of any OTC derivatives on account of the credit worthiness of a counterparty.
The Fund has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). While the adoption of SFAS 157 does not have an effect on the Fund's net asset value, it does require additional disclosures about fair value measurements. SFAS 157 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the reliability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based on inputs that are unobservable and significant.
13
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the inputs used as of August 31, 2009 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
U.S. Government | $ | — | $ | 790,928,878 | $ | — | $ | 790,928,878 | |||||||||||
TOTAL DEBT OBLIGATIONS | — | 790,928,878 | — | 790,928,878 | |||||||||||||||
Mutual Funds | 14,006,504 | — | — | 14,006,504 | |||||||||||||||
Options Purchased | 300,000 | 1,479,300 | — | 1,779,300 | |||||||||||||||
Short-Term Investments | — | 1,974,434 | — | 1,974,434 | |||||||||||||||
Total Investments | 14,306,504 | 794,382,612 | — | 808,689,116 | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements | — | 8,245,693 | — | 8,245,693 | |||||||||||||||
Total | $ | 14,306,504 | $ | 802,628,305 | $ | — | $ | 816,934,809 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements | $ | — | $ | (5,070,058 | ) | $ | — | $ | (5,070,058 | ) | |||||||||
Written Options | (225,000 | ) | (735,300 | ) | — | (960,300 | ) | ||||||||||||
Total | $ | (225,000 | ) | $ | (5,805,338 | ) | $ | — | $ | (6,030,358 | ) |
Underlying funds are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying fund, please refer to the portfolio valuation note in its financial statements.
The Fund held no investments or other financial instruments at either March 18, 2009 (commencement of operations) or August 31, 2009, whose fair value was determined using Level 3 inputs.
14
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on the 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at the 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. The Fund does not isolate realized and unrealized gains and losses that result from changes in exchange rates from realized and unrealized gains and losses that result from changes in the market value of investments. Both of those changes are included in 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 (or to pay or receive the amounts of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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. These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the
15
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase put and call options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. Options contracts purchased by the Fund and outstanding at the end of the period are listed in the Fund's Schedule of Investments.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., c all options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. Over-the- counter options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market.
When an option contract is closed, the Fund records a realized gain or loss 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations. Written options outstanding at the end of the period are listed in the Fund's Schedule of Investments.
16
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
For the period ended August 31, 2009, investment activity in options contracts written by the Fund was as follows:
Puts | Calls | ||||||||||||||||||||||||||
Principal Amount of Contracts | Number of Contracts | Premiums | Principal Amount of Contracts | Number of Contracts | Premiums | ||||||||||||||||||||||
Outstanding, beginning of period | $ | — | — | $ | — | $ | — | — | $ | — | |||||||||||||||||
Options written | (25,000,000 | ) | (10,000 | ) | (1,976,000 | ) | (400,000,000 | ) | (9,600 | ) | (6,752,729 | ) | |||||||||||||||
Options bought back | — | — | — | 10,000,000 | 5,280 | 3,063,190 | |||||||||||||||||||||
Options expired | 25,000,000 | 4,000 | 1,163,000 | 90,000,000 | 4,320 | 3,569,539 | |||||||||||||||||||||
Outstanding, end of period | $ | — | (6,000 | ) | $ | (813,000 | ) | $ | (300,000,000 | ) | — | $ | (120,000 | ) |
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal.
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g. , default or similar event) occurs with
17
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
respect to a reference entity or entities. A seller of credit default protection receives payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations. Buying credit default protection reduces the buyer's exposure (or increases negative exposure) to a reference entity or entities in the event that a credit event relating to that entity or entities occurs (e.g., it is intended to reduce risk when a party owns a security issued by or otherwise has exposure to the reference entity). Selling credit default protection increases the seller's exposure to the reference entity should a credit event relating to the reference entity occur. If no credit event occurs, the seller has no payment obligations.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the party with whom the Fund contracts defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the
18
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at a later date at a fixed price. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which can cause the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. As of August 31, 2009, the Fund had entered into reverse repurchase agreements, plus accrued interest, amounting to $67,901,784, selling securities with a market value, plus accrued interest, of $70,016,892. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a stated price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in Options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. Warrants and rights often are less liquid. In addition, the terms of warrants or rights may limit a Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
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 all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards 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 gain, if any, at least annually. All distributions are
19
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (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 and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital.
As of August 31, 2009, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 814,364,484 | $ | 1,089,300 | $ | (6,764,668 | ) | $ | (5,675,368 | ) |
The Fund is subject to the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 sets forth a minimum threshold for financial statement recognition of a tax position taken or expected to be taken in a tax return that could affect the Fund's financial statements. The Fund did not have any unrecognized tax benefits or liabilities at August 31, 2009, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period then ended.
Security transactions and related investment income
Security transactions are accounted for on the trade date in the financial statements and usually one business day following the trade date in the daily net asset value calculations. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
20
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the funds based on, 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 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 incurs fees and expenses indirectly as a shareholder in the underlying fund (See Note 3).
State Street Bank and Trust Company ("State Street") serves as custodian, fund accounting agent and transfer agent of the Fund. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value and an investor may lose money by investing in the Fund. Following is a brief summary of the principal risks of an investment in the Fund. Many of these risks are more pronounced as a result of current global economic conditions that began to unfold in 2008. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads. Recent changes in credit markets increased credit spreads and there can be no assurance that those spreads will tighten or not increase further.
• Credit and Counterparty Risk — This is the risk that the issuer or guarantor of a fixed income security, the counterparty to an OTC derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security, will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk may be particularly pronounced for the Fund because it may invest up to 100% of its assets in below investment grade bonds ("junk bonds"). Junk bonds have speculative characteristics, and changes in economic conditions or other circumstances are more likely to lead to an issuer's weakened capacity to make principal and interest payments than is the case with investment grade bonds. A dditionally, to the extent that the Fund uses OTC derivatives, including swap contracts with longer-term maturities, and/or has significant exposure to a single counterparty, this risk will be particularly pronounced for the Fund. The risk of counterparty default is particularly acute in economic environments where financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions.
21
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
• Derivatives Risk — The use of derivatives involves risks different from, and potentially greater than, risks associated with direct investments in securities and other assets. Derivatives may increase other Fund risks, including market risk, liquidity risk, and credit and counterparty risk, and their value may or may not correlate with the value of the relevant underlying asset.
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities may fluctuate more rapidly and to a greater extent than those of U.S. securities, which may adversely affect the value of the Fund's foreign investments, with the Fund's investments in emerging countries subject to this risk to a greater extent), Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies), Liqui dity Risk (difficulty in selling Fund investments), Leveraging Risk (increased risks from use of reverse repurchase agreements and other derivatives and securities lending), Focused Investment Risk (increased risk from the Fund's focus on investments in countries, regions, or sectors with high positive correlations to one another), Management Risk (risk that the Manager's strategies and techniques will fail to produce the desired results), Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally), Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors or other series of the Trust, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis), and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected). The Fund is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. For more information about reverse repurchase agreement and other derivatives, please refer to the descriptions of financial instruments (e.g. reverse repurchase agreements, swaps, futures, and other types of derivative contracts) in Note 2 above as well as the discussion of the Fund's use of derivatives below.
Disclosures about Derivative Instruments and Hedging Activities — Effective March 1, 2009, the Fund adopted FASB Statement of Financial Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This standard is an amendment to FASB Statement No. 133 ("FASB 133"), "Accounting for Derivative Instruments" which expands the disclosure requirements of FASB 133 regarding an entity's derivative instruments and hedging activities.
The Fund uses derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and indices, and include swaps, reverse repurchase agreements and other over-the-counter ("OTC") contracts.
The Fund uses derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps (including credit default swaps) or other derivatives on an index, a single security
22
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
or a basket of securities to gain investment exposures. The Fund also may use currency derivatives (including currency forwards, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund may use derivatives in an attempt to hedge or reduce its investment exposures. For example, the Fund may use credit default swaps to take an active short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to hedge or reduce some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may attempt to alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed vs. variable and shorter duration vs. longer duration. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives contracts exposes the Fund to the risk that the counterparty will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivative contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but there can be no assurance that the Fund will be able to enforce its contractual rights. For example, because the contract for each OTC derivative is individually negotiated with a specific counterparty, a Fund is subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund. If that occurs, the cost and unpredictabil ity of the legal proceedings required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or that those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. A further risk of using OTC derivatives arises when the counterparty's obligations are not secured by collateral, the Fund's security interest in any collateral is not perfected, the Fund is required to make a significant upfront deposit, or when the collateral is not regularly marked-to-market. Even when obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives the collateral. When a counterparty's obligations are
23
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. Due to the nature of the Fund's investments, the Fund may invest in derivatives with a limited number of counterparties and events that affect the creditworthiness of any one of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in economic environments in which the Fund's counterparties and other financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. Derivatives also are subject to a number of risks described in the "Investment Risks" note, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The terms of many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation. There can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are reflective of levels at which the OTC derivatives purchased by the Fund may actually be closed out or sold. This valuation risk is more pronounced in case s where the Fund enters OTC derivatives with specialized terms because the value of those derivatives in some cases can be determined only by reference to similar derivatives with more standardized terms. Improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of a Fund's net asset value.
There can be no assurance that a Fund's use of derivatives will be effective or will have the desired results. Suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivatives positions may be prohibitive and, if a counterparty or its affiliate is deemed to be an affiliate of a Fund, none of the Funds will be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce a Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates or indices they are designed to hedge or closely track. The use of derivatives also may increase the taxes payable by shareholders.
The Fund's use of derivatives may cause its portfolio to be implicitly leveraged. Leverage increases a Fund's portfolio losses when the value of its investment positions declines. Since many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the initial value of the derivative.
24
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2009.
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | 1,779,300 | $ | — | $ | — | $ | — | $ | — | $ | 1,779,300 | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized appreciation on swap agreements | 8,245,693 | — | — | — | — | 8,245,693 | |||||||||||||||||||||
Total | $ | 10,024,993 | $ | — | $ | — | $ | — | $ | — | $ | 10,024,993 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | (960,300 | ) | $ | — | $ | — | $ | — | $ | — | $ | (960,300 | ) | |||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Unrealized depreciation on swap agreements | (5,070,058 | ) | — | — | — | — | (5,070,058 | ) | |||||||||||||||||||
Total | $ | (6,030,358 | ) | $ | — | $ | — | $ | — | $ | — | $ | (6,030,358 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments. Period end variation margin is reported within the Statement of Assets and Liabilities.
25
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended August 31, 2009:
Derivatives not accounted for as hedging instruments under Statement 133^ | |||||||||||||||||||||||||||
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | (5,895,573 | ) | $ | — | $ | — | $ | — | $ | — | $ | (5,895,573 | ) | |||||||||||||
Futures contracts | 3,288,999 | — | — | — | — | 3,288,999 | |||||||||||||||||||||
Swap contracts | (1,545,283 | ) | — | — | — | — | (1,545,283 | ) | |||||||||||||||||||
Written options | 5,365,495 | — | — | — | — | 5,365,495 | |||||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | 1,213,638 | $ | — | $ | — | $ | — | $ | — | $ | 1,213,638 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | 327,300 | $ | — | $ | — | $ | — | $ | — | $ | 327,300 | |||||||||||||||
Futures contracts | — | — | — | — | — | — | |||||||||||||||||||||
Swap contracts | 3,781,177 | — | — | — | — | 3,781,177 | |||||||||||||||||||||
Written options | (27,300 | ) | — | — | — | — | (27,300 | ) | |||||||||||||||||||
Forward currency contracts | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | 4,081,177 | $ | — | $ | — | $ | — | $ | — | $ | 4,081,177 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the statement of operations, it does not qualify for hedge accounting under FASB 133. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
Volume of derivative activity, based on absolute values of month-end notional amounts outstanding during the period, was as follows for the six months ended August 31, 2009:
Futures | Swaps | Options | |||||||||||||
Average notional amount outstanding | $ | 155,973,958 | $ | 407,216,667 | $ | 386,050,000 | |||||||||
Highest notional amount outstanding | 689,675,000 | 514,200,000 | 800,000,000 | ||||||||||||
Lowest notional amount outstanding | — | 102,500,000 | 400,000 |
3. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is 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
26
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
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 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 0.055% 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 expenses incurred by the Fund through at least June 30, 2010 to the extent the Fund's total annual operating expenses (excluding "Excluded Fund Fees and Expenses", as defined below) exceed 0.25% of the Fund's average daily net assets. Excluded Fund Fees and Expenses include 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 approved by the Manager for the Trust, compensation and expenses of the Trust's Chief Compliance Officer ("CCO") (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2010 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 GMO U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses) 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 funds. For the period ended August 31, 2009, 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 | % | 0.000 | % | < 0.001% |
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and CCO during the period ended August 31, 2009 was $1,331 and $718, respectively. The compensation and expenses of the
27
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
4. Purchases and sales of securities
For the period ended August 31, 2009, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 993,748,454 | $ | 208,178,977 | |||||||
Investments (non-U.S. Government securities) | 191,729,606 | 170,363,623 |
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 that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
6. Principal shareholders and related parties
As of August 31, 2009, 77.53% of the shares outstanding of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
As of August 31, 2009, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and all of the Fund's shares were held by accounts for which the Manager had investment discretion.
28
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
7. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from March 27, 2009 (commencement of operations) through August 31, 2009 (Unaudited) | |||||||||||
Class III: | Shares | Amount | |||||||||
Shares sold | 4,073,711 | $ | 102,534,290 | ||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | |||||||||
Shares repurchased | (2,695,268 | ) | (68,237,851 | ) | |||||||
Net increase (decrease) | 1,378,443 | $ | 34,296,439 | ||||||||
Period from March 18, 2009 (commencement of operations) through August 31, 2009 (Unaudited) | |||||||||||
Class VI: | Shares | Amount | |||||||||
Shares sold | 29,068,670 | $ | 733,252,518 | ||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | |||||||||
Shares repurchased | (1,494,507 | ) | (37,764,085 | ) | |||||||
Net increase (decrease) | 27,574,163 | $ | 695,488,433 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2009 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. Treasury Fund | $ | — | $ | 182,273,410 | $ | 168,255,000 | $ | 13,410 | $ | — | $ | 14,006,504 | |||||||||||||||
Totals | $ | — | $ | 182,273,410 | $ | 168,255,000 | $ | 13,410 | $ | — | $ | 14,006,504 |
29
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2009 (Unaudited)
9. Subsequent events
In connection with the preparation of the Fund's financial statements for the period ended August 31, 2009, events and transactions subsequent to August 31, 2009 through October 30, 2009 (the date the Fund's financial statements were issued) have been evaluated by the Manager for possible disclosure. The Manager has not identified any subsequent events requiring financial statement disclosure as of October 30, 2009.
30
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2009 (Unaudited)
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, to be relevant. At a meeting on December 4, 2008, the Trustees discussed materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their 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. During the meeting, the Trustees met with a member of the Manager's Asset Allocation Division, the investment division that would be responsible for overall management and strategic direction of the Fund, and members of the Manager's Fixed Income Division, the investment division that would b e responsible for day-to-day 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 Manager's investment advisory personnel over the course of the year with respect to other funds of the Trust. The Trustees also considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel who would be providing 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 internal 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 the Manager's senior management to the Fund. The Trustees considered the business reputati on 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 that the Fund's purpose is to serve as an investment vehicle for the Trust's asset allocation funds and GMO asset allocation separate account clients rather than as a stand-alone fund, the qualifications and experience of the personnel responsible for managing those 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 to be paid under the Fund's investment management agreement. The Trustees considered information prepared by third-party data services concerning fees paid to managers of funds deemed by those services to have similar objectives. In evaluating the proposed advisory fee arrangement, the Trustees 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 how the proposed fees compared to fees paid by other funds of GMO Trust and so-called "fallout benefits" to the Manager, such as the receipt of shareholder servicing fees pursuant to the
31
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2009 (Unaudited)
Trust's servicing agreements and possible reputational value to be derived from serving as investment manager to the Fund. As the Fund had not yet commenced operations, the Trustees did not consider possible economies of scale to the Manager associated with managing the Fund. 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 considered 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 of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also took into account information concerning the Manager's practices and results with respect to the execution of portfolio transactions that they received over the course of the year. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
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 legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for 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 shareholder services. The Trustees considered the Manager's oversight 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 reimbu rsement arrangement with 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.
Following their review, on December 4, 2008, 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.
32
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2009 (Unaudited)
Expense Examples: the following information is in relation to the expenses for the period ended August 31, 2009.
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 $10,000,000 account value divided by $1,000 = 10,000), 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 | 0.43 | % | $ | 1,000.00 | $ | 1,020.30 | $ | 1.87 | (a) | ||||||||||
2) Hypothetical | 0.43 | % | $ | 1,000.00 | $ | 1,023.04 | $ | 2.19 | (b) | ||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.34 | % | $ | 1,000.00 | $ | 1,026.80 | $ | 1.57 | (c) | ||||||||||
2) Hypothetical | 0.34 | % | $ | 1,000.00 | $ | 1,023.49 | $ | 1.73 | (b) |
(a) For the period March 27, 2009 (commencement of operations) through August 31, 2009. Expense is calculated using the Class's annualized net expense ratio (including interest expense and indirect expenses incurred) for the period ended August 31, 2009, multiplied by the average account value over the period, multiplied by 157 days in the period, divided by 365 days in the year.
(b) For the period March 1, 2009 through August 31, 2009. Expense is calculated using the Class's annualized net expense ratio (including interest expense and indirect expenses incurred) for the period ended August 31, 2009, 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 March 18, 2009 (commencement of operations) through August 31, 2009. Expense is calculated using the Class's annualized net expense ratio (including interest expense and indirect expenses incurred) for the period ended August 31, 2009, multiplied by the average account value over the period, multiplied by 166 days in the period, divided by 365 days in the year.
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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) 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) 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 are attached hereto as EX-99.CERT.
(a)(3) Not applicable to this registrant.
(b) Certifications by the Principal 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 are attached hereto as EX-99.906CERT.
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/ J.B. Kittredge |
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| J.B. Kittredge, Chief Executive Officer |
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| Date: | November 4, 2009 |
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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/ J.B. Kittredge |
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| J.B. Kittredge, Principal Executive Officer |
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| Date: | November 4, 2009 |
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By (Signature and Title): | /s/ Sheppard N. Burnett |
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| Sheppard N. Burnett, Principal Financial Officer |
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| Date: | November 4, 2009 |
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